Gold price higher after stock market correction

The sudden correction in the U.S. stock market caused a rebound in gold prices this week. While the Dow Jones index fell by more than 5% in two days, the price of the precious metal rose to its highest level in two months. The price of a troy ounce of gold was $1,184 per troy ounce on Monday, but on Friday it was about $1,220 for the same weight. Measured in dollars, this is an increase of 3%, while the price in euros has risen by about 2.3% this week.

The increase in the Gold price is a response to the increased uncertainty in the financial markets. Investors are worried about rapidly rising interest rates and a possible escalation of the trade conflict between the United States and China. There was no immediate indication as to why the stock markets fell so hard. The Dow Jones and S&P 500 lost a total of more than 5% of their value in two trading days. Stock markets also fell elsewhere in the world, especially in the emerging economies in Asia.

Gold benefits from fall in stock prices

Stock market correction

The correction in the US stock market was the worst in eight months, as investors were also startled by a sudden drop in prices in February. It is impossible to predict whether this correction is a harbinger of a further price decline. However, we do see that more investors are seeking refuge in safe havens, including precious metals such as gold and silver.

In recent years, equities have shown excellent returns, but rising interest rates will see them face more competition from bonds. With a 3.2% interest rate on US 10-year Treasuries and a 2.8% interest rate on two-year debt, bonds are starting to become an attractive alternative to equities again.

Rising interest rates

Historically, a rise in interest rates has been unfavorable for gold and silver, as precious metals do not provide income in the form of interest or dividends. But in recent years, that theory does not seem to hold true, because the last three interest rate hikes by the US central bank were followed by a rise in the price of gold.

One possible explanation for this is that higher interest rates could put pressure on the recovery of the global economy, because the economic growth of recent years was largely due to the fact that borrowing was so cheap. Now that central banks are turning off the money tap again, the growth of the global economy may slow down.

Central banks turn off the money tap again (Source: Incrementum)