One month after the February stock market rout is an excellent time to step back and review all the facts – and their implications for the gold market. Here’s exactly what happened – and what it implies for your capital allocation.

  • After more than a year of continuously advancing, the S&P 500 fell nearly 10 percent in five days.
  • The sell-off was allegedly triggered by the surprisingly strong January jobs report, showing the acceleration in wage growth. That released fears of higher inflation, which could prompt the Fed to tighten its stance further. As President Trump rightly pointed out (on Twitter, of course):

    In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down.
     

  • The stock market correction came on top of bond market tumble. The 10-year Treasury yield jumped from 2.72 percent on January 31 to 2.84 percent on February 2. Analysts claim that bond yields also spiked due to inflation concerns.
  • Gold didn’t offer a hedge against stock market turmoil. Instead, it shared with equities the fears against a more hawkish Fed and moved in tandem with stocks, as one can see in the chart below. The correlation between these two assets this year is about 0.6, which is pretty high.

    • Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $) and S&P 500 Index (green line, right axis) from January 1, 2018 to February 28, 2018.

    These are facts. But what do they imply for the future? Are they changing the economic outlook? Not really. First of all, fears of inflation are clearly exacerbated. Just look what happened to the oil prices in February. It doesn’t suggest that enormous inflation is coming. And it doesn’t bode well for bullion, given the strong correlation (almost 0.6 – see also the chart below) between the yellow and black gold in 2018.

    Chart 2: Gold prices (yellow line, left axis, London P.M. Fix, in $) and oil prices (black line, right axis, WTI, in $) from January 1, 2018, to February 26, 2018.

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