What the Price of Gold Is Trying to Tell Us

After reaching the $1,600 mark last week, gold began to really break out. While many market analysts had expected gold to see major resistance at $1,600, and perhaps some profit-taking, gold took on that barrier and continued to move up. That confounded many who still rely on outdated correlations and relationships to determine what’s going on in gold markets. Here’s what the price of gold is telling us.

Gold vs. Stock Markets

Conventional wisdom posits that gold and stocks generally move inversely to one another. In general, that relationship has held in the past. When stocks boom, gold stagnates, and vice versa. But the past 20 years have seen that relationship completely upended.

For instance, after the dotcom bubble burst, both stocks and gold moved upward in price, with gold seeing much greater appreciation than stock markets. Then when the housing bubble burst, gold continued to gain, reaching its all-time highs in 2011, a full three years after the financial crisis. Both stocks and gold floundered for a couple of years after that, before stock markets took off in 2016.

Gold took a few years to find its footing, then took off last year and hasn’t looked back. It continues to gain value at the same time stocks are near all-time highs, which is consistent with similar instance over the past 20 years.

While some analysts say that this isn’t an indicator of safe haven buying, we would beg to differ. The smart money realizes that a recession is imminent, which is why many are now buying gold. Those investors are taking their profits and protecting them with gold, leaving everyone else who is buying into the late part of the stock market rally to hold the bag when stock markets crash.

Gold vs. the Dollar

Conventional wisdom also states that gold and the dollar are inversely correlated. As the dollar gets weaker, gold gets more valuable, and vice versa. But that relationship is also breaking down in recent days, as gold continues to strengthen even as the dollar is also getting stronger.

Here again we’re seeing the result of a flight to safety. Investors want the safety and security of gold, and they don’t care what the dollar and stock markets are doing.

We’re reaching an inflection point, after which stock markets will begin their downturn into a bear market. That’s why we’re seeing gold moving up in price alongside high-priced stock markets and a stronger dollar. That rising price of gold is trying to tell us that a recession is around the corner, and we would do well to take heed. Investors who ignore that price signal and who think that stocks will continue to make great gains will find out the hard way that they should have been paying attention to gold.