(Kitco News) - No market trades in a vacuum. As traders are keenly aware today, events in equity markets across the globe can wreak havoc on stocks close to home. The dollar, crude oil, bonds, stocks—all these markets have intermarket relationships and impacts. Some are inverse correlations while some are positive.
Let's take a look at related market action for gold and what their trends could be signaling:
- U.S. Stocks: While this commentary was written before the close on Friday Jan. 8, it appears, the S&P 500 is setting up for a lower weekly settlement. If this is confirmed at Friday's final bell, The Stock Trader's Almanac's "First Five Days" indicator will flash red.
The Stock Trader's Almanac devised the First Five Days indicator as an early warning system for its venerable January Barometer, which states as the S&P 500 goes in January, so goes the year. The January Barometer has an impressive 87.7% accuracy rate since 1950. But, for those impatient traders who can't wait for the end of the month, action in the First Five Days is an early temperature read on stock direction for the year.
"Prior to the full-month January Barometer, the First Five Days of January can also provide some insight into full-year market performance. The last 41 up First Five Days were followed by full-year gains 35 times for an 85.4% accuracy ratio and a 14.0% average gain in all 41 years," explains Jeffrey Hirsch, editor of the Stock Trader's Almanac.
Why this is bullish for gold: If the S&P 500 maintains its weekly loss at Friday's close it will trigger a warning signal for stock direction in 2016. The current Bull Run in US stocks is getting old, nearing its seventh birthday in March. If a bear market emerges (defined as a decline of 20% or more in US stocks), gold could garner continued safe-haven buying. Gold is viewed as an alternative asset and as a hard currency tends to appreciate during phases of financial market meltdown.
- U.S. 10-Year Yield: The 10-year yield is currently trading around 2.15%, off its 2012 post-crisis low at 1.39%, but well below its pre-crisis high at 5.31% in 2007. (Looking back, the 10-year yield traded as high as 8.16% in 1994).
What if the analysts are wrong again? The majority of Wall Street analysts called for higher bond yields for 2015. Didn't happen. The U.S. economic cycle is getting mature. While the recovery has been historically slow and weak, the business cycle is getting old. Major headwinds are seen internationally, with low inflation and weak demand worldwide. If economic growth remain limp in the U.S. with tame inflation numbers, and worldwide markets remain volatile, the U.S. Federal Reserve will be hard pressed to aggressively raise interest rates three or four times throughout 2016.
Why this is bullish for gold? Analysts at HSBC defy the consensus street forecast for 10-year yields for a 2.75% yield at year-end. HSBC forecasts call for a 1.5% 10-year Treasury yield in 2016. All may not be as rosy as the Fed officials hope. Low interest rates remove a competing influence for gold and will be supportive to the metal in 2016 if they occur.
- Crude Oil: The price of crude oil tumbled this week, while the price of gold surged since the start of the year. Gold's willingness to rally in the face of declining crude prices reveals a "decoupling" of gold from the commodity sector. Gold gained early in the week on its inherent safe-haven and portfolio diversification qualities.
Why is this bullish for gold? Gold's willingness to decouple from the declining commodity sector underscores its place in investor's portfolios as an alternative currency.
As investors prepare for a potentially volatile year in global financial markets, inter-market clues are boding bullishly for gold.
By Kira Brecht, contributing to Kitco News;
Follow her on Twitter @KiraBrecht
