I’ve been bullish on gold for many months now, arguing that the precious metal has been “sending a warning” since October. Gold tends to move when expectations for increased stock market volatility are rising. That warning clearly hasn’t been heeded by many. Large-cap averages are sitting at all-time highs despite risks beneath the surface. Still – the bull case for gold is alive and well, and the reason now may be unemployment.
How are jobless claims linked to the price of gold? We have to look to the Fed for answers. It’s clear the lags of the fastest rate hike-cycle in history are starting to impact the labor market. Data from the June jobs report was, for lack of a better way to say it, a disaster. The unemployment rate is up and, more importantly, data for April and May was revised to reflect significantly lower job gains. Job openings are shrinking, and experts are saying a rate cut in September is necessary to counter the economic weakness we’re seeing now.
The thing is, even if the Fed does cut rates to try to stem a rising unemployment rate, it’s likely the damage is already done and a stock market correction cannot be avoided.
Remember – historically when the Fed begins an easing cycle, it’s actually NOT bullish for stocks. Why? Because the message of a rate-cut cycle is that the Fed let rates get too high in the first place. The question now is whether the stock market (and in this instance I mean the S&P 500) will correct as it normally does on a Fed cut, or will AI mania continue to cause large-caps to ignore history.
Correction or not, gold is likely to advance
Either way, I think it’s bullish for gold. Let’s say the stock market begins a correction after the first Fed cut. That would likely mean volatility rises, and there could be a flight to safety trade into gold (and Treasurys). Let’s say the stock market doesn’t correct as unemployment continues to rise and the economy slows. I still think that’s bullish for gold as large players position into the yellow metal in anticipation of a recession to come.
If I’m right that a Fed cut means gold resumes its advance, there’s a lot of opportunity here. Gold is one of the few non-correlated alternatives to stocks, and money likely will continue to flow into it as negative rates return and risk in equities becomes more evident.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
