The stock market is key to the price of gold right now, and here’s why

(Kitco News) Bloomberg Intelligence said gold’s next rally may depend on the stock market and how quickly it shrinks as the Federal Reserve tightens its monetary policy.

The stock market is an important barometer for gold, as the trend of outperformance against gold may reverse, Mike McGlone, chief commodity strategist at Bloomberg Intelligence, wrote in a note Monday.

“The maximum potential strength of the Fed to de-tighten – gold resistance – is the deflationary stock market,” he said. “A prolonged period of gold underperformance and stock market outperformance may reverse. This narrative from the year 2000 is gaining momentum in 2022. The metal is down about 6% versus a drop of about 15% for the S&P 500 through September 9.”

The story is different in other currencies. Gold jumped about 7% and 17% in the euro and the yen, respectively. “The metal made new highs in other major currencies, which is usually a precursor to similar behavior in the dollar,” McGlone added.

The low gold to S&P 500 ratio may be the reason for the need for gold. “The Fed started easing in 2001 as stocks contracted and helped boost gold. We see similarities brewing in 2022,” McGlone noted.

The Fed has a track record of hiking until something in the economy collapses. Gold could benefit from this as the fourth quarter approaches.

“The tendency of the Fed to raise interest rates until something is broken that may approach an inflection point in currencies, with implications for gold. The dollar price of the metal on an annual basis through September 9 is down about 5% versus an increase of 24%, and 12% In terms of the yen and the euro, it could be an indication of global economic stress as growth tends to be negative and most countries fight inflation.”

Also, gold tends to react favorably to the Fed’s endgame when it comes to tightening. “The most aggressive Fed tightening in 40 years and the strengthening of the dollar are strong headwinds for gold, but it is the end game that usually matters to the metal,” McGlone said. “At some point, the central bank will stop raising interest rates…the world is falling into a recession.”

Big signs to watch are GDP data, property issues in China, and the war in Ukraine. The bottom of gold could coincide with a bottom in GDP globally. That could lead to the next big rally, McGlone added.

“That most central banks in history are raising their rates to combat inflation is good reason to expect a continued decline in global GDP. Gold broke through the $1700 resistance in the first half of 2020 as GDP turned negative and bottomed at $700 in 2008. We see similarities in 2022.”

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