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Time to Go Gold? Metal Outshines Risk Assets on Growth Concerns

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Gold versus other assets

For most of the year, gold prices (GLD) have languished, thanks to a strong US dollar (UUP), hawkish Fed rate hike outlook, and strength in the equity markets. For the last few months, though, some of these factors seem to be reversing course. Equity markets, for one, have remained quite fragile and volatile (VIX) since October.

In December, the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite (QQQ) have lost 10.3%, 10.4%, and 10.1%, respectively. Gold prices, on the other hand, have gained 3.2% while the VanEcK Vectors Gold Miners ETF (GDX) compounded that gain to a record 8.3% surge. The price action in leveraged gold ETFs, such as the Direxion Daily Junior Gold Miners Bull 3X ETF (JNUG) and Direxion Daily Gold Miners Bull 3X ETF (NUGT), has been more dramatic with gains of 28.2% and 25.1%, respectively.

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Gold gains bid on sell-off in risk assets

The sell-off in equities intensified after the Fed hiked rates (TLT) by 25 basis points on December 19 and signaled two more hikes in 2019. The Fed’s tone and inflexibility spooked the market.

Initially, gold prices also decreased, owing to rate hikes as higher interest rates are detrimental for metal’s non–income-yielding investment appeal. However, as the Fed rate hike exacerbated markets’ concern for slower growth, the US dollar (USDU) hit a one-month low on December 20 and gold prices reached a six-month high.

Time to go gold

Gold prices gained more than 1.0% yesterday. Gold also gained on safe-haven bids as investors exited high-risk assets, including equities. Oil futures (USO) also slumped on concerns of weaker global growth as well as oversupply.

As we highlighted in Jim Cramer Feels ‘Powerless,’ Tells Investors to Buy Into Gold, Cramer suggests investors buy gold as it seems to be in a bull market. We also observed in Could Market Risks Bring Investors Back to Gold in 2019? how the factors hurting gold prices could reverse in 2019, giving gold a nice tailwind.

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