COVID – 19, Gold and Equities | The Gold Forecast

COVID – 19, Gold and Equities

May 12, 2020 - 7:10pm

 by Gary Wagner

During the last two severe economic contractions and recessions in which the Federal Reserve intervened to help stabilize the economy a new paradigm occurred in which both U.S. equities and gold would move in tandem to the upside. The explanation is fairly straightforward in the case of U.S. equities they are reacting in a bullish manner due to the fact that there is tremendous liquidity and inexpensive money in terms of borrowing costs. In the case of gold, it is also fairly straightforward and that every time the Federal Reserve increases their balance sheet they in essence increase the money supply and devalue the U.S. dollar.

At some point the positive correlation between rising equities and rising gold reverses. We saw that during the middle of 2011. Gold and equities had been rising since 2009 due to the factor stated above. However, the disconnect occurred when gold began to plummet from its all-time record high above $1900, and U.S. equities continued to gain ground.

Although one day does not make a trend, today we witnessed U.S. equities trade sharply lower, while gold had moderate gains. The relationship which is typically in inverse correlation between the two asset classes has returned to this traditional relationship. Market participants and traders tend to move the majority of their investment capital into equities when the stock market is rising, avoiding a major percentage of their capital to gold holdings. Inversely when U.S. equities are trading under pressure traders tend to move that capital into a safe haven asset group, gold being one of the most prominent places to park their capital. Especially when interest rates are at the lowest points seen in quite some time bonds become less attractive.

As for today’s activity it is certainly feasible that investors and market participants have actively moved money from the risk on asset class (stocks) to the safe haven asset class (gold).

It has been the belief of many economists and advisors including myself that the recent climb in U.S. equities was a bear market rally. This assumption is based upon the dramatic and destructive effects of the coronavirus pandemic which is resulted in a global economic contraction. Whenever you get worldwide declines in GDP, global equity seems to react by trading lower.

Another important potential outcome of the current pandemic is the unknown factors. Since the virus has never before been encountered, medical professionals have only models and assumptions to determine whether or not a second, third or even fourth wave will follow after this first wave has run its course.

Another variable which is possibly the largest wildcard is the creation of a vaccine. Because even after the effects of the pandemic diminish and individuals worldwide attempt to return to a more normal lifestyle one question is most important, what is the new normal without Covid-19’s eradication or vaccination.

How long will it take before individuals are willing to attend large sporting events, large social interactions as well as other activities that revolve around social activity of large groups of individuals. This could take years not months if a vaccine isn’t forthcoming by then.

While it is easy to ponder potential outcomes of the pandemic, truth be told no one can answer that question with any modicum of assurance. With that in mind depending on how this pandemic plays out could see gold move substantially higher over the next 12 months.

Wishing you as always good trading and good health,

 

Gary S. Wagner - Executive Producer

This report is now free and publicly available to everyone

Gold Forecast: Proper Action

We are currently flat with no active trades

Our Last Trade:

Thursday  May 7th we set out a trade alert to Buy June gold @ the market ($1724.10. However I spoke to aggresive and conservative traders with different parameters. Today we were stopped put of our traderthe specifics.

Long long gold at $1724. Stopped out @ $ 1701for a loss of $2300 per cpmex cpmtract

The trade before that:

On Thursday April 30  we were stopped out of our trade.

We went  long June gold @ $1728.20, our Stop was hit at  @ $1698 for a loss of $3020 per Comex contract

The trade before that:

We sent out a Trade alert on Monday April 20th to buy june gold @ $1614.

We were stopped out at $1680 for a loss of $35.00 or $3500 per Comex Contract

The trade before that:

We went long gold at $1602 with a stop a $1737 (we sent out a trade alert on Tuesday April 14th).

We went long at $1602 and out at $1737 for a profit of $$135 per ounce. Each comex contract returned a profit of $13,500.00

The trade before that:

On Monday, March 23rd we sent out a Trade alert to buy April gold at the market ($1570.10) and place your stop at $1501.We raised our stop to $1613, which was hit when the market hit a low of $1611.

In at $1571 - Out at $1613 for a profit of $4200 per Comex Contract

Gold Market Forecast

Today’s video report will focus upon one of the most important underlying causes that will result in which way gold as well as equities go over the next 12 months. I’m referring to the Federal Reserve’s monetary policy which is accommodative and includes quantitative easing with no preset limits. We will look at the effect that quantitative easing had in 2008 following the financial crisis of 2007. You will quickly see that both the precious metals as well as equities moved in tandem to the upside when the Federal Reserve initiated the new monetary policy. You will also see that in approximately the middle of 2011 there was a reversal in terms of the correlation between the two asset classes.

Typically, safe haven assets and risk on assets have an inverse correlation, meaning they tend to move in the opposite direction. The rare exception to that correlation is during the Federal Reserve reducing interest rates and implementing quantitative easing.

For the last few weeks both gold and silver have for the most part been moving in tandem which is an unusual correlation. Today we saw a return to the normal negative correlation between gold and stocks. Although one day does not make a trend it has to begin somewhere. We will have to see if this this negative correlation continues as it did during the financial crisis in 2008.

If that is the case and we see US equities begin to really trade under pressure we could see gold skyrocket and challenge not only $1800 per ounce but the all-time record high above $1900.

Market Overview

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