The gold market is once again moving higher as risk aversion is on the rise. Stocks are seemingly running into a brick wall today after seeing record strong gains yesterday. The significant price swings appear to be a “new normal” and increasing volatility may be here to stay.
What a Ride
Stocks are currently giving back much of yesterday’s historical gains. In early action Thursday, the Dow Jones Industrial Average is off over 500 points while the benchmark S&P 500 is shedding well-over 2%.
The selling has quickly returned to the marketplace after a day of respite. All three major indexes are down over 10% for the month and the Nasdaq remains in bear market territory. Despite yesterday’s strong gains, investors remain unconvinced and larger market players may be looking to sell into any significant rallies.
Market volatility, as measured by the CBOE’s VIX index, is up over 9% in early action at $33.16.
What’s Behind the Selling?
There are numerous potential factors driving market declines and volatility. The short, holiday trading week is likely a factor as many market participants take a lot of time off for the holidays. Thinner trading volumes and less liquidity can make for larger swings in price. A similar situation will likely be seen next week as investors take time off for the New Year holiday.
Then there is end-of-year position squaring. Many market participants will look to get a jump on 2019, with some looking to buy risk assets and others looking to book tax losses.
The partial government shutdown remains ongoing and thus far there does not appear to any viable solution on the table. President Trump is digging his heels in and demanding funds to build a wall along the country’s border with Mexico. There simply is no telling just how far the funding stalemate will go and investors appear to be getting increasingly anxious by the day.
Yesterday’s record point gains may also be under general scrutiny as investors feel that the rally was overdone. The rally could have been due, in part, to lower volumes and investors may now be reevaluating. Other markets point to this as a plausible scenario, with the yield on the benchmark 10-year note declining and the Japanese Yen rising versus the dollar. Both assets classes may see capital inflows during times of economic or geopolitical stress.
The gold market is moving higher again today as the market distances itself from previous resistance at the October highs around $1252. As of this post, spot gold is up $6.21 per-ounce at $1275.41. Gains today are being fueled by both increasing risk aversion as well as a softer dollar index. The yellow metal has been pushing higher this month and may now have some significant price support just below current levels. A negative correlation between stocks and gold may intensify and if equities remain under pressure gold could continue to see significant capital inflows. Gold may now target a band of resistance from the $1270-$1280 areas in the days ahead and a breach above these levels could set the stage for another significant leg higher in price.