Gold Rally Cut Short by Rising Equities

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By Jacob Maslow

Kilogram of Fine Gold Bars
Close Up of Gold Bars

Gold has always been locked in eternal battle with alternative investments. Alternative assets like stocks and bonds, government debt, and real estate compete with gold. If these other assets are more attractive, gold falls out of favor and declines in price. This should not be a surprise. Gold after all is a commodity and is not immune from the law of supply and demand. As demand picks up for alternative investments and alternative assets, demand for gold drops. When the demand for anything drops, the price normally follows. This is precisely what’s happening with gold.

According to New York futures and options figures, hedge funds cut their gold positions quite a bit recently. They have a lot more places to put their money in. You have to remember that hedge funds are relentless in their drive for strong returns. They will quickly unload assets that are not producing the return that they’re chasing after. Currently, the strong dollar and the record highs on Wall Street are more attractive than gold.

Not surprisingly, gold future prices in New York fell for three straight weeks now. It doesn’t look like it will recover anytime soon. This is bad news for gold, which started off 2015 with a solid month in January. In fact, January was the best month for gold since 2012.

Will this trend persist? Personally, I don’t think so. A lot of the nice pop in the stock market was due to great fourth quarter 2014 earnings. With so many companies issuing negative guidance for 2015, I doubt that the equities market will repeat its recent performance. As the equities market faces more downward pressure due to lousy earnings, expect gold to rally.

Will it result in a significant pop for gold prices? I’m not sure. However, one thing that I can be sure of is that gold will recover. It might not set new records, but it will definitely recover as its alternatives falter. One key factor that works against a record gold recovery is the strong US dollar.

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