by Victor Mozambigue
A tame stock market and an S&P Index that isn’t posting losses or gains of even 1% for 40 consecutive trading days, present a troublesome picture for the investors. But with tranquil stability, there comes rising gold prices which are historically known to shake the very core of the stock markets. Bond yields have been rising in conjunction with the gold prices, signaling an imminent doom. We have seen similar conditions before. At the time of the 1987 Black Monday crash, the gold prices, and bond yields had risen consistently for three quarters straight. Rising gold and bond yields preceded the 1973-74 bear market.
What is the current gold and bond situation?
Gold reached $1,275.40 per ounce during the Presidential elections. It has been rising for 5 weeks now and has reached $1,230 per ounce. The stocks have been moderate for a while and gold corrective measures are no more influencing the prices. People are rushing towards a safe haven which is creating waves for gold. The yellow metal may have another 10% upside advantage now and is likely to follow 2015/2016 trends. The move towards gold is quiet but dramatic. Global political uncertainty is making investors flock to gold. A long-term interest in gold will rise as more political chaos comes into play.
— Axesun (@Axesun) February 8, 2017
The 10-year Treasury yield has been sending signals of distress all over. On November 8, 2016, the yield rate was 1.85% which reached 2.6% by December 16. Yields are currently hovering around 2.4%. The bear market on bonds is ending with both 2-year and 10-year yields going bullish. If US treasury yields keep rising like this, the stock markets will move even fast to a track of doom. By some estimates, silver may go back to $50 rates before Trump finishes term. Gold is also expected to reach $1900 per ounce.
Chief Investment Strategist at Bank of America Merrill Lynch Michael Hartnett has warned that a long term rise in gold prices and bond yields will spook the markets and call a crash. If this must happen, then a 5 week upward-trend in gold and a steeply rising bond yield could be signaling a big problem for the stock market.
Gold is a safe investment avenue in testing times. Some analysts believe that gold prices usually rise in correspondence to inflation levels and may not always be a bad indication for the economy. However, if investors flock towards gold in large numbers, they do so because of lack of trust in stock market. Fear and panic drive the willingness to buy more gold. The world patiently stood witness to Brexit and the uncertainties of President Trump’s early plans. However, there is a Frexit in making which will create further troubles for the world economy.
To put things into perspective- the shares of Randgold Resources witnessed a 4 percent rise. They have also increased their dividend payout by 52%. This means that dividend payout for each share will be $1. While their production output has been increasing for 6 years in a row, it reached record high last year as they extracted 1.25 million ounces of gold in 2016. The profits of the company stand at $294.2 million in 2016. Gold demand has been rising steadily and the financial reports of Randgold show that this trend will not end anytime soon.
President Trump has also unleashed his plans of making a wall along the Mexican border, restricting entry to the US and a launching a trade war on China are making investors more suspicious. Treasury yields and gold prices rising at the same time is harmful for the economy. While the crash may not come right now, it is highly likely to arrive sooner than later.