The Gold prices have been on a tear lately, gaining over 5% in less than two days. The price got just shy of $3,370/oz, before coming down with a bit of profit taking ahead of the long weekend. While the recent moves have been dramatic, it’s still within the trend that has been going on for months. That is, ever since the Fed started moving towards easing.
But, the performance of gold provides some important insight into the major theme for the markets these days: The impact of tariffs. Particularly, what we might expect to happen going forward. Traders were very worried about a recession recently, which naturally would majorly impact markets. What does the skyrocketing price of gold mean about future market performance? Is there a particular connection to forex?
Making Sense of the Rollercoaster
Gold had some important price shifts that are really revealing about what’s going on in the markets. Following US President Donald Trump’s announcement of massive tariffs at the start of the month, the stock market naturally tanked. And the price of gold fell as well. This was likely the result of traders being forced to liquidate positions as the market corrected and even turned bearish.
As discussed previously, these situations of lack of liquidity are a major warning sign for markets. No sooner had the phenomenon been observed, the White House announced a 90-day moratorium on the tariffs. This prompted a reversal in the stock market. But also a move higher in the gold prices which continues to this day.
Up, Up and Away
Typically, gold and the stock market move in opposition. That’s because gold is seen as a safe haven, and stocks are more risky. If the market was relieved by the pause in tariffs, why, then, did the gold prices start to rise? If there is a generalized move towards safe havens, then why are stocks not falling?
The simple answer is that as risk appetite came back a little bit, the liquidity squeeze eased up a bit. Even if the economy and the stock market underperforms, there isn’t such a strong downward move that traders would be forced to sell assets like in the first couple of weeks of April. This allows safe havens like gold (and the Swiss franc) to appreciate as investors are worried about growth. But not so worried as to expect an imminent market crash or a major recession. For now.
The Best Case For Gold?
This slower economy but not outright recession situation provides a perfect scenario for gold. Investors want safe havens. But, also, interest rates would be expected to fall as the Fed tries to support the economy and prevent deflation from happening. On top of that, tariffs are expected to raise inflation, which is another impetus for investors to put money in a store of value like gold.
Markets are now pricing in as many as four rate cuts this year, double what was expected just a couple of weeks ago. This contributes to appetite for gold as lower interest rates makes gold a more compelling investment. But, market conditions don’t always remain stable, so if (or when) one of these conditions change, then gold might finally reach a ceiling.
