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Stock Traders: Gold Can Flash Potential Volatility Signals

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October 6, 2015
Stock Traders: Gold Can Flash Potential Volatility Signals

Gold may be the shiny fishing lure of the financial markets—hard to miss, hard to take your eyes off it once you know what you’re looking at. Even if you never own more than you can wear on your finger, the shiny stuff is a potentially valuable market indicator for research across markets.

Gold is considered by some as the ultimate safe haven investment for select investors—a place to stash cash during fears of stock market declines, global recession, war, or just about any political catastrophe you can imagine. For the rest of the pack, it is one potential signal for a next stock market move or moves; typically, but not always, gold and stocks move inversely. Last week, gold prices surged over $30 per ounce in one day as investors poured money into the yellow metal following a weaker-than-expected September employment report. The jobs data disappointed with only 142,000 jobs created last month.

"Gold is often considered a place of safety and when the September employment numbers hit and were bad, investors turned to three places—gold, fixed income, and CBOE Volatility Index (VIX) futures and options," says JJ Kinahan, chief market strategist at TD Ameritrade.

Of course, in theory, gold is even more of last resort for some.

"When the world is coming to an end people need three things: guns, canned food, and gold,” opines Sam Stovall, managing director at S&P Capital IQ. “Gold is an emotional barometer. That’s what people were talking about in 2008 [as the global financial crisis was ramping up].”

Gold Reflects Fed-Move Predictions

While the September jobs miss doesn't likely spell economic doomsday, it was enough to convince some investors that the Federal Reserve could hold monetary policy steady at its October meeting and refrain from its long-anticipated first interest rate hike since 2006 until at least another meeting. The Fed does meet in December and kicks off 2016 with a January gathering.

Uncertainty over the Fed’s monetary policy outlook has been one factor injecting volatility into the stock market in recent months. From its recent peak in May to the August low, the S&P 500 (SPX) declined just a shade over 12%. In stock market lingo that’s defined as a "correction." Generally, analysts call a zero to 10% decline in the stock market a "pullback," a 10% to 20% retreat a "correction," and declines of 20% or more as a "bear market."

Vulnerable Range?

When the stock market is in turmoil, gold can be a temporary holding place for investors until stability returns to the marketplace, Kinahan says. Stock investors looking to play detective for near-term directional clues on the broader equity market can monitor the recent gold price range.

Since late August, Comex-listed December gold futures have largely traded in a range between $1,155 on the upside and $1,100 on the downside (figure 1). A bullish, or upside, breakout above the $1,155 region in gold could suggest stock market volatility will continue ahead, Kinahan says, citing chart historicals. On the flip side, a break below the $1,100 per ounce level in gold could "signal that people are shifting more money back into stocks," Kinahan said.

Trader cheat sheet: 

· Gold goes up and breaks the top of the range, stock market sentiment could remain jittery and volatile.

· Gold goes down and breaks the bottom of the range, it could be a sign the recent stock market volatility is fading. 

FIGURE 1: GOLD IN A SNAP.

TD Ameritrade clients can view this chart charted on the new-look thinkorswim® platform. After log in, go to Charts. Enter “GC” in the ticker box.  Under the Style menu in the upper-right corner, go to Daily > One Month > Day to change the chart to a one month, daily chart as shown here. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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