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Price of Gold Fundamental Daily Forecast – Direct Correlation with Stocks Likely to Continue Over Near-Term

By:
James Hyerczyk
Published: Mar 21, 2020, 21:42 UTC

The positive correlation between gold and stocks has been a bit of a surprise for many veteran traders, who have been used to buying hard assets when soft assets plunge. But this financial crisis isn’t about weak stocks. It’s about weakness in all asset classes and a huge desire to own cash.

Price of Gold Fundamental Daily Forecast – Direct Correlation with Stocks Likely to Continue Over Near-Term

Gold posted a volatile two-sided trade before settling higher on Friday. The market was underpinned by a wave of fiscal and monetary stimulus by global central banks to counter the economic impact of the coronavirus outbreak that eased demand for cash, while generating a little light demand for stocks (paper assets) and gold (hard assets).

On Friday, June Comex gold settled at $1488.10, up $5.80 or +0.39%.

After getting crushed on Monday, gold started to stabilize. Monetary stimulus is likely behind the base-building as aggressive help from the major central banks starts to work its way into the financial markets.

Equity markets remained under pressure, however, they also stabilized at times, as liquidity issues started to dissipate. Gold and stocks continued to be highly correlated, however, and this is likely to continue over the near-term until the volatility in the market softens.

The positive correlation between gold and stocks has been a bit of a surprise for many veteran traders, who have been used to buying hard assets when soft assets plunge. But this financial crisis isn’t about weak stocks. It’s about weakness in all asset classes and a huge desire to own cash (U.S. Dollars to be specific).

In addition to the massive demand for the U.S. Dollar, which tends to lower foreign demand for dollar-denominated gold, investors also had to succumb to stock market margin call selling. In other words, rather than blow out of leveraged stock positions, investors sold gold to raise the cash needed to stay in stocks.

The surprising direct correlation between stocks and gold is likely to continue until investors feel the liquidity crunch is over. The first sign of this will be profit-taking or a sustainable break in the U.S. Dollar.

If the dollar starts to weaken then look for demand to pick up for gold. Any rallies are likely to be tentative at the start because traders are still going to be nervous.

Gold traders are likely to continue to monitor the stock market too. Although it stabilized last week, Friday’s close was bad, which could be an indication that the sell-off will continue next week. This could drag down gold prices.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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