In a matchup of gold versus the broader equity market, Bloomberg Intelligence’s Mike McGlone favors the yellow metal in a research note published this week.
Gold’s recent draw down is one reason. The end of 2020 was tough on the yellow metal. In November gold suffered its deepest single-day decline in the last seven years. As of 4:20 PM EST gold futures basis, the most active February 2021 Comex contract is up $0.50 (+0.03%) and fixed at $1844.70. The March contract of silver futures is currently fixed at $25.285, after factoring in today’s decline of $0.15 (-0.59%).
McGlone writes that the S&P 500 appears to be extended compared to gold, which has reverted to near its mean.
“With the CBOE S&P 500 Volatility Index (VIX) at about 23% and above the same measure of gold around 19%, the indication from the marketplace is the S&P 500 is at greater risk of a drawdown. The bottom line is the stock market is more susceptible to some form of catalyst that may spark a mean reversion, as seen with gold in 2H. At almost 20% above its 52-week moving average to Jan. 12, the S&P 500 is the most extended since 2010,” writes McGlone.
He notes that the technical underpinnings are still there, writing that the U.S. debt-to-GDP is at a 130% threshold, a post-war high. Addtionally, G4 central-bank balance sheets as a percentage of GDP have reached an all-time apex of about 54%.
“Unless an unlikely scenario unfolds in which these measures sustain declines, it should be hard for gold to do anything but appreciate, particularly when the metal is in close proximity to its upward-sloping 12-month moving average.”
McGlone also notes that the U.S. money supply increased by about 25%, but gold has not yet followed. There is also an “…investment landscape increasingly dominated by how low — or negative — central banks.”
“Resistance at about $2,000 an ounce in 2020 is set to transition to support in 2021.”
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