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3% Drop In U.S. Equity Market Could Spark Gold Rally - Analysts

Kitco News

Editor's Note: The article was updated to reflect further weakness in equity markets, which are down more than 3% across the board

(Kitco News) - Equity markets are breaking down and that could be the catalyst needed to light a fire under the gold market, according to some analysts.

Ahead of the close, the S&P 500 and Dow Jones Industrial Average have dropped significantly with both falling 3% during the session; The Dow Jones is down almost 800 points. According to reports equities are seeing their biggest five-day drop in nearly two years. The Nasdaq Composite Index is the worst performer, falling 3.5% on the day.

Meanwhile, gold prices are trading near session highs.  December gold futures last traded at $1,196.70 an ounce, up 0.44% on the day.

In the current market environment, many analysts are keeping an eye on the $1,200 an ounce level since it represents the first hurdle gold needs to clear.

“Right now gold is up but compared to the drop in stocks it’s still just trading at its base,” said Colin Cieszynski, chief market strategist at SIA Wealth Management. “Gold needs to at least clear $1,200. If it doesn’t, that is not a good sign.”

However, despite gold’s slow start, Cieszynski said that he is expecting to see higher prices as this is the perfect environment for the yellow metal.

“We haven’t seen this in a long time, equities are down and volatility is up. Capital is starting to find its way back into the old school havens,” he said.

Jim Wyckoff, senior technical analyst at Kitco.com, said that there is a very good chance gold regains the $1,200 level as he thinks this is just the start of a correction in equities.

“There are technical and fundamental signs the U.S. stock indexes have put in at least near-term market tops, if not major market tops,” he said.

George Gero, managing director with RBC Wealth Management, said that gold’s rally isn’t bigger because he suspects that some investors and traders are selling the liquid asset to maintain margins in their equity accounts.

However, he added that there are plenty of bullish factors that will continue to support higher gold prices.

“We still have midterm politics, we still have currency and other dislocations in Italy, Greece, Brazil, Argentina, Venezuela and now China adding to economic headlines,” he said. “All this means higher prices for gold.”

Cieszynski also pointed out that while the breadth of the equity selloff is a bit shocking, the move is not a major surprise. He added that equities have been pricing in perfection ahead of the third quarter earnings, but companies are facing significant issues like a stronger U.S. dollar and rising interest rates.

He noted that investors were pushed out of their complacency after bond yields pushed to their highest level in seven years.

“Faced with a stronger U.S. dollar and rising interest rates something had to give and we are seeing the result,” he said. “Gold should do well because investors just don’t have a lot of other options.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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