By Amram Margalit – Leverate
By the 8th of February, the S&P 500 had dropped $300, wiping trillions of value off US shares. This drop, on the back of global concerns of the impact of Trump’s protectionist fiscal policies, was most unusually reflected in the price of gold. The subsequent rebound in US shares was a much welcome reprieve for investors, who had significant fears of a long sustained drop in US equities. The S&P 500 price peaked at $2,779 on the 26th, before dropping again to $2,677 at the beginning of March.
The initial rebound in the S&P was reflected in the gold price, which peaked on the 15th at $1,363, before dropping down to about $1,311 by the end of the month.
In early February, the similarity of price patterns between gold and the S&P represented an unusual situation. Gold, which often serves as a hedge in times of geo-political turmoil, generally strengthens when stock markets begin to drop. Since it is priced in USD, the link between gold to US equities and the dollar is particularly strong.
With low confidence in the stock market, gold, which has been in the process of a long term uptrend based on moving averages, should have pushed through the resistance line. However, it has actually not moved substantially, maintaining its levels around the $1,300 for an extended period of time.
Perhaps a better understanding of the gold activity in February is more accurately reflected in the precious metals sector, rather than in reflection of the S&P. Generally, precious metals have been in correction. In early march, silver was in a consolidation, with the daily sentiment index for silver showing at 40% bull, whilst being stuck within the support resistance lines. Gold, however, has been trending around $1300 without significant breakout despite the long term bullish moving averages. The commodity is not overbought, whilst gold shares were in overbought territory. This indicates an interesting element, seemingly with the value of gold in dispute between the shares and the commodity.
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The expected increase in gold from a macroeconomic perspective relates to a potential increase in inflation. This is something that was not immediately expected in February, with current global competitive pressures hampering this increase. In this light, the current sideways trend – using long term indicators and the lack of breakout as a result of Trump’s policies and subsequent confusion – would point to a longer term fundamental reason that the gold price has remained the same. The increase in gold shares purchasing in this case would be reflective of a market that recognizes the potential for gold, whilst understanding that the value of gold is not yet ready to breakout.
The activity of gold during February seems to be more in line with longer term precious metal activities. Because of this, the apparent mirroring of the S&P and gold was both out of character for short term, but in character for a long term analysis.
Time will tell if the summer of gold is upon us, and how much the glitter predicted by the increase in gold shares will be a forbearer of things to come.
About the Author:
Amram Margalit is a professional writer who has worked in a wide range of settings, including technology companies, nonprofits, and the entertainment industry. Within these positions, Amram has provided quality content and advertising services and is currently the Content Manager at Leverate.