Is Gold the Canary in the Coal Mine?
Many foreboding signs have been stirring in the global economy of late. Rumors of a general economic slowdown, the US-China trade war, low inflation and low interest rates, dovish statements from both ECB president Mario Draghi and Federal Reserve Chairman Jerome Powell. In such a climate, one asset seems to unequivocally tell the story of the general sentiment and that asset is gold.
The yellow metal remains a long way off from its 2011 highs, but while a weakening stock market and falling bond yields were not enough to give it the boost required to break out of its multiple month trading range, this week it did and in quite impressive fashion.
The catalyst, oddly enough, is likely to have been the same one that sent US stocks higher as well this week. Jerome Powell has publicly stated that the Fed will do what is required to keep the US economy’s record expansion going despite President Trump’s trade war. On Tuesday he signalled the possibility of actually cutting rates if on-going trade tensions with China and Mexico called for it. This is a significant course change considering that the Fed predicted a further two rate hikes for 2019 back in December and then walked this back in March by stating that there would be no further hikes. Now it would seem that even rate cuts are back on the table. Below you can see how US equities reacted to these comments in December, March and June, respectively.
On Thursday Mario Draghi was even more dovish than Powell, stating that further interest rate cuts could well be in store for the eurozone. This sent the price of gold even higher. We all know that equities love low interest rates as money that would ordinarily sit on the sidelines and earn interest begins to flood into stocks. However, gold loves risk and uncertainty. This week’s gold rally could be a signal that the markets are starting to distrust business as usual. The stock markets can be induced to keep rising but not forever and not when the global economy is struggling to grow. Is gold acting as a leading indicator of global economic recession? Time will tell.
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