(Kitco News) Gold's next rally might depend on the stock market and how fast it can deflate as the Federal Reserve tightens its monetary policy, said Bloomberg Intelligence.
The stock market is a crucial metric for gold since the trend of its outperformance versus gold might be reversing, Mike McGlone, senior commodity strategist at Bloomberg Intelligence, wrote in a note Monday.
"A top potential force for the Federal Reserve to lighten up on tightening -- which is gold resistance -- is a deflating stock market," he said. "An elongated period of gold underperformance and stock market outperformance may be reversing. This narrative from 2000 is gaining traction in 2022. The metal is down about 6% vs. about a 15% decline for the S&P 500 to Sept. 9."
The story is different in other currencies. Gold has climbed around 7% and 17% in the euro and yen, respectively. "The metal has made new highs in other major currencies, which is typically a precursor for similar behavior in dollars," McGlone added.
The gold- to-S&P 500 ratio bottoming could be the trigger gold needs. "The Fed started easing in 2001 as equities deflated and helped to buoy gold. We see parallels brewing in 2022," McGlone pointed out.
The Fed has a bit of a track record of hiking until something in the economy breaks. And gold can benefit from this as the fourth quarter approaches.
"The tendency for the Fed to hike rates until something breaks may be nearing an inflection point in currencies, with implications for gold. That the dollar price of the metal on a year-over-year basis to Sept. 9 is down about 5% vs. up 24%, and 12% in yen and euro terms, may be indicative of global economic stress as growth tilts negative and most countries battle inflation," McGlone highlighted.
Also, gold tends to react most positively to the Fed's endgame when it comes to tightening. "The most aggressive Fed tightening in 40 years and strengthening dollar are strong headwinds for gold, but it's the endgame that typically matters for the metal," McGlone said. "At some point the central bank will stop hiking rates … the world is plunging into recession."
The big markers to watch are GDP data, China's property issues, and the war in Ukraine. A bottom for gold could coincide with a bottom in GDP globally. And that could usher in the next big rally, McGlone added.
"That the most central banks in history are hiking rates to combat inflation is a good reason to expect global GDP to continue falling. Gold breached $1,700-an-ounce resistance in 1H20 as GDP turned negative and bottomed around $700 in 2008. We see parallels in 2022," he said.
