Weakening USD, Lower Equities Bode Bullish For Precious Metals
Erik Swarts | Nov 03, 2016 06:15AM ET
Notwithstanding the fluid polling data of the approaching US presidential election – or the outcome of yesterday’s less-anticipated November Fed meeting, the equity markets continue to wilt lower and follow gold’s leading footprints, left roughly four weeks back. Should the relationship continue to prove prescient towards stocks, we would guesstimate an initial target for the move in the S&P 500 of around 2050-2060.
That said, there are potentially short-term positive developments working against a broader market dislocation that had raised concerns a few weeks back (see here), as gold has nearly retraced the entire decline from last month; long-term Treasuries have found a bid within the current equity market weakness and the breakdown in the US dollar rally this week.
As described in that note, from our perspective the magnified risk of negative feedback pressures building across asset markets would be greatly heightened with a restrengthening US dollar and higher yields. As such, should the equity markets take another leg down as we suspect they will and upside momentum continue to bleed from the dollar, the utility of maintaining a reflationary hedge – such as the aforementioned EEM short, would diminish considerably in the wake of further equity market weakness. Long story short, a window to cover approaches.
Overall, while it wouldn't surprise us to see the recovery rally in gold cool a bit if and when the equity markets stabilize, we're encouraged by the recent break in the US dollar and action in the silver:gold ratio that continues to bode bullish towards higher prices in the precious metals sector. Moreover, drawing on the historical parallels in real yields and the dollar from the mid to late 1970s, gold continues to walk the line – regardless of the buildup to the US presidential election.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.