Gold has all along been a safe haven for cash and investors usually turn to Gold when the stock market is unstable. This means that there will be a shift in cash and credit from stocks to gold and vice versa. However in the past 6 months, both Gold and the US stock market has been rallying. Which brings us to the question of where does the money come from? In this post, we will explore reasons why Gold is rallying alongside the stock market and how it affects the future of the stock market.

Gold is rallying because the stock markets remains unstable and is universally recognised

At the moment, the stock market led by the US is in a state of rebellion. Essentially, the stock market is ignoring the grave impacts of the pandemic that plagued many businesses as well as workers in the country. Great forces are supporting the rally at the moment. GDP figures even in the US has been less than ideal despite massive governmental support for their people. Not to mention that many people are still at risk of contracting the virus. That is the reason why Gold still remains as a popular choice for investors to park their cash during such times.

Furthermore, Gold is a precious metal and its value is determined by the rarity of the metal itself. While its real value might be subjective, its innate value is undeniable. Hence the recent growth in the value of Gold can be explained by the continued belief that the pandemic is not over and the markets are currently still in a less ideal state for investors. On the other hand,

Money from Gold will eventually go back to stocks

Gold has a high innate value but it itself is not able to generate returns like companies. This means that investing in Gold as a commodity itself cannot generate regular payout in the form of coupons or dividends. Whereas it can only benefit investors through price difference or capital gains. This will lead to many investors leaving the gold scene and returning to the stock market when the pandemic is over. As such, I would say that regardless of the stock market conditions at the moment, it is still far from its peak as the indication from Gold hitting all-time highs shows that a lot of capital has not returned to the market.

Whats next for the stock market and investors?

Much like the unprecedented rallying of both stocks and Gold at the same, investors will eventually witness all-time highs in the stock markets. This will lead to a new generation of equity investments where dividends become so minuscule for certain popular counters unlike in the past where counters with high distribution yields are generally more popular. When that time comes, investors will need to find a sweet spot as there might be another massive bubble caused by the flood of cheap money printed during the pandemic. Therefore it will still be better for investors to look for safer options when stocks reach too high a price above their fair values.

Closing Thoughts

We are in difficult times not just because of the pandemic but also because it is getting harder to be objective in our investment decisions. On one day, we aren’t seeing many improvements in terms of the spread of the virus, and death rates are not slowing down as well. However, markets led by the US are seemingly about to void all concerns about the pandemic and have returned to pre-COVID levels. At the same time, Gold is still climbing and have hit new all-time highs in the past week due to the instabilities of the stock market. As such, when the pandemic is tamed by the vaccine and other factors such as herd immunity (possibly). We will be able to see another significant rally for all stocks as investors will rush back in with their monies withdrawn from other investments including Gold. We are indeed in the end game for the pandemic but the madness of the market has yet to begin.