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The S&P 500 is headed lower, which is good for gold

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(Kitco News) -After a one-day reprieve, the S&P 500 is once again seeing some intense selling pressure, and the gold market continues to benefit from the market volatility as prices hold above another critical resistance level at $1,850 an ounce.

As the broad-equity market index continues to struggle and flirt with bear-market territory, the chorus of negative sentiment among economists and market analysts grows. Many analysts are looking for significantly lower price prices through the end of the year.

In a recent report, market strategists at Société Générale warned investors that equities could be prone to bouts of rallies; however, they added that the S&P faces a heavy uphill battle.

The French bank also warned that the U.S. economy faces growing stagflation risks as inflation remains stubbornly high and weighs on growth expectations.

"The most important leading indicators support our conviction to stay in a "de-risking' mindset (long USD, U.S. 10y, curve flatteners, defensives) and focus on the tail risks, especially that of "stagflation," the analysts said in their latest report. 

Market analysts at Bank of America are also raising the specter of stagflation. The analysts said that renewed weakness in equity markets could signify that investors are now focused less on rising interest rates and more worried about slowing economic growth.

Bank of America sees the S&P falling to a low of around 3200 points this year.

"This coincides with the typical 33% peak-to-trough S&P 500 recessionary decline," said Candace Browning, Head of BofA Global Research, in a note Sunday.

The bank is recommending investors increase their exposure to the energy sector over broad commodities as a risk hedge.

Hedge funds continue to sell gold but sentiment is shifting

"We remain overweight Energy, which benefits from low U.S. supply, accelerating services demand and war," the analysts said.

Market analysts at CrossBorder Capital said that they see the S&P 500 falling to 3,250 as Federal Reserve tightening continues to remove liquidity from the marketplace.

"They aim to make dollars scarce for both domestic inflation and international geo-political reasons, and they will tighten, as always, until something breaks," the analysts said.
"If we think of the fall in stock prices so far as the first-leg down in the market, associated with falling P/E multiples, then this second-leg down may be driven more by a collapse in earnings. We look set for at least a 30% peak to trough decline in the major indexes."

In the current environment, some market analysts continue to see gold as an important market diversifier and risk hedge against falling equity markets. Gold prices are significantly outperforming the S&P 500.

The broad market index is down 18% this year; meanwhile, gold, trading above $1,850 an ounce, is up more than 1%.

In a recent interview with Kitco News, Axel Merk, President and Chief Investment Officer of Merk Investments, said that although gold faces some challenging headwinds as real interest rates turn positive, it continues to do its job.

He added that rising inflation and market instability will continue to support gold prices.

"The Federal Reserve has one tool and that is not good for risk assets," he said.

However, despite gold's new momentum, some analysts still see the precious metal trading in a broad range.

"Several key themes continue to pull and tug at gold prices, dictating the short to long-term outlook. These include recession fears, inflation jitters, Russia-Ukraine developments, China's Covid-19 crises, and Fed hike expectations. While gold seems to be pushing higher, the Federal Reserve's aggressive approach towards higher-interest rates could act as a major roadblock for the zero-yielding metal," said Lukman Otunuga, Senior Research Analyst at FXTM. "Technically, a breakout above $1855 could trigger a move towards $1885 and $1900. Sustained weakness under $1855 is seen opening the doors towards $1820 and $1800."

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