Both risk-on and safe-haven asset classes gain ground

U.S. equities staged a 180° turn around in trading today. All three major indices sustained major drawdowns yesterday, with the NASDAQ composite moving into corrective territory. Today the tech heavy NASDAQ composite gained 2.71%, and after factoring in today’s gains of a little over 293 points closed at 11,141.5642. To that end, today’s reversal in U.S. equities were impressive. Tesla which had lost 30% since the stock split 5 to 1 on the 31^st of last month gained back almost 11% in trading today. Gains in the NASDAQ were not isolated to that index alone with the S&P 500 gaining 2.02%, and the Dow Jones industrial average gaining 1.6%.

At the same time, we saw the precious metals complex continue to gain ground and move to higher pricing. Although dollar weakness contributed slightly to gains realized in gold, silver, platinum and palladium, it was traders actively buying the precious metals that were responsible for the majority of today’s gains.

This can be illustrated when we view the KGX (Kitco Gold Index). According to the index spot gold gained a total of $16.70 in trading today and is currently fixed at $1,947.70. On closer inspection we can see that traders bid gold pricing higher to the tune of $11.70, with the remaining gain of $5.00 directly attributable to dollar weakness.

Gold futures basis the most active December 2020 Comex contract is currently fixed at $1,955.70 which is a net gain of $12.50 (+ 0.65%) on the day. The dollar index lost -0.22% and is currently fixed at 93.235. Simple math tells us that the differential between a gain of +.65% in gold futures and the loss of -0.23% in the dollar index means that 0.42% of today’s gains in gold futures can be directly attributable to buying.

It seems as though at least for now, traders are witnessing the unique tandem moves to the upside in both U.S. equities (risk-on asset class), and gold (safe haven asset class). This occurrence is typically not what investors expect to see, because these two different asset classes tend to move with a opposite correlation in different directions.

However as we have spoken about on many occasions this negative correlation seems to vanish when the Federal Reserve is actively keeping interest rates extremely low, and has a monetary policy which includes quantitative easing achieved by purchasing treasuries, mortgage backed securities, and in this instance corporate bonds. It seems unlikely that the Federal Reserve will raise rates before real progress has been made on their mandate of a stable economy and maximum employment. The only difference in recent Fed actions is a rebalancing of their acceptable target for inflation, which for years was set at 2%.

Chairman Jerome Powell in his keynote speech during the economic symposium made it clear that they will focus on economic growth and job growth while they let the level of inflation run hotter than they have in the past.

As long as the monetary policy of the Federal Reserve in conjunction with other central banks globally maintain a monetary policy that is extremely accommodative and maintain low interest rates we can expect to see a continuation of the rally in gold and silver in tandem with U.S. equities.

Wishing you as always, good trading and good health,