The gold market is on the offensive once again, with prices rising to a fresh 6-month high. Recent market turbulence is likely a major catalyst for gold’s recent upside, and prices appear poised to see further gains in the weeks and months ahead.
What is Behind Increasing Risk Aversion?
The financial markets are currently facing several significant issues worth worrying about. The potential for a global economic slowdown, an ongoing war over trade with China, rising interest rates and substantial geopolitical issues including the current partial shutdown of the U.S. Government are all playing a role in the current shift in market dynamics.
Last weekend’s announcement from Secretary of the Treasury Steve Mnuchin did not help matters either. Mnuchin reportedly spoke with the CEOs of the nation’s six largest banks to discuss their capital positions and operations. Although this was said to have been done to calm investors, it clearly had the opposite effect as stocks saw their worst Christmas Eve on record. The Dow Jones Industrial Average shed nearly 700 points, while declines in the S&P 500 brought it to within just a few points of bear market territory.
The necessity and timing of the Treasury Secretary’s calls have come under serious scrutiny. President Trump has since vocalized his support for Mnuchin even as he attacks the Fed’s decision to raise interest rates again last week.
In addition to all these factors, control over the House of Representatives is about to change hands. A democratically-controlled House could make it exceedingly difficult, if not impossible, for the Trump administration to implement key components of its agenda.
Shifting Market Dynamics
The last several weeks have seen a major shift in market dynamics and investor sentiment. The strategy of buying dips in stocks that worked for so long is no longer viable. Equities have been unable to hold any major rallies and investor mentality has changed from a “buy the dips” to “sell the rips” attitude towards stocks. Markets are facing some serious issues as outlined above and will now also have to contend with fading tax cut and stimulus effects along with the potential for congressional gridlock.
The stock market could potentially see more downside before eventually finding a bottom. The risk of recession appears to be on the rise and some analysts have already suggested that GDP is likely to slow to a crawl. The current economic and geopolitical backdrop could be extremely conducive to higher gold and hard-asset valuations.
The gold market has continued its push higher after recently clearing overhead resistance at the October highs. The market is currently trading up by $10.15 per-ounce at $1277.65. Of note is the fact that gold is gaining in spite of the dollar index also moving higher. Although gold and the dollar often exhibit a negative correlation, any positive correlation between the two asset classes may be indicative of strong safe-haven demand.
The gold market has already passed some significant technical tests and appears headed to higher price levels. If economic and geopolitical risks remain elevated, the gold market will likely find strong buying interest on any pullbacks. Any further declines in equities will also likely fuel buying interest in gold as investors seek out alternative asset classes and the perceived safety that the yellow metal may provide.