UBS : US$ 2K Level

(Wed, 30 Sept 2020). UBS expects the spot price of gold to reclaim $2,000 by the year’s end. That has major implications for the U.S. stock market.

UBS, a top Swiss bank, expects the spot price of gold to hit $2,000 by the year’s end. The gold price is hovering at $1,881 and an increase to $2,000 would mark a 6.3% rise. The positive outlook around gold and the uncertainty around the dollar raise the probability of stock market woes.

UBS, the Swiss banking giant, expects the spot price of gold to achieve $2,000 by the end of 2020. The precious metal tends to rise when the U.S. dollar declines. A continuously declining dollar presents a threat to the ongoing stock market recovery.

The precious metal is hovering at $1,881, and that would indicate a 6.3% increase in the fourth quarter. For a haven asset, which has historically shown low volatility, a 6.3% increase is considered a strong bull case.

Banks Might Be Indirectly Hinting at a Lower U.S. Dollar

Since its peak in March, the U.S. dollar index (DXY) has declined from $102.99 to $91.75. The dollar’s 10% drop coincided with a steep stock market pullback. The correlation between a strong dollar and a robust stock market uptrend dates back to at least 2002.

From 2002 to 2007, the U.S. stock market massively underperformed against emerging markets. The U.S. dollar fell 34% in that period, coming off a major downtrend against other reserve currencies. From 2011 onwards, U.S. equities outperformed emerging markets by over 8%. During that time, the dollar rose 24%.

There exists a clear historical correlation between a strong reserve currency and the equities market. Since gold typically rallies when global reserve currencies fall, the rising gold price could hint at an impending stock market slump.

Tay told CNBC’s Squawk Box that election uncertainty and the pandemic could buoy gold’s outlook. Coincidentally, the same factors caused the dollar to lag the Swiss Franc and Japanese yen.

Persistent Narrative: Only Stimulus Could Trigger Dollar and Stock Market Rebound

There is one catalyst that could cause a dollar rally in tandem with the stock market in the near term. As seen in the euro’s strong performance in August, a stimulus package might restore confidence in the dollar. A new stimulus agreement would boost the dollar and also result in direct checks to individuals. Both factors could fuel a newfound stock market uptrend before the year’s end.

But the issue remains the reluctance of Washington to agree on a stimulus proposal. Although the Republicans and Democrats have an agreement is near, the discussions remain at a stalemate. As long as the stimulus stalemate continues, the threat against the dollar and the stock market will likely remain intact.

DISCLAIMER ON

GFS ASIA TEAM

• 0
• 0
• just now
• 0