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Rare phenomenon: gold at record level – should this be why equity investors worry? | message

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Rally in gold and stocks at the same time is rare
Corona aid measures support both
Dollar weakness also helps

Gold has a reputation for being a “safe haven”. In uncertain times, many investors usually sell their shares and park their money in gold investments. For the security that is promised, they accept that they will not receive any interest or dividends for doing this. This is why the yellow precious metal typically has a negative correlation to stocks: when stock prices fall, gold becomes more expensive and vice versa.

Gold and stocks rally

But the Corona crisis turns this common truth on its head. The US leading index Dow Jones and the S & P500, which reflects the broad US stock market, have both risen by over 40 percent since their corona-related lows reached on March 23.

But at the same time the gold price also climbed by around 30 percent. Barely nine years after the last all-time high, it has passed the $ 2,000 mark and hit new record highs. That makes many investors very nervous. Due to the record slump in US economic output in the second quarter by 32.9 percent (annualized), they are already wondering whether stocks are currently overpriced. The rally in the gold price reinforces this concern.

Rare phenomenon

But Ryan Detrick, chief investment strategist at the independent broker-dealer LPL Financial, appeased in a blog post: “It is widely believed that a strength of gold probably indicates that something is wrong in the market and investors are more defensive, but that simple it may not be. ”

He continues: “2020 is the first year since 1979 in which both gold and the S & P500 reached new highs in the same calendar year. What happened after that? Gold climbed 17 percent in 1980 and the S & P500 by 26 percent.”

The fact that both gold and stocks are currently rising sharply is rather rare, but does not necessarily mean that the future outlook for stocks is bleak. Rather, both asset classes could continue to grow.

Recently, a weak dollar had also increased demand. Because gold is traded in dollars on the world market, a weak US currency makes the precious metal cheaper in countries outside the dollar area.

Corona measures support gold and stocks

In order to mitigate the economic effects of the corona crisis, the international central banks and governments have decided on stimulus measures worth billions. But the loosened one Monetary policy and the aid packages also feed inflation concerns among investors, from which gold can benefit, as it is traditionally seen as protection against inflation.

Among other things, the Fed has lowered its key interest rate to close to zero percent and has signaled that it will stay there for a long time. However, the loose monetary policy of the currency authorities and the increased borrowing of the government have led to a noticeable decline in yields on government bonds.

Both gold and stocks can benefit from this environment. On the one hand, investors who value returns have fewer and fewer alternatives. Investors for whom the yields on government bonds have meanwhile become too low could switch to equity investments, although these are more risky than bonds.

On the other hand, the interest in gold is growing, because due to the low yield on bonds, the big disadvantage of the yellow precious metal – its interest-free status – hardly plays a role in comparison to government bonds.

Weak dollar helps both

In addition, investor confidence in the US economy is declining as a result of the escalating US budget deficit. This weighs on the dollar. The dollar index, for example, which reflects the exchange rate in relation to important currencies, was last at a two-year low.

However, this weak dollar strengthens the demand for gold; after all, the precious metal is traded in dollars on the world market. A weak greenback therefore makes gold cheaper for investors outside the dollar area. But stocks in export-oriented companies can also benefit from a weak national currency, as their products become cheaper for customers in other currency areas.

Finanzen.net editors

Image sources: domnitsky / Shutterstock.com



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