Gold Delivers Best Performance Since 2016 As Stock Rout Continues

By Albert Lu

Dow Jones Industrial Average. Chart courtesy of StockCharts.com

Stocks plunged again on Friday as U.S. markets concluded a volatile week. The Dow Jones Industrial Average began strong on Monday but faltered Tuesday following a surprise 50 basis point rate cut by the Federal Reserve. The seesaw action continued through the week and, despite a healthy February jobs report, the Dow finished Friday down 250 points.

By contrast, U.S. Treasuries continued to climb higher. The yield on the benchmark 10-year Treasury note reached yet another record low, piercing the 0.7% threshold to 0.676%.

OPEC’S DEAL REJECTED

The economic fallout from the coronavirus has major oil producers scrambling for solutions. As world demand for oil slumps, members of OPEC+ met in Vienna to address the supply glut.

Talks broke down on Thursday when Russia rejected an OPEC proposal for additional production cuts of 1.5 million barrels a day, about 1.5% of world supply.

Crude oil price fell over 10% on Friday.

CREDIT MARKETS STRAINED

Friday marked the worst day in a decade for U.S. credit markets. Investor withdrawals from corporate bond and loan funds reached a 10-year peak.

Earlier in the week, Jeffrey Gundlach of DoubleLine Capital told CNBC that the “seizure in the corporate bond market was not getting enough attention.”

“The junk bond market widened out about as much as it did in the fourth quarter of 2018, and it’s widening out massively again today.”

According to Gundlach, the Fed’s emergency 50 basis point cut was in direct response to credit market stress.

“[Powell’s] actions on short rates have been, pretty much, in reaction, ever since he started the easing cycle, … to problems in the corporate bond market which are really worth paying attention to.”

Gundlach believes the weakening corporate bond market may also pose a problem for stock prices which have benefited in recent years from debt-fueled, corporate buyback activity.

“Nobody knows what’s going on so caution is in order.”

GOLD SHINES

$GOLD Continuous Contract (EOD) CME. Chart courtesy of StockCharts.com

The best place to be, according to Gundlach, is gold. “The thing you’re supposed to own … is gold.”

The spread of the coronavirus combined with the equity sell-off and unprecedented yields in U.S. Treasuries have underscored gold’s safe-haven value.

“I turned bullish on gold in the summer of 2018, on my Total Return webcast, when it was at $1,190. It seems to me, as I talked about on my … Just Markets podcast … that the dollar is going to get weaker. The dollar getting weaker is almost a policy. And the Fed cutting rates, slashing rates, is clearly going to be dollar negative. And that means that gold is going to go higher.

“Gold is doing super well, even with the dollar unchanged over the past, really, 14 months or so. And gold is at a record high in terms of euro and many other currencies. And I feel like it’s almost a certainty that gold is going to go to an all-time high versus the dollar as well.”

Andy Schectman, president of Miles Franklin Precious Metals Investments, concurs.

“[I]t’s interesting in that just about every other currency across the planet is viewing gold at all-time highs — in the Swiss franc, euro, pound, Aussie dollar, Canadian dollar — just not the U.S.”

Gold bullion gained just under 7% for the week.

MORE INTEREST RATE CUTS ON THE WAY

Even with the emergency action, further rate cuts are likely.

“If you look at history, once the Fed does a panic inter-meeting rate cut, particularly when it’s 50 basis points which is usually what it is when they panic, they typically cut pretty quickly again, even at the next meeting,” said Gundlach.

“So, I’m in the camp that the Fed is going to cut rates again, perhaps even in two weeks, and you will see short rates going to zero.”