Gold is a favorite commodity among traders, and for good reason. As a safe haven commodity, it’s relatively simple to predict movement in the price of the metal and it is heavily correlated or negatively correlated with several other assets, making gold a signal of what’s happening in the market overall. With recent economic data released out of the United States and the effect on gold, the data is proving what many have been talking about for some time now. A dangerous bubble is forming in the stock market. Today, we’ll talk about the data, how gold reacted, why this suggests that we’re looking at a bubble in the market, and what traders should be watching for ahead.
US economic data disappoints
As mentioned above, recent economic data was released out of the United States. Unfortunately, this data wasn’t great. In particular, personal consumption expenditures or the PCE price index excluding food and energy fell 0.1% in March. That’s the largest decline we’ve seen in this index since September of 2001. In the 12 months ending on the last day of March, the core PCE price index rose by 1.6$. That’s the smallest gain we’ve seen since last July. As a result, the USD took a dive. In a statement, Richard Franulovich, senior currency strategist at Westpac Banking Corp, had the following to offer:
“We’re sort of knee-deep in a soft patch of numbers… If the numbers continue to come out on the weaker side of expectations for the next two or three months, then iI would say yes, the Fed would be revising their expectations for the economy…”
How gold reacted
In general, any time we see bad news out of the United States economy, two things happen…the USD falls and gold climbs. That’s because gold, like most commodities, is priced using the USD around the world.
Therefore, when the USD falls, gold becomes more accessible worldwide, generally increasing demand and ultimately leading to gains in value. However, that’s not what’s happening. In fact, gold is having a rough day in the market today.
Why this is a troubling sign
The market has been climbing for some time, and for months now, many experts have been warning of a stock market bubble. Of course, we learned how devastating bubbles can be in any market when the real estate bubble in the United States collapsed leading to a global economic recession.
In general, when we see negative economic data, gold tends to climb. After all, a negative economy will lead to market declines, pushing safe haven investors toward the commodity. However, that’s not what’s happening. The market’s appetite for risk is at such a high point at the moment that investors seem to be blowing over the poor economic data and continuing to look for profits in the massive bubble that’s known as the market.
What traders should be watching for ahead
Moving forward, traders should be keeping a close eye on gold. Not only will gold itself present opportunities in the future, it will likely continue to be a great signal for movements in other assets ahead. So, keeping an eye on the commodity will likely create several profitable opportunities across a multitude of assets ahead.