The Stock Market May be the Key Gold Driver

By Mike McGlone, Special Contributor to Kitco News 

Monday May 16, 2016 09:31

(Kitco News) - The significance of last week’s market activity was the decline in the stock market and US Treasury bond yields, despite the stronger than expected retail sales number on Friday. Gold reversed earlier in the day weakness on Friday to end up on the day, with carry through strength Monday. Last Tuesday’s stock market rally may have marked the peak for 2016. Declining bond yields and stock prices are support factors for gold, but bond yields have been declining for years, most notably the past few two years, very much against the consensus. Persistent declining bond yields and the steeper yield curve are a strong indication of economic weakness. US dollar strength last week limited gold prices, but the US dollar appears to be teetering on the brink of further mean reversion of the rally since 2013, as Fed tightening expectations in a global deflationary environment, become increasingly suspect. Last week’s hawkish fed comments supported the US dollar and followed the pattern of recent years – they appear to be highly responsive to higher stock market prices. “Excessive risk taking” issues are becoming increasingly obvious, in the aftermath of QE3.  The S&P 500 is hovering over 30% above the pre 2008 crisis highs while most of the rest of the world’s stock markets remain below similar peaks. Stock price appreciation should continue to be greeted by hawkish Fed rhetoric, declining earnings and mean reversion of the QE3 supported rally.  

The Gold vs. S&P 500 ratio appears to be in the early recovery stage. Gold appears to be just getting back to the rally that began with the millennium, looking in the rear view mirror at the foundation of a near 50% retracement – often times necessary in good longer term bull markets. The featured chart depicts the gold Vs. S&P 500 ratio, potentially in the early recovery stages from pre 2008 crisis levels. Hopefully most investors will be just fine and the above average stock market returns of the past few years will resume. Just in case some of these historic relative value trends prevail, prudent investors appear to have plenty of incentive to continue to overweight portfolio gold and silver positions.   

Gold appears to be bottoming relative to the S&P 500

Source:Kitco