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Gold, Miners Have Surged on the Market Rout—What’s the Upside?

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Gold has failed to draw a bid

Gold prices have failed to draw a bid in 2018 despite many market uncertainties, including trade war tensions, the emerging market (EEM) currency crisis, and other geopolitical concerns.

Year-to-date, gold prices have fallen 6.4%, and they’re currently down 9.6% from their April peak.

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The wind beneath gold’s wings

However, the last few days have put the wind back beneath gold’s wings. The SPDR Gold Shares ETF (GLD), a proxy for physical gold’s price, rose 2.6% yesterday, bringing gold’s gains in the last three days to ~3.0%.

The bond market and the stock market have been in turmoil for the last few days. The sell-off in bonds led to rising bond yields, which negatively impacted stocks on fears of rising interest rates. Investors are worried that because the era of near-zero rates has ended, companies’ margins could get squeezed. We’ve discussed this in more detail in Is the Current Sell-Off a Blip—or the Start of a Downtrend?

Market concerns

Apart from rising rates, investors are worried about upcoming earnings deceleration. The 2018 stock market rally has been fueled in part by the tax reform windfall. Moreover, US companies (SPY) (DIA) have initiated record levels of stock buybacks in 2018. The impact of these factors, however, is expected to start fading in 2019, leaving earnings more exposed to fundamental factors such as the rising US dollar (UUP), the ramping up of trade tensions, and the building of inflationary pressure.

Read Does the Sell-Off Imply Market Repositioning for Lower Growth? for more on this topic.

Gold has finally caught a bid on equity market correction as well as the weakening US dollar. In Why Gold’s Upside Potential Seems to Outweigh Downside Risks, we discussed why the metal seemed primed for a comeback given the current macroeconomic backdrop.

In this series, we’ll discuss the factors that could support gold’s and miners’ (GDX) (NUGT) runs for the rest of 2018 and beyond. In the next article, we’ll kick off the discussion by looking at traders’ short positions on gold and whether the above-mentioned factors could lead to short covering, further helping gold.

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