(Kitco News) Gold’s next rally could depend on the stock market and how quickly it could deflate if the Federal Reserve tightens monetary policy, Bloomberg Intelligence said.
The stock market is a critical measure of gold as the trend of its outperformance against gold could reverse, Mike McGlone, senior commodities strategist at Bloomberg Intelligence, wrote in a note Monday.
“A top potential force for the Federal Reserve to ease tightening – which is the gold resistance – is a deflating stock market,” he said. “A protracted period of gold underperformance and stock market outperformance could reverse. This 2000 story is gaining momentum in 2022. The metal is down about 6% from a drop of about 15% for the S&P 500 through September 9. .”
The story is different in other currencies. Gold is up about 7% and 17% respectively in the euro and yen. “The metal has hit new highs in other major currencies, which is typically a precursor to similar behavior in dollars,” McGlone added.
The low of the gold-to-S&P 500 ratio could be the trigger that gold needs. “The Fed started easing in 2001 as stocks deflated and helped boost gold. We’re seeing parallels brewing in 2022,” McGlone noted.
The Fed has a good track record of walking until something in the economy breaks down. And gold could benefit from this as the fourth quarter approaches.
The Fed’s propensity to raise rates until something breaks may be approaching a currency inflection point, affecting gold. That the dollar price of the metal is down about 5% year-over-year through September 9 vs. 24% and 12% in terms of yen and euro could indicate global economic stress as growth turns negative and most countries fight inflation,” McGlone emphasized.
Gold also reacts most positively to the Fed’s endgame when it comes to tightening. “The most aggressive Fed tightening in 40 years and stronger dollar are strong headwinds for gold, but it’s the endgame that usually matters for the metal,” McGlone said. “At some point the central bank will stop raising interest rates…the world will plunge into recession.”
The big markers to keep an eye on are GDP data, China’s property issues and the war in Ukraine. A gold bottom may coincide with a global GDP bottom. And that could usher in the next big rally, McGlone added.
The fact that most central banks in history are raising rates to fight inflation is good reason to expect global GDP to continue to decline. Gold broke the resistance of $1,700 an ounce in 1H20 as GDP turned negative and bottomed out around $700 in 2008. We’re seeing parallels in 2022,” he said.
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