Equities Frenzy Spills over into Precious Metals

December 7, 2016 - 3:12pm

 by Gary Wagner

The US equities markets, which began to rally immediately following the US presidential election held last month, continue to rise. Today, we witnessed the return of the equity bulls, resulting in a new, all-time record high close for both the Dow Jones Industrial Average and the Standard & Poor’s 500.

Once again, investors and traders are witnessing US equities moving into uncharted territory. The result is a 1.4 % gain, with the Dow Jones Industrial Average closing above 19,500 for the first time in history. This, coupled with Transports running to a new record high for the first time in two years, is a strong indication that this trend will continue. However, unique to today’s historical rally is the fact that US equities and precious metals are running in tandem.

The typical relationship between precious metals (safe haven) assets and equities contains a negative correlation. But today’s tandem run is reminiscent of what traders and investors witnessed in 2008 as both US equities, and gold and silver, all began a substantial upside move.

Of course, the factors in 2008 were exceedingly different than our current economic environment. However, the net result, at least for today, seems to be the same. The real question is whether or not today’s positive correlation and tandem run will continue or if it simply an aberration.

Today’s rally in the precious metals markets seems to be based more upon a technical belief that gold and silver prices are extremely oversold. This “buy the dip” attitude and short covering, as cited by Kitco news, could be pervasive over the next couple of weeks. It will be interesting to see whether or not recent lows in both gold and silver will hold and lead to higher pricing.

The Ying and Yang of Central Banks

Another factor to take into consideration is the diametrically opposing timelines that the European Central Bank and Federal Reserve are in. The Federal Reserve is at the tail end of the monetary stimulus program, with an expected interest rate hike on Wednesday of next week. Since 2008, the Federal Reserve, through quantitative easing, sent interest rates to near zero, along with an extremely accommodative monetary policy.

At the same time, recent announcements made by the European Central Bank indicate that a new round of quantitative easing and monetary stimulus are at hand. The net result is the most powerful central banks in the world are at the opposite ends of their respective economic stimulus cycles and policies. These opposing cycles, as well as real differences in the economic outlook of the European Union and the United States, could be supportive of the safe haven asset class short-term.

The fact of the matter is, we now have a Dow Jones Industrial Average destined to trade above 20,000. The question now is not so much if the Dow will trade to 20,000, but when. This newfound optimism, which began just following the presidential election held last month, has now resulted in a 1000-point gain in the Dow Jones. At the same time, gold and silver traders witnessed dramatic declines in safe haven assets.

Today’s tandem run of equities and precious metals could be signaling a dynamic change in the perceived relationship between those asset classes. Only time will tell.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Correction: Yesterday’s article said, “Adding $200 to the yearly low of 1050 will result in a 61% retracement of the yearly range. “which should have said: "Subtracting ~$200 from the yearly high of 1375 will result in a 61% retracement of the yearly range."

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