It seemed like nothing could stanch the flow assets pouring out of gold this past year. As equities rallied and saw new high after new high, gold took a beating as investors flocked to a more lucrative corner of the market. Slowly but surely, however, gold has pulled itself from the depths and was able to break through a key resistance at $1,336/oz. last week. Now, the precious metal sits at a key turning point, as it tries to establish a definitive upward trajectory for the remainder of 2014 [for more gold news and analysis subscribe to our free newsletter].
After tacking on 9.5% through the first two months of the year, gold is out for vengeance after 2013 saw its first annual drop in more than a decade. Now that the precious metal has proven it can get through its key resistance level, the question is whether or not it will be able to hold. Gold’s impressive start to 2014 has come mostly on the back of market fears and taper concerns, as the S&P 500 stumbled out of the gate this year. In fact, gold’s correlation to equities has been a near perfect inverse over the trailing year, coming in at -0.80.
As far as the near term is concerned, gold is holding its breath to see what markets are going to do next. If the first part of the year was just a bump in the road for equities, and the bull run is set to continue, gold may lose its grip and teeter off. But if market fears continue and negative reaction to Fed tapering persists, gold will continue to jump. With the S&P 500 making a fresh high last week, the outlook is anything but clear [see also Ignoring the Gold Predictions].
Active traders will be able to take advantage of the negative correlation in gold markets right now and make a play on any kind of negative economic news. Those with a strong conviction in either direction can set up a nice long/short pair with these two assets, though that is among the riskier plays. For long-term investors, this recent activity won’t make too much noise, as little has changed in the fundamentals of the precious metal over a long time span.
For now, keep a close eye on gold and equities alike, as the direction of the latter will determine that of the former for the near future.
Disclosure: No positions at time of writing.