Why All That Glitters in 2016 Will Be Gold

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Gold bars and stock market

Holders of gold are having an incredible year so far, with the yellow metal gaining 22 percent as the S&P 500 struggles to stay positive. What’s especially notable is for the precious metal to outperform the market so spectacularly at a time when stocks are generally up.

Even looking more than three decades back, there has only been a single instance in which gold has bested the S&P by 20 percent or more while the latter was in positive territory, and that was in 2007.

Both gold and the CBOE Volatility Index, which measures market expectations of near-term volatility, spiked in the second half of that year, even as stocks maintained their position.

While the direction of the equity market can’t be predicted based on just one data point, and we’re barely halfway through the year, analysts point out that the gold’s propensity to detect bad news quicker than most markets has some investors feeling less secure about betting on stocks.

Uncertainty and negative news make investors nervous, and that is what drives many into gold, points out some observers.

Meanwhile, the dollar continues to fall against its rivals. The dollar index, so far, has shed more than 7 percent of its value. After years of strong performance, the American currency has lately been pulled back by the Federal Reserve delaying its earlier plans of raising interest rates and sluggish, if not negligible economic growth in the U.S.

The anemic performance of the dollar has likely fueled the gold’s extraordinary rise, given the traditionally inverse relationship between the two assets. In addition, some observers note that gold’s massive drop over the past few years has pulled the yellow metal’s prices too far down, making the asset a very attractive bargain at the year’s outset.

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