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Is the Rising Volatility in Equities a Good Omen for Gold Prices?

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US equity market outlook

The US equity markets have rebounded from the correction witnessed at the beginning of February 2018. However, market participants are concerned that the markets might see a more sustained slowdown going forward.

The US equity indexes were sharply lower following President Trump’s support of tariffs on steel and aluminum imports. These rising concerns of protectionism aren’t conducive to a healthy corporate and consumer environment in the country.

Please read Could Gold Catch a Bid if Equities Stay Weak in 2018? for a discussion of how various equity market scenarios could bode for gold prices.

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US equity fund outflows

The US equity fund outflows have continued after the rebound in the markets. According to EPFR Global (Emerging Portfolio Fund Research), the US equity fund outflows totaled $2.4 billion for the week ended February 21, 2018. This trend followed outflows of $6.2 billion in the previous week.

When the S&P 500 lost more than 10.0% in the first week of February, the outflows had amounted to $33.0 billion. Outflows from the SPDR S&P 500 ETF Trust (SPY) (SPX) also continued with SPY’s net redemptions of $4.8 billion for the week ended February 16, 2018.

Concerns about faster-rising inflation, as well as higher interest rates, are the major factors impacting US equities. Citi (C) sees a more moderate trend in 2018 compared to 2017. The firm cites mounting inflation pressures as the major factor impacting an equity bull market.

Volatility on the rise

The US markets touched higher highs in 2017 with very low volatility. That scenario has changed in 2018. The CBOE’s Vix Volatility Index has remained elevated, having soared to its highest level since August 2015 in early February 2018.

When volatility rises, the perceived risk rises. As a result, gold’s appeal in a portfolio as a risk mitigant comes into play. A positive sentiment for gold could affect miners such as Royal Gold (RGLD), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG).

Although royalty companies such as RGLD did well in 2017, other miner categories lagged. ABX and CDE returned -9.4% and -17.5%, respectively. With its return of 39.9%, KGC was an outlier in 2017.

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