Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Gold vs Stocks: The New Normal

Commodities / Gold and Silver 2016 Sep 11, 2016 - 08:49 PM GMT

By: Nicholas_Kitonyi

Commodities

Stock prices have always been deemed to have an inverse relationship with the price of gold mainly because unlike the yellow metal, investors tend to fancy them when global economies are doing well. Gold is often seen as a fallback plan when things go caput in the stock market.

Stocks are income driven and if the economy is doing well, then equity prices are likely to improve to mirror the change in the overall economic outlook. Income driven investments tend to provide better returns than currency investments in a strong economy.


When the economy is growing, the federal government moves to convert some of its gold reserves into income generating assets while in the case of a reverse situation, more gold or the USD is needed to boost reserves in a bid to stabilizing the local currency.

This is what brings about the inverse relationship between Gold and the currencies it is quoted in—and by extension—the equities markets. That’s what has been considered to be normal for decades.

However, things appear to have changed over the last couple of months in a situation that would seem to suggest that investors are creating a new normal in the market. As demonstrated in the chart below, the inverse relationship is now being nullified.

According to Jason McFarlan, a senior analyst at 24option, the introduction of high frequency trading technologies in the stock market is slowly rewriting the principles of investing from the practices of the past to quant-driven methodologies.

As such, most investing fundamentals such as economic conditions are now being tested on their relevance to the modern investing techniques, which rely on trading data to determine the next possible price movement.

This means that the analogies of the past with regard to income generating equities versus currency-backed gold are being dumped and replaced with new speculative theories. Last year, when commodity prices were falling, stocks rallied.

This did not happen because of the inverse type of relationship but rather, because investors remained optimistic on the stock market for no ideal reasons, between January and February this year, there was a major market correction that cut across the globe.

After the correction ended in February, the stock market experienced high volatility for the following three months before finally mirroring the price of gold in June. Since then, the three major global indices have maintained an upward movement thereby creating a direct relationship with the price of gold.

Under normal circumstances, this would be considered abnormal, but it has now become the new normal. The reason for this kind of relationship is simple. Gold is still recovering from the unfair treatment it got from investors starting in mid-2014 to the end of 2015.

The price of the yellow metal declined to multi-year lows last year to trade at just above $1,000 after hitting historical highs of $1,900s in 2011, but it has now rallied back to what most investors would consider to be within fair pricing levels--$1,300-$1,400—after the 2012-2013 correction.

During that period of unexplainable fall in gold prices, there was barely any recognizable trading momentum in comparison to other periods, which shows that investors had either pulled out their investments in the yellow metal or basically chose to hold on to their positions and avoid trading.

As demonstrated in the chart above, since the year 2006, the price of gold has illustrated an inverse relationship with equities. In this example, the FTSE 100, the Nikkei 225 and the S&P 500 have been used for illustration.

However, following that 18-month period when there was barely any trading activity in the gold bullion market, the yellow metal and equity prices now appear to have a picked a trend reminiscent of what happened during the pre-financial crises of 2008/2009.

This movement has led some to suggest that the global economies could be on the verge of another crisis while others believe that another market correction is due in 2016. However, unless that happens, it appears as though the current upward trend is the new normal for both gold and stocks.

Conclusion

In summary, there could be a lot that is making gold and stock prices to behave the way they currently are. Among other things, the highly anticipated second US interest rate hike in the post-2008/2009 financial crises could be a major catalyst.

However, as witnessed in January this year, another rate hike by the end of the year could yet open another bag of surprises in early 2017. This could also be the reason why the price of gold continues to rally despite the anticipation of the rate hike contrary to last year.

By Nicholas Kitonyi

Copyright © 2016 Nicholas Kitonyi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules