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I’m a big fan of looking at divergences to see if there are disconnections. And a big one is happening now.
Gold is the most important signal of all right now.
Something is happening.
— Michael A. Gayed, CFA (@leadlagreport) November 21, 2023
Why is gold holding up so well here despite a strong start for the stock market in November? I find it interesting that gold, which is a risky asset, is still hovering around its all-time high. This is not me trying to find faces in the cloud. Why is it that despite hopes for a year-end rally in stocks, there is stubborn force in the yellow metal? Clearly, gold does not need to move based on the stock market, but it tends to move when expectations of increased stock market volatility increase.
What’s next?
So let’s play it. What happens if gold continues to rally and actually breaks through new all-time highs in the coming weeks? I suspect you would see some incredible FOMO if that happens. It would be a multi-year breakout that makes some serious momentum players rush. But at the same time, if that were to happen, it could scare stock investors for a while. Why? Because if the Fed were to “stick the soft landing,” then demand for gold would likely fall instead of remaining sticky against a strong dollar.
There is another interesting dynamic going on here as well. Gold tends to do well when the Fed stops raising rates and boosts its strength as they cut. You know what else happens when the Fed pivots? Odds favor a bigger drop for the stock market. What if all of this is the same possible message here? What if gold is sending us a signal that the Fed is done and that is not good for risk assets?
Risk Remains
Let’s combine that with capital letters, which I keep saying “hold the key.” You do realize that with all the excitement surrounding caps in November, we’re still basically just hacking, right? I see strength in gold, strength in Treasurys, and an uncertain factor of small cap momentum not quite playing out yet, in a seasonal period that is supposed to favor caps the most. Yes – I was wrong about the risk of a corporate credit event happening in early November, but what if it was just a month early and something more sinister comes in December when most investors least expect it?
I don’t think that’s an impossible scenario. Gold may indeed be signaling with its relative strength that risk-off conditions are not yet completely done.
As of 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 Publishing Guidelines of InvestorPlace.com.
The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All views and opinions mentioned in this report constitute our judgments at the date of writing and are subject to change at any time. Information in this material is not intended to be used as a primary basis for investment decisions and should not be considered as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and placement of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in connection with actions taken based on any or all of the information in this writing. Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management firm specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers. InvestorPlace readers who are new subscribers to the Lead Lag Report can receive a 30% discount.
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