Gold price at 3-month high after stock market warning

On Monday gold for delivery in June – the most active futures contract – shot up in early trade to a three-month high after a research note from Bank of America had Wall Street buzzing.

Gold gave up those gains and ended the day unchanged at $1,225 an ounce in New York trading, but is still trading at the highest level since February 13.

In a widely quoted and  discussed research note out before the open Bank of America Merrill Lynch issued a stark warning to stock market investors about a "scary summer" and advised on holding cash and gold:

Investors remain trapped in “The Twilight Zone”, the transition period between the end of QE and the first rate hike by the Fed, the start of policy normalization…until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause either a market or macro shock (as it infamously did in 1936-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.

For this reason we continue to advocate higher than normal levels of cash, adding gold and owning volatility in mid 2015. Given extremities of liquidity, profits, technological disruption, regulation, income inequality…potential for a cleansing drop in asset prices cannot be dismissed. Most likely catalysts: Consumer, Rates, A-shares, Speculation, High Yield.

The Dow Jones index of blue chips stocks and the broader S&P500 traded near all-time highs on Monday and many believe when the US Federal Reserve raise interest rates for the first time since 2006, the market for riskier assets could turn.

The gold price and interest rates have a strong negative correlation. As the metal produces no income, the opportunity costs of holding gold rises in a high-yield environment.

Higher interest rates also boost the value of the dollar which usually moves in the opposite direction of the metal. The US dollar index against major currencies is down 6% since mid-March, but at 94.2 remains up 16.6% over the past year.

Image of newspaper excerpt from 30 Sept 2008 by Scorpions and Centaurs