What gold's rise means for rates, equities

It has been several years since we have seen volatility in gold. An increase in gold volatility can typically be associated with a change in sentiment and investor behavior. The precious metal has surged this year on increased demand for safe haven assets as U.S.-China trade tensions persist and seemingly have impacted global growth.

 

The World Has Changed

Although the S&P 500 is nearly at the same level in September 2019 as it was in September 2018, money has moved out of global equities and continues to seek shelter. In addition, central bankers have endured a variety of complex challenges and now have been forced to lean back towards an accommodative stance to combat these undercurrents of waning global growth.

Gold was highlighted on our relative strength matrix back in Q4 2018 and has had a steady climb higher all year in 2019. Gold futures are up 20% through September 10. As gold attempts to reclaim its previous safe haven title, we have seen ripple effects into other markets. Reverberations in equities as well as the bond market have occurred in 2019, and these moves are in the wake of the grab for gold that started in late 2018. Historically, as market participants grow worrisome (and there certainly is a lot to worry about these days), gold indeed attracts buyers.

 

Central Bank Experiment

The amount that investors are willing to pay for options premium (specifically down-side puts), is one way for investors to measure current market sentiment. Bonds are another important market to keep an eye on as investors will feverishly dive into U.S. Treasuries similar to gold. One nuance that is convoluting this usual relationship is the fact that we are seeing nearly $17 trillion in negative yielding bonds from a global perspective.

However, one could argue that gold may have the ability to move even higher as the surge into negative yields globally raises the appeal to own gold. Trading back above $1,900 like we did in 2011 will be challenging, but those all-time highs may get tested as this central bank experiment plays out. The continued mix of global data and the anticipated mirror-like policy reactions from central bankers globally will allow for a persistent bid in the precious metal.

 

An Unorthodox Market

Another important piece of the puzzle to be fully aware of when trading or investing in gold is the U.S. dollar. Gold is a U.S. dollar-denominated asset. Typically when the dollar strengthens, foreign demand for gold weakens and vice versa when the U.S. dollar weakens. However, there is nothing typical about the 2019 marketplace as we have seen gold rally in the face of a rising U.S. dollar.

This certainly is unorthodox, but gold has swiftly overcome the strengthening U.S. dollar in recent months as the Fed insinuates several potential rate cuts coming in the next year. If the Fed continues to articulate the fact that the economy faces “significant risks” over the upcoming quarters, rest assured that investors will continue to make gold glitter.

 

Jeff Kilburg has 25 years of investment experience and is the CEO of KKM Financial, an investment solutions provider based in Chicago, IL. KKM works with wealth advisors, financial institutions, and family offices globally. Follow Jeff on twitter @JeffKilburg.

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