Anyone who reads my work knows that I’m bullish on gold going into 2020. The fundamental forces are well aligned, led by negative real rates.
There is one force that isn’t playing along: the US stock market. The bull market in US stocks is the biggest headwind for gold. It captures whether investors need safety or not. As long as stocks keep rising, investors don’t feel much need to flee.
US markets are up 11% since August. On first glance that would suggest gold is being ignored…but it is not.
And so, we get to the thing. The ‘thing’ is that we just don’t know what’s going to happen with US stocks. And that question, combined with the support of negative real interest rates, has gold holding its ground despite the headwind of a risk-on market.
The risk-on market returned in September, after a summer when Google searches for recession ramped right up, stock suffered, and gold rain. So which is it? No one knows. Hard data has been mixed for years now – in the last week, for instance, we saw the manufacturing purchasing managers’ index in contraction territory but a strong employment report from the BLS – but these days all you need is some pervasive optimism to lift stocks 11%.
How is this going to play out for gold? I can’t know, but I can hypothesize.
First of all, the inverse relationship between gold and stocks is well developed. And you can see the same pattern comparing gold with copper, which is a proxy for growth and therefore trades right alongside stocks.
By extension, there’s a strong correlation between the copper-gold price ratio and the yield on the 10- year Treasury. Bond yields rise when investors are confident in the economy; they fall when sentiment turns down. Copper does the same; gold does the opposite. As such the copper-gold ratio and the 10-Year yield correlate closely.