Gold or Stocks: What Will Drop First?

Throughout this year, there has been a lot of uncertainty in the market. We are still unsure whether the Federal Reserve will lift or cut rates. China is planning to cut new coal fired power plants. Brexit threw a spanner into European equity markets, sending the pound spiralling down. And, until recently, we were unsure whether Australia would have a majority government or not.

All of these events — some more than others — have pushed gold higher. The gold price in USD has risen 27.4%, to US$1,354.49 per ounce. And it’s no surprise that it has. Usually, when times are bad, investors rush to safe havens.

One of those safe havens is gold — for the simple reason that it holds its value. So by putting your cash into gold, you can protect yourself from the volatility of the market.

Now, because investors know this, they use this knowledge to profit. In times of uncertainty, they quickly buy gold with the idea that many other investors will buy as well. And, once gold prices have reached their peak (hopefully), these investors sell out to crystallise profits.

Another simple way to see overall optimism within the market is to look at the market itself. The S&P/ASX 200 is only slightly up 0.78% this year, to 5,337.1 points. However, since its low of 4,765.3 points in February, the market is up 12%.

But how can this be possible? Both the market and gold are climbing together. If you look at the graphs below, you’ll see what I’m talking about.

Bullion Vault Gold ASX 200 investing

Source: BullionVault; Investing.com

The rapid shift upwards (gold) and downwards (stocks) reflect the markets’ views on Brexit. From here, everything seems fine. Uncertainty has increased and, therefore, gold has jumped and stocks have dropped. However, since then, gold has risen higher, and so have stocks.

This could create confusion among investors. Are we still in uncertain times? Or are we just coming out of the fog? Can both be true at the same time?

Which one will revert first?

It is unlikely that both gold and shares will continue to rise. It is just a question of which one will drop first. When it comes down to it, there are more reasons for gold to blink first.

Gold has climbed far higher than stocks this year. But, unless we are in dire economic peril, or company earnings season looks as if it will disappoint, it is unlikely gold will continue to climb.

Some of the economic uncertainties noted at the start of this article have fizzled out. For example, the Brexit decision has now been digested and priced in. The Federal Reserve is unlikely to lift rates until the end of this year (even that’s still a ‘maybe’). The Australian government, too, has been determined, and now has a ruling party with a majority.

As you can see, many of these fears and uncertainties have now been priced in or forgotten. So if gold attempts to rally again, it will need to be on a new fear that circulates throughout the market. One of these fears could be the US election. However, we won’t know the results until November.

But there is more than a few speculators who think gold’s price rise will continue. Billionaire George Soros created his ‘short stocks, long gold’ position on 9 June. And while people might want to follow where the big money is going, I don’t believe George is one to follow.

Yes, he’s worth billions. And his opinion is widely respected when it comes to currencies. However, this man is a true speculator. What’s more, Mr Soros is a punter. He’s betting that gold will increase, and that stocks will decrease.

But the huge difference between Soros and everyday investors is that he can afford to lose millions. He can hold a position until it swings his way, whereas you need to be more cautious with your investments.

Just for a second, let’s say I’m wrong. Let’s say stocks continue to decline, and gold climbs. In this scenario, I believe investing in stocks could be even more profitable. And the reason why is because, in a bear market, you have the option of picking up bargains.

There are always opportunities in the market, and cycles never last forever. In order to buy low and sell high, you first need to buy low. And what better way to do that than in a bear market?

Härje Ronngard,

Junior Analyst, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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