There seems to be some optimism in the gold market as prices started creeping up in the past week, with the yellow metal trading for $1,728.28, at the time of writing, meaning that it successfully bounced off of the $1,700 resistance.
For gold traders and investors, the data points on inflation, such as the US Consumer Price Index (CPI) and the preliminary inflation expectations released by the University of Michigan, will determine the level of bullishness.
“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. In euro and yen terms, gold has advanced around 7% and 17%, which emphasizes its store-of-value attributes.“
Stock market is the key
According to McGlone, a potential force that could push the Federal Reserve (Fed) to ease the tightening cycle could be a deflating stock market; furthermore, the tightening cycle is often viewed as resistance to a gold rally.
“Our graphic shows the gold-to-s&P 500 ratio potentially bottoming from its enduring support level since 2002, with the Federal Reserve’s tightening being the key difference to the last time the stock market dropped from a similar stretched condition in 2021.”
He also added:
“The Fed started easing in 2001 as equities deflated and helped to buoy gold. We see parallels brewing in 2022.”
If inflation data comes in lower than expected, a potential rally in stocks could occur, and whether that precipitates a fall in gold prices will remain to be seen. History often repeats itself; however, a short-term stock market rally doesn’t have to necessarily mean doom for gold prices.
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