Gold Is So Misunderstood

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
June 10, 2024

If I hear that gold is a hedge against inflation or a hedge against market weakness again, I think my head is going to explode.  Oooops.  Too late.  I just saw an article claiming that “[b]earish signs in the stock market indicate it's a good time to hedge portfolios with gold and silver.”

So, while I apply some bandages to my head, let’s contemplate how there so many people in the metals market that are not burdened by the facts of history.   

How one can claim that gold is a hedge for stock market weakness is simply beyond my ability to comprehend.   Does such an analyst completely ignore the facts of history in order to make such a claim?  The clear answer is yes.

I do not have to go back terribly far in history to prove this premise as being an outright falsehood.   First, let’s start with early 2020.  As the SPX proceeded to crash during the Covid outbreak, did gold rally?   Nope.   Did gold at least remain stagnant?   Nope.   In fact, gold proceeded to drop by 15% during that time.  Silver was even worse as it lost almost 40% of its value during that same timeframe.

Now, if you are still not convinced, well, let’s go back a bit further to the Great Financial Crisis of 2008.   Again, did gold rally during this financial upheaval during which the perceived “safety” of gold was sorely needed?   Nope.   Did gold at least remain stagnant?  Nope.   Gold lost 30% of its value, which clearly outlined that you cannot rely upon gold as a hedge against stock market upheaval.  And, again, silver was much worse as it lost 60% of its value during this time.

But, clearly, history did not teach this lesson to everyone, as many completely ignored what occurred during this timeframe, and again expected gold to save them during the Covid crisis.   And, the many that have still not learned this lesson now come back to prognosticate that gold will provide safety in the event the stock market turns down.  

What is most interesting is that most of these same folks also maintain a world view that gold will not rally alongside the equity market.  In fact, I just read another article which outlined this erroneous commonly held view, and claim surprise when it does rally alongside the equity market:

“The yellow metal's big moves have many long-time gold watchers perplexed as the metal is rallying despite economic conditions that should cause it to lag: equity-market strength, a muscular U.S. dollar and reduced expectations for any rate cuts soon from the Federal Reserve.

For gold prices to be strong alongside equities is unusual. Higher stock prices usually mean a risk-on environment, whereas gold demand often picks up when investors seek a safe haven. Through late May, front-month Gold futures prices were up 17% year-to-date, while the S&P 500 was up about 12%.”

They even quote a supposed gold “expert” in this article, who claimed "[i]t is absolutely counterintuitive of everything I've ever seen in a rally."  If this is what he has seen in the gold market history, then he is clearly looking at the market with blinders or simply not looking at the market at all.

Clearly, I do not think we have to highlight the rally we have seen since October of 2023 in both the equity market and the gold market as an example of when gold and equities rally together.   But, how about the rally in gold seen during 2019 equity market rally until the Covid Crash, and then again after the Covid Crash?   And, let’s go back even a bit further and look at the gold rally seen alongside the equity market rally from 2009 until the fall of 2011.  And, we can go back even a little further and look at the gold rally seen alongside the equity market rally from 2003-2007. 

I am not sure how someone cannot “see” these periods of time, again, unless they are purposefully not looking or are wearing blinders.

And, the same applies to inflation.   How many of you were absolutely shocked that gold did not rally in 2021, 2022, and 2023 while inflation was raging forward through the economy?  If you maintain the premise that gold is a hedge against inflation then you would have been.  

My friends, at some point, one has to open their eyes and look at markets objectively.  Gold is not driven by inflation.  Nor is it driven by deflation.  Nor is it driven by the dollar.  Nor does it fall when the equity market rallies or vice versa.  Gold is driven by market sentiment.  And, it is the only constant in the gold market which allows one to maintain an objective perspective on the price trend in gold, and be able to prognosticate that trend in any reliable and consistent manner.

IF you would like to learn more about the methodology we employ to accurately prognosticate the moves in gold, feel free to read this six-part series I wrote a number of year ago:

https://www.elliottwavetrader.net/market-update/Elliott-Wave-Intro-Series-Part-1-201808184848063.html

In fact, this methodology provided for advance warning of the gold top in 2011 within $6 of the actual high struck, and outlined the downside target for the 2011-2015 correction even before we topped.  Moreover, this methodology caught the low struck by gold at the end of 2015 as it was striking that low in the after-hours.  You can read more about it in my last article, and it also outlines my upcoming general expectations for the gold and silver markets:

https://www.elliottwavetrader.net/p/analysis/The-Market-Wizard-Of-Odds-Issues-Another-Bullish-Proclamation-About-Gold-and-Silver-202406049104996.html

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: [email protected].


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