How Will Equity Market Affect Gold Prices?

Equity markets are making higher highs

Stock markets around the world and especially in the US are making higher highs, which is keeping investors interested in stocks as opposed to precious metals. Along with positive market fundamentals, the possibility of market-friendly tax reform is helping the stock markets in the US. On a year-to-date basis, the S&P 500 has returned ~15% as of the end of October 2017. Other US (IWM) (QQQ) indexes such as the Nasdaq Composite Index (COMP-INDEX) and the Dow Jones Industrial Average (DIA) rose nearly 24.5% and 18.6%, respectively, in the same period.

How Will Equity Market Affect Gold Prices?

Speculators added bullish bets last week 

According to the latest Commitment of Traders (or COT) report, large speculators of the S&P 500 (SPY) (SPX) increased their net bullish bets to 32,018 contracts for the week ended October 31, 2017, as compared to 26,432 contracts a week earlier. Positive earnings along with the expected tax reform are encouraging speculators to remain invested in equity markets.

Equity market outlook

The US business environment seems to be strong based on business confidence and consumer confidence surveys. Anticipated tax reform is also playing a major role in the market movement. Republican lawmakers released their tax reform framework at the end of September 2017. In this framework, they proposed to reduce the corporate tax rate from 35% to 20%. If the tax reform bill passes in Congress by the end of the year, we could see more upside in the major indexes. That being said, there is a high probability of a correction in US equity markets given a consistent rise in 2017. The valuations might be factoring in a lot of positives that are yet to materialize. Such a correction would favor gold prices as well as miners such as Gold Fields (GFI), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG). These stocks could appreciate more than gold prices in the event of an upturn.