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Why Is Gold Rising Along With the Stock Market?
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Loading...U.S. stocks may be somewhat impervious to global political tensions. Gold’s a different story.
Many investors look at gold and its financial equivalents as insurance policies for when stocks falter.This year, stocks have performed well with the Dow Jones Industrial Average up 7% this year, to 21,136 as of Tuesday’s close.
Yet the insurance is also paying off nicely. This year, an ounce of gold has gained almost 13%, to $1,296 an ounce.
What’s going on?
The thinking is that stocks are driven primarily by the fundamental relationship between earnings and interest rates – not political issues. And the strongest quarterly earnings growth since 2011 combined with stubbornly low rates have helped propel the bull market.
But those same sets of macroeconomic factors are also helping gold.
As several articles in the financial press point out, investors in stocks may be downplaying talk about apparent executive-branch disarray in Washington and rising tensions in the Korean Peninsula. But gold is arguably now viewed as a way for investors from professionals to individuals to hedge growing concerns that the political tensions could bleed into the economy and ultimately upend corporate profit growth.
“The latest terror attacks in London. The upcoming U.K. election. More drama in the Trump administration as former FBI director James Comey is set to testify in front of Congress Thursday.La Monica adds that gold could climb even higher, especially if Qatar and other nations in the Middle East continue to feud. But while geopolitical tensions exist in the world, Tuesday’s 73rd anniversary of D-Day should remind us that the world’s markets have handled far worse in the past century.
Actually, there are another set of factors that are pushing gold prices up, and they tend to be treated as secondary points by La Monica and other writers because they’re less sexy: the relationship between monetary policy and interest rates.
Gold tends to rise when the U.S. dollar falters. And these days the greenback, compared with other world currencies, is hovering near a seven-month low. The dollar’s weakness isn’t a result of geopolitical tensions, it’s largely a result of expectations that the Federal Reserve will go slow on short-term interest rates this year, thanks to less-than-robust economic growth.
In a recent piece for Bloomberg, writer Ranjeetha Pakiam suggests that gold’s rally has been more about a reappraisal of the likely path of U.S. monetary policy in light of disappointing economic data, rather than geopolitical tensions.
he Bloomberg article adds that the bullish sentiment surrounding gold is backed up by a jump in investor demand. “Money managers boosted their long positions in U.S. futures to the highest in four weeks in the five days to May 30 after increasing them by the most in almost a decade a week before, Commodity Futures Trading Commission data show,” the article stated. “Meanwhile, holdings in the SPDR Gold Trust, the world’s largest exchange-traded backed by bullion, have climbed by more than 6 percent since the end of January to 851 metric tons as of June 2.”
“It’s no coincidence that gold’s long bull market unfurled from 1999 to 2011 against a long decline in real rates, or that gold fell in 2011 as real rates started to tick higher,” wrote Tan.
He added that it makes sense that gold thrives when real rates wilt: “Robust yields on other assets make investors less keen on owning a precious metal with no industrial use. On the other hand, when real rates are low and investors are less confident in fiat currencies, the opportunity cost of holding gold declines, as well.”
If these conditions remain for a while, so could gold’s rise along with the stocks that they insure.
Source: Bloomberg Pro Terminal
Senan Fuchedzhiev - Trader
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