Chart Of The Day: Gold's Upside Breakout Could Go Even Higher

 | Feb 20, 2020 08:51

Right now, market incongruities are increasing on what appears to be three levels:

1. On Wednesday, both the S&P 500 and NASDAQ Composite each notched new record highs, yet demand for Treasurys also grew. That's counterintuitive. Investors tend to flee to bonds during times of fear, which obviously shouldn't be the case when equities, which are popular risk assests, just set fresh records.

2. Rising Treasurys boost the dollar, a necessity for global investors wishing to purchase U.S. sovereign bonds. A stronger USD makes assets priced in dollars, such as gold, more expensive. Thus the greenback and the yellow metal are normally negatively correlated, meaning when one goes up the other generally goes down. The same negative correlation usually exists for equities and Treasurys.

3. When investors are feeling emboldened, they buy equities. When they're fearful, they shift into safe havens such as gold and Treasurys. But right now all three asset classes are moving higher in tandem. That shouldn't happen.

Nonetheless, gold hit a 7-year high today, even as the dollar is at a two-and-half year high and U.S. equity indices are at or near their own record levels.

How is this contradiction—that both risk-on and risk-off assets are rising simultaneously—even possible?

It could be we're seeing the same investors driving shares sky-high on central bank accommodation, though they don't trust the cheap money will last, so they're hedging. Or we’re witnessing a strategy disagreement between investors; some are going all-in on stocks while others are steadfast on Treasurys and gold.

Whatever the case, one thing looks certain—technicals are signaling that gold is in a position to keep climbing.