Gold, S&P, DXY, bonds: What is driving them during the pandemic?

This is a cross-asset analysis of the following instruments: XAUUSD (Gold), S&P500, U.S. Dollar Index (DXY), the U.S. 10Y Note and M1 Money Supply. The initial idea was in our attempts to determine basically what is driving Gold's price during this period of pandemic. This multi-dimensional work reaches some interesting conclusions.

First we start with the week starting February 24th, 2020. The stock markets plunge due to growing fears of COVID spreading outside of China (E.U. starting to get hit hard). S&P, Gold and DXY decline rapidly while the 10Y (bonds) rise.

The second phase we look at, and the most important in our opinion, is the period from March 3rd to March 15th, 2020. That is when the Federal Reserve announced Trillion Dollar rescue packages in order to stimulate the economy from falling demand under the lock-downs. The interest rates were lowered by 0.50% (March 3rd) and 1.00% (March 15th). Overall the rates fell from 1.75% to 0.25% in 10 days. This is seen by the parabolic rise on M1 Money Supply. The result was very beneficial for the stock market (S&P500) obviously but also for Gold, which was seen as a measure to counter inflation cause by the Fed's actions. See how S&P500 and Gold have started to move in parallel motion, meaning that investors saw Gold as a form of stock asset and not the safe haven it normally is during crises. On the contrary, the USD (DXY) mostly and the 10Y (bonds) were the safe haven from March 9th to March 20th when stocks (S&P) and Gold collapsed.

Since then the markets consolidated for a few weeks and after around May 12th-18th we see a big decoupling of S&P500 and Gold (rising) against DXY and U.S. 10Y (falling). This divergence obviously shows that as long as rates stay the same, those four will continue to move into opposite directions. And it is also obvious which assets the markets deems risky (stocks, Gold) and which not (DXY, bonds).

Under the umbrella of stimulus (M1) and despite the rising pandemic cases all around the globe, investors continue to feel confident to invest in riskier assets. What we see since Wednesday, is the fear factor hitting the markets again and DXY, 10Y turning higher, while S&P and Gold fall.

So to come back to our original intention for this analysis, we encourage Gold traders to be very careful and treat Gold during this pandemic and as long as stimulus lasts as a stock and not an asset that moves in opposite direction from the stock market (at least mostly). The gap between the four asset classes has grown very big as seen on the chart and another shock will cause that to close.



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