Hawaii Six O - Gary Wagner
Gold and U.S. equities de-couple with stocks selling off, and gold moving higher
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In the last 12 years, the United States has experienced two major economic disruptions both requiring massive Federal Reserve intervention to lessen the effect of a contracting economy. The first occurrence was in response the financial meltdown of 2007 and subsequent recession which began in 2008. The second occurrence is still in progress and based upon a global pandemic which had a major impact on many industry sectors.
What is unusual about these two occurrences is that even with Fed intervention market sentiment has dramatically changed in reference to stock and gold prices. In 2007 it was discovered that there was an imminent banking crisis which would lead to a recession which began in 2008. In the fourth quarter of 2009, the Federal Reserve realized that action was necessary and initiated the first round of quantitative easing, simply referred to as QE1.
At that time gold was trading at approximately $700 per ounce, and for the next two years would rise dramatically to its all-time record high. This was aided by the second round of quantitative easing (QE2) which began in the fourth quarter of 2011. Gold had been priced at approximately $1300 prior to the initiation of QE2 and continued to trade higher through the middle of 2011 when it hit $1900 per ounce. However, at that point gold prices began to define a range with a highs of $1800, and lows at approximately $1537.
In April 2013 gold prices began to trade below the support level of $1537, and by the end of 2015 had reached a low of $1020 per ounce. The chart below clearly illustrates how gold prices reacted as different stages of quantitative easing were implemented. During QE1 gold prices gained significant value. The rally continued as the Federal Reserve implemented QE2. Both QE1 and QE2 were instrumental in taking gold to its all-time record high. From the middle of 2011 up until the middle of 2013 gold traded within a $300 price range and hit $1800 per ounce for the final time when the Federal Reserve announced the last round of quantitative easing (QE3). QE3 differed greatly from the quantitative easing that had preceded it. The Federal Reserve named this action “twist”, in which they swapped long-term and short-term bonds in their asset sheet portfolio, rather than increasing their balance sheet which had swelled to $4.5 trillion by that time. Whether QE3 was the root cause of gold prices dropping from $1800-$1200 is unknown. However, it is very likely that this Fed action had a pretty profound impact on gold prices. In the middle of 2013, the Federal Reserve announced that it was going to begin to taper and by the third quarter of 2014 the Federal Reserve ended the monetary policy of quantitative easing. This was the final straw that took gold pricing to the lows achieved at the end of 2015 when prices fell to just above $1000 per ounce.
Most noteworthy is the fact that U.S. equities continue to rise through 2013 up until 2020 when the global pandemic it. At the same time quantitative easing by the Federal Reserve boosted equities pricing causing them begin a decade-long rally (that would result in the highest price recorded for the three major indices; the Dow, the NASDAQ composite, and the Standard & Poor’s 500.
It seems however that recent action by the Federal Reserve has resulted in the negative correlation between the safe haven asset class gold, and U.S. equities. This negative correlation is typical, with one of the few exceptions being a response to Federal Reserve actions.
Over the last two days we have seen a decoupling of the tandem upside moves of both equities and gold. We are now seeing U.S. equities come under pressure, and gold pricing moving higher. The question then becomes whether or not we are witnessing a pivot in terms of the relationship between those two asset classes. If this is the case, we can expect US equities to continue to lose value and gold simultaneously moved to higher pricing.
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Wishing you as always good trading and good health,