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Rate Cuts Continue to Favor Stocks Over Gold

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The Latest FOMC meeting concluded with the expected rate cut. The Federal Reserve cut their Fed funds rates by a ¼% (25 basis points) to take the current spread to 175 bps. (1 ¾%) to 200 bps (2%). This action resulted in an increase of bullish sentiment in both stocks and gold.

We reported that there was a high probability that the Fed would report and implement a rate cut. 

However over two weeks prior to the October 29 meeting we spoke about the relationship between gold and stocks which typically has an inverse correlation and relationship as traders move investment dollars from the save haven assets to risk on assets when they believe that stocks will continue to gain value.

The inverse relationship and correlation between gold and stocks is suspended during periods of central bank intervention. This is because both asset classes benefit from central bank action where they either print more money and/or increase their asset balance sheet.

Although we focused upon a subtle change in that pattern when traders witnessed both asset classes moving higher, the subtle difference this time is that stocks gains are absolutely outperforming gains in gold prices. It seems as though that particular bias continues to still dominate price action.

Today both asset classes (U.S. equities and gold futures) closes higher on the day, but with a noticeable difference of stocks having substantial gains and gold barely holding onto fractional gains. One possible explanation for this exception is that a stronger dollar entices foreign investment dollars to trade in our markets believing that they will gain value both from the stock moving higher as well as the dollar.

Today the Dow Jones industrial average gained a little over 4/10 of a percent, or 114.75 points, and is currently fixed at 27,004 62, in fact today’s advance took the Dow to an all-time record high. At the same time the Standard & Poor’s 500 closed at 3,078 a new all-time record high and the NASDAQ composite did the same closing in new record territory.

Gold and silver did move fractionally higher on the day, but the keyword is a fractional gain. The fractional gains in both gold and silver today directly pressured by the strong U.S. dollar. Currently the dollar index is up +0.30% and is fixed at 97.335. Considering that gold futures gained 0.04% it is clear that if the dollar was neutral or weaker today gold prices would have ended at a higher price.

The effect of a strong dollar was even more noticeable and pronounced in spot gold. Physical gold closed off by $4.50 today. According to the KGX (Kitco gold index) market participants actually bid the precious yellow metal higher resulting in a gain of $0.65. However, that gain was dwarfed by a strengthening U.S. dollar which removed $5.15 of value per ounce.

That being said even though there was a rate cut announced at the end of last month, Fed comments both in the statements and Chairman Powell’s press conference revealed that they don’t have an extended plan to continue this practice. However, one major change that is largely gone unnoticed is there additional purchases of balance sheet assets to the tune of $60 billion per month.

As we spoke about in the past if it quacks like a duck, and walks like a duck, it must be a duck. So while the Fed is making a case for a reduction or end to rate cuts, their monetary policy of now incorporating some sort of quantitative easing and injecting or printing money is simply the same  misdirection as a magian uses so you see want they want you to see.

Wishing you as always, good trading,

For those who would like more information, simply use this link.

 

Gary S. Wagner - Executive Producer