Trade of the Day – April Comex Gold/March E-mini S&P 500 Index Relationship – February 3, 2016

Worries about whether the Fed will raise interest rates at all during 2016 continued to drive a wedge between April Comex Gold futures and the March E-mini S&P 500 Index futures contract. Investors are selling stocks because of the volatility in the Chinese markets and the weakening Chinese economy. They feel that these two factors are likely to delay the planned series of Fed rate hikes that the central bank mentioned in its December monetary policy statement when it raised rates for the first time in nearly 10 years.

As investors pull their money out of equities, they are turning around and putting it in the safety of gold. Although there is no inflation, so to speak, gold has been rallying as investors use the market as a hedge and an alternative investment.

Technically, the main trend is down in the March E-mini S&P Index according to the daily swing chart. April Comex gold, however, is in an uptrend. The spread between the two contracts is likely to continue to widen if investors can sustain a rally in gold over the recent top at $1128.70 and S&P 500 short-sellers continue to defend the key 50% level at 1939.75 and the main top at 1946.50.

Some investors believe that the rally by gold into a two-week high is a precursor to a weak U.S. Non-Farm Payrolls report due to be released on Friday, February 5.

Since the Fed has said that it is “data dependent”, a lower-than-expected print in the jobs report could send gold sky-rocketing because it will likely mean the Fed will pass on a rate hike at its next meeting in March. Stocks could break initially because a weaker report will indicate the economy is losing steam.

A scenario where both gold and stocks rally will develop if traders decide the economy too weak for even one rate hike in 2016. Additional stimulus from the European Central Bank, the Bank of Japan and the People’s Bank of China could also be supportive for both gold and stocks.

Faltering U.S. growth and global liquidity concerns could also drive the U.S. Dollar lower which would help underpin gold. Increased bets that the Fed will grow less hawkish as the year progresses could lead to a decline in U.S. Treasury yields which will also pressure the dollar, and lead to more foreign demand for gold.

Over the next couple of days leading into the U.S. jobs report, we’re going to keep an eye on the relationship between gold and stocks. This could give us clues as to how the major players feel about the odds of a Fed rate hike over the near-term.