Is this a reason to be bearish on gold?

Updated on

If you’ve been reading anything at all about gold prices, you’ve already read plenty about how the bulls are in control. But is there a reason to be bearish on gold? Economic data and the “everything rally” could offer some contrarian insight into the widely held bullish view of the yellow metal.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2019 hedge fund letters, conferences and more

Economic data is bearish for gold

Since gold is a safe-haven asset, its price rises whenever there are any concerns for the economy. However, what makes this latest gold price run so interesting is the fact that it coincides with strong economic data.

Jobless claims rose 4,000 to 210,000 for the week that ended Feb. 15, according to the Department of Labor. That's in line with the consensus from a poll of economists by Reuters.

Some view the four-week moving average of jobless claims to be a better indication of trends in the labor market because it smooths out volatility from week to weak. The four-week moving average reveals a decline of 3,250 to 209,000 jobless claims last week.

The U.S. economy added 225,000 jobs last month following December's increase of 147,000 jobs. The unemployment rate increased one-tenth of a percentage point, rising to 3.6%. More people are returning to the workforce, which signals confidence in their ability to find work.

The Fed minutes from Wednesday showed that U.S. policymakers say the labor market remains "strong." They also expect payroll employment to "expand at a healthy pace this year."

There was also good news for the manufacturing sector from the Philadelphia Federal Reserve. The Philly Fed said its business conditions index climbed to 36.7 this month. That's the highest reading in exactly three years. In January, the index managed a reading of only 17. The measurement of the number of new orders factories in the region receive rose from 18.2 last month to 33.6 this month, further signaling economic strength.

Do you know which under-the-radar stocks the top hedge funds and institutional investors are investing in right now? Click here to find out.

While economic data is bearish for gold, it seems investors may be more focused on the impact the coronavirus will have on the global economy. More than 75,000 people have been sickened by the virus, and at least 2,100 people have died from it.

Beware the "everything rally"

One other interesting thing that could be bearish for gold is the fact that everything has been rallying at the same time. Wednesday brought record highs for major U.S. stock indices while the gold price plowed higher and higher.

Thursday brought a shift as the S&P 500, Dow Jones Industrial Average and Nasdaq Composite are all in the red. However, if recent history has told us anything, the pullback won't last for very long. Of course, there is a chance that the stock market rally has finally reached its end, but it's too early to say that with any certainty.

Also on Thursday, the U.S. Dollar Index is also in the green, which calls further attention to the gold price. Historically, the U.S. dollar has been negatively correlated with the gold price, but the two assets have been rising together for quite some time.

Investors are right to worry about the "everything rally," but whether it means gold prices reverse course or stocks do, it can't last forever.

Data from IG Client Sentiment reveals that about 58% of traders are net long gold, which is also bearish for the precious metal, according to DailyFX.

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!