Gold Emerges As A Hedge Against Falling Stock Prices

Gregory A. Clay • by Gregory Clay

Option Trading Strategist & Financial Writer • Nov 4, 2016 at 10:18 AM EDT

Gold's recent gains are linked to nervousness over a potential presidential election win for Donald Trump and a subsequent Brexit-like shock to the stock market.

Gold's recent gains are linked to weaker dollar as well as nervousness over a potential presidential election win for Donald Trump and a subsequent Brexit-like shock to the stock market. Nervous traders have dropped the S&P 500 for eight straight days which hasn’t happened since October 2008.

As indicated in the chart below, gold has emerged as a hedge against falling equity prices. The SPDR Gold Shares (GLD) ETF gained for six consecutive days amid growing uncertainty about the outcome of the election. The Gold ETF retook the downward-sloping 50-day moving average for the first time in more than a month. Gold acts as haven for investors in times of uncertainty and the 50-day line serves as an indicator of short-term strength. Also benefitting gold is the Fed holding off on a November rate hike. Higher rates increase the opportunity cost of holding gold while boosting the dollar in which the metal is globally priced.

Betting on the Gold should be short-term insurance in case stocks follow through on the current bearish signals. If the FOMC raises rates at their December meeting as most fed watchers expect, this will probably depress precious metal prices.

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