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Election And Whats Happening In The Markets

One of the most anticipated days for the markets, the Election has approached us in the midst of one of the most turbulent years in the past decade. It is important to note the critical factors that the markets look for and a general overview of the markets.

Certainty is the leading factor the markets are looking for

Earlier today, as Biden strongly lead the race, commodity and equity markets were up firmly as the likelihood of a contested election faded away. However, with Trump planning to contest the election results alongside Trump claiming that the Democrats are stealing the Election by allowing votes to be continued after the ballots close, a contested election has come back into question. Markets started to retreat, with the Dow Jones pushing lower.

Sells on the indices as uncertainty spiked. NASDAQ in Blue, Dow Jones in Orange

There are no consistent signals showing consensus in the Market

As predicted, volatility has been rocking the futures market today. Particularly with Gold, a commodity that was expected to do relatively well amidst the volatility has taken on an equity-like behavior instead of being a "save haven."

Gold swingin'.

Equity markets have swung back and forth, with the S&P 500 and the Dow Jones being up / down 1% during the day. A little bit more consistent, the NASDAQ has been up above 2% for most of the day as many investors and traders retreat to tech stocks as a "defensive" play. With that said, U.S. futures near the tail end of the night grinded lower with European equities trading in the negative territory.

Another consistent player in the Market has been the U.S. dollar, as investors and traders sell positions to hold the U.S. It has rallied on risk-off trades. However, it has remained relatively flat. If you take a look at the cable, it essentially mirrors the dollar index.

Mirror, Mirror on the wall

It's going to be a tight race

The Democrats hope for a blue sweep have all but gone as Donald Trump clinches Florida and Ohio, battleground states that Biden hoped to win. Fabiana Fedeli, global head of fundamental equities at Robeco, said that "The blue wave trade has been going on since summer and has built up more recently, and I would expect to unravel now." However, she does warn that trading the outcome "makes no sense."

Remember, its not about total votes - its about the electoral votes.

We can clearly state that we do not know what's going to happen in the next couple of hours. However, as all is said and done, markets should return back to a relative normal. Stay put. Stay safe and Trade safe.

Gold hasn’t been itself lately

There was this substantial rise in Gold in July. Touted as the "safe haven," many reasons were stated as the reasons for Gold's rise. Inflation, currency debasement, risk-off, etc.

However, I believe we saw three different types of correlations in Gold this year. The first one was the "risk-off" trade. Investors and traders buy up Gold during the equity rout.

The second period combines two very similar mindsets in investment in Gold. The first one can be associated with "institutional money," quoting currency debasement and inflation. The second one comes from retail investors, who have been plowing money into Gold ETF's such as GLD, quoting what institutional investors stated. This pushed a strong bull rally in Gold, as investors and speculators press onto the yellow metal alongside a risk ON market.

Now the gold dynamic has taken a new personality. We saw substantial swings in the equity markets in the last two weeks, with the equity markets diving as of late. However, Gold entered a consolidation – not making the "risk-off" moves we saw earlier this year. This is after Gold sold off near the $2,100 market as investors feared the bull run for Gold had run its course. Is the Gold's silence a sign of more things to come? What other things can we deduce from these three different correlations?

Gold in Blue, S&P 500 in Orange

The silence in Gold highlights its bull run was more on positive sentiment, not the risk off-trade.

The silence during this period, where Gold is supposed to be the outperformer, suggests that the interest in Gold was due to more of a speculative Bull bull run, disguised as the "save haven" trade.

The stretched valuation in Gold may favor bonds in the safe-haven trade

The bull run giving Gold new highs has insinuated investors' minds that Gold is overstretched. Safe-haven assets are supposed to have an inverse correlation with risk-off assets. However, Gold as not exhibited that in the past couple of months. Nor has it exhibited risk-off, "safe haven" characteristics either. Furthermore, safe-haven assets should not have the stigma "oh, its overstretched" – Bonds don't have that stigma or cash.

However, another explanation could be that Gold has been right all along?

An explanation to the rally could be that investors were worried about the potential selloff due to equities' rallying. Therefore, when equities did selloff, Gold was perfectly priced. This is on top of institutional money and general interest in the metal citing devaluation and inflation.

Whatever the reason is, the mentality of whether Gold is overstretched or not should be a trait safe-haven assets should have. If you're looking for a legitimate safe-haven asset, you may want to look in bonds. Or better yet, hold some cash to take advantage of the dip.