What Gold’s Price Plunge Tells Us About the Record-High Stock Market

The gold price has dropped by 4% in the past nine days against the U.S. dollar as the Dow Jones surged past its all-time high.

In previous weeks when the Dow Jones demonstrated promising upside movements, gold continued to rally, as investors were cautious about various geopolitical risks that posed a threat against the momentum of the equities market.

In the past two weeks, the spike in the Dow Jones from 27,046 to 27,681 points coincided with a noticeable drop in the gold price, indicating that investors are moving out of the safe haven asset market to re-enter the equities market.

Big investors are moving away from gold to more risky options

Some of the world’s largest banks by market capitalization including JPMorgan and Citibank have closed their positions on gold as the sentiment around the U.S stock market improved.

JPMorgan strategists Marko Kolanovic, Nikolaos Panigirtzoglou and John Normand named cyclical recovery, lessening geopolitical risks, increasing monetary easing from central banks, and more investors on the defense as the main reasons behind their change in stance towards gold.

Term premiums for bonds have started to decline as well, which historically have indicated a sell-off for bonds, sending a “red alert” to investors in the bond market.

Roberto Perli, a partner at Cornerstone Macro LLC, told Bloomberg:

Term premium was extremely depressed due to trade uncertainty, Brexit and you name it. These risks have abated so there is room for about a 50 basis point move higher in term premium. And given the Federal Reserve is on hold — with no chance of lifting rates – there’s a lot of incentive for investors to take risk.

The gold price records a sharp drop against the U.S. dollar in less than two weeks (source: TradingView)

As gold and bonds struggle, and major banks shift from safe havens to riskier options amidst brightening global economic sentiment and productivity, the upward trend of the Dow Jones is expected to be sustained.

The market anticipating a deeper pullback for bonds may also suggest that investors are dismissing the possibility of the trade deal between the U.S. and China faltering despite the statement of U.S. President Donald Trump, which is to establish a strong ground for the Dow Jones to initiate an extended rally.

Nobel laureate says geopolitical risks over-estimated

According to Nobel laureate Robert Engle, an economist at NYU Stern, numbers show that geopolitical risk in the global economy is lower now than it was before.

“Is geopolitical risk really higher now than it was before?’ I don’t know how confident I am in the answer, but the numbers at least suggest that it’s not, he said.

The outflow of capital from the safe haven market is demonstrating the over-estimation of the potential impact of geopolitical risks on the market by investors, which over time could play as a catalyst for the strengthening momentum of the Dow Jones.

This article was edited by Samburaj Das.

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