Gold Is Markets' Friend 'with Benefits': Strategist

Gold is the market's 'friend with benefits', and investors would do well to park their cash in the precious metal whilst stocks attempt to find levels more appropriate to the recent economic weakness, according to Nicholas Colas, the chief market strategist at ConvergEx.

Gold Bars
Gold Bars

"The recent rally in gold stands in stark relief when compared to equities or, indeed, most other commodities. It isn’t that the yellow metal has no correlation to financial assets at the moment, but rather a negative correlation. Which is odd, given the selloff is just about everything else," said Colas in a research note.

"The obvious answer is that gold tends to rally when the dollar falls, which is exactly what it has done in the last few weeks. The greater disconnect is that stocks have parted ways on a falling dollar, so we have the unusual situation that the dollar is weakening and equities are in full-on retreat."

Ruling out inflationary pressures in the US, but not China, as a catalyst for gold’s recent gains, Colas believes there are a number of factors underpinning gold’s rise.

"Low stock market volatility is clearly a contributing – and underappreciated - factor, since gold-based exchange traded funds would take enough of a hit in a margin-call driven selloff to push the yellow metal lower," said Colas

"Most importantly, gold appears to have a wealth of near-term catalysts to support its valuation, ranging from chatter over another round of quantitative easing to the likely large increase in the Federal Debt Limit."

"That makes it an ideal near term 'parking lot', or a 'Friend with Benefits', if you like, for capital while stocks try to find a level more appropriate for a weaker economic outlook” said Colas.