GOLD : Bad News For Stocks
(Tue, 28 July 2020). Gold prices are surging because the economy is in trouble. That scenario doesn`t bode well for the Dow Jones. The very same factors that are driving gold higher could send stocks lower.
Gold hit a record high on Monday as investors are rushing towards the haven asset. Concerns about the economy are driving the gold rally. A slower recovery is a threat to the Dow rally. Gold investors have reasons to cheer. The price of gold climbed to an all-time high on Monday, rising above $1,940 per ounce.
Gold has gained almost 30% this year. The party should go on for a long time, as Bank of America foresees the yellow metal going to as high as $3,000 per ounce over the next 18 months.
Fears About the Economy Are Driving Bullion Higher
Investors are pouring their money into the precious metal amid fears over the pandemic’s impact on the global economy and worsening tensions between the United States and China. Falling returns on U.S. government bonds and a weaker dollar are also driving the yellow metal higher.
This is not the first time that gold has received aid from central bank stimulus programs. From December 2008 to June 2011, the Federal Reserve bought $2.3 trillion in debt and kept borrowing costs near zero to support growth. Those efforts helped send gold to a record high of $1,921.17 in September 2011.
The Yellow Metal Rally Isn’t Positive for the Dow
The gold rally signifies that the economy is in trouble, which is terrible news for the Dow. Rising virus cases and death spikes are threatening the fragile recovery. The economic recovery is slowing as lockdowns resume in many states. After declining for four months, unemployment claims are on the rise again. There are fears that the expiration of the additional $600 in unemployment benefit will deal another blow to consumer spending. Lower-income workers will feel the hit the most.
In a Reuters survey, economists have warned that any job gains are about to be erased as virus cases topped 4 million in the United States last week, with reports of more than 2,600 new cases per hour, the highest rate in the world. Almost 60% of economists said the risk that the employment recovery will reverse by the end of this year was high or very high.
It’s unlikely that the U.S. economy can have a sustainable rebound as it tries to extricate itself from the worst losses since the Great Depression. Two-thirds of economists said it would take two or more years for the U.S. economy to reach its pre-pandemic levels.
Increased risks to the economy are positive for gold but not for the Dow. Investors will pour more money into gold as the economy crumbles since it’s a haven asset. A slower recovery could halt the Dow rally, which has lost steam in recent weeks.
The stock market valuation seems too high relative to the uncertainties. Long-time market bull Ed Yardeni warned that new risks from the virus surge and increased tensions with China could trigger a 20% to 30% meltdown.
The Dow, meanwhile, has rallied on hopes that a vaccine will become available soon. CNBC’s Jim Cramer says gold’s move higher is a sign that a vaccine will fail and that central banks will continue to print money to support the economy during the crisis. The Dow will need other catalysts to go higher.
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