Higher gold prices paired with rising bond yields is one trend to watch to signal impending market volatility, according to a new report from Bank of America Merrill Lynch, CNBC reported.
Both the stock market crash of 1973-1974 and Black Monday in October 1987 were preceded by three quarters of rising bond yields and rising gold, CNBC reported, citing data by strategist Michael Hartnett and colleagues.
"The thinking is that if interest rates and gold rise in tandem, it signals rising inflation, which lead the Federal Reserve to increase its short-term interest rate targets. Rate hikes tend to be bad news for the economy and for stocks in particular," CNBC explained.
"For years, gold was the inflation play and the fear play, and I would say that we probably had a bit of both over the past few months, regardless of what end of the political spectrum you're on," Zachary Karabell, head of global strategy at Envestnet, recently told CNBC's "Trading Nation."
"So the Fed raising rates in December, even though they didn't do anything this week, is an indication that there's some modest anticipation of inflation," he said.
Since gold is traditionally considered a safe haven for investors, few shrewd strategists will ever argue against pouring money into anything related to the precious metal.
To be sure, Olivier Garret recently detailed for Newsmax Finance his "Bullish Case for Gold Under Trump, Even If He Fails."
"We are in a unique situation today, in that any action from the Fed is unlikely to affect gold prices. (Fed Chair Janet) Yellen’s comments over the last few months demonstrate that the Fed will only hike rates if they feel compelled to do so," he wrote.
The Fed Chair also made it clear in remarks a month or two ago that she would not be afraid to use negative rates if the economy entered a recession.
"Either inflation or negative real rates would definitely be a plus for gold prices," he explained.
"Of course, if the economy really starts to show strong growth, the Fed will begin a series of rate hikes to put the brakes on inflation, but we anticipate them to be reactive. In either case, we believe real interest rates will remain negative—or at best near zero—in both scenarios. This makes a very strong case for holding gold at current prices," he said.
"Add to this a very volatile geopolitical environment, fragile economies worldwide, and excessive levels of debt across the globe: the case for gold as insurance and also as a solid long-term investment is as strong as ever. In fact, the current price decline may be one of the best opportunities for contrarian investors to move cash into a very attractive but unloved asset class."
(Newsmax wire services contributed to this report).
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