One way to support the economy is to make money cheaper and incentivise lending by cutting interest rates, the mandate of central banks. The chair of the most important among them, the U.S. Federal Reserve, hinted as much on Tuesday when he pointed to a fragile labour market despite a resilient U.S. economy. The end-October Fed meeting will therefore likely bring another 25-basis-point cut, the probability of which stands at 98%, according to the CME’s FedWatch tool. Stock markets advanced further, brazenly ignoring the brewing trade tension between the U.S. and China, which could erupt at any time.

The unbridgeable difference between the world’s two largest economies was on display yesterday when the U.S. Treasury Secretary warned China that its planned export controls on rare earths would lead the U.S. and other trading partners to decouple from it to the benefit of no one. It is as fair a point as noting that import controls, in the form of excise duties, could also lead to isolation. Tit-for-tat tariffs can, and most probably will, turn sentiment on a dime, and FOMO (Fear of Missing Out) will be followed by JOMO (Joy of Missing Out).

One way to support the oil market is to reduce the availability of its currency, oil, which is within the realm of its central bank, OPEC. Yet the exact opposite has been on the agenda in recent months, with the producer group seemingly undeterred in its effort to regain a fair share of the market. This, combined with the consensus expectation of an imminent and significant increase in global and OECD inventories, is putting downward pressure on prices, which fell on Tuesday and yesterday to their lowest levels in five months. The harbinger of global stock build is the US. The API reported swelling crude and gasoline stocks last week, with distillate registering a significant decline.

Whether this move south is sustainable chiefly depends on developments in Russia. Ukrainian drone attacks have severely damaged the country’s capacity to export refined products. The situation is so dire that the Russian Deputy Prime Minister has recently floated the idea of importing gasoline. The U.K. aims to tighten oil sanctions on Russia, targeting the country’s two largest oil companies and more than 50 of its shadow-fleet tankers in an effort to further deprive the invader of petrodollars. President Trump said overnight his Indian counterpart assured him that it would gradually halt the purchase of Russian oil, hence the morning’s strength. The port of Novorossiysk is reportedly operating at full capacity and is unable to ship surplus volumes of crude oil, according to Reuters. Global oversupply remains the main concern; however, the plummeting availability of Russian products and crude oil ought to set a floor under the market. This year’s low of $58.40 per barrel (Brent basis), reached in April, may well prove a cumbersome task to breach.

Will Either of Them Crumble?

The world has never been a static place. Wars, political struggles, and scientific and financial innovations always drive change. This constant motion, for better or worse, ensures that once-axiomatic theories and rock-solid relationships are often upended.

The latest example of this ever-changing environment, from our own neck of the woods, the financial markets, is the relentless and simultaneous rise in gold and equities. Conventional wisdom has always held that a bull equity market is the unmistakable sign of a healthy economy; therefore, there is no need to seek financial shelter, the most popular form of which is gold.

Yet, what we have witnessed since the beginning of the year is a seemingly counterintuitive bull market in both asset classes, as investors’ appetite for stocks and for the precious metal appears insatiable. The MSCI All-Country Equity Index has advanced 16% year-to-date (as of October 14), matching the performance of the tech-heavy Nasdaq Index. Gold, during the same period, has delivered an almost unbelievable 58% return. Meanwhile, Brent crude has shed 16% of its value. The once non-existent correlation between gold and oil has turned into an inverse relationship: while one ounce of gold bought 34 barrels of Brent crude oil at the end of 2024, it now buys twice as much.

It is, therefore, a timely exercise to examine what lies behind these performances and whether either stocks or gold is prone to a significant correction. In today’s note, we discuss why gold remains strong, while the perpetual optimism in equities will come under scrutiny on Monday.

It is noteworthy that gold first breached the $1,000/ounce mark in 2008, at the height of the subprime-induced recession. The $1,500/ounce milestone was surpassed in 2011 during the eurozone crisis. The social and economic devastation caused by the pandemic in 2020 then propelled it above $2,000/ounce. Each of these episodes was accompanied by a painful, albeit relatively short-lived, plunge in equities, suggesting that gold tends to be in demand during times of economic hardship. Statistical evidence, nonetheless, challenges this perception, as gold has actually tended to move in lockstep with equities: the weekly correlation has averaged 90% over the past seven years. Yet, it is the pace of its stratospheric rise relative to equities that is somewhat perplexing.

Experts and analysts cite several reasons for gold’s ascent. First, central banks are eager to diversify away from the dollar. This has been particularly evident under the Trump presidency. Capricious policymaking, including trade frictions and attacks on the Federal Reserve, created an uncertain environment. This drove up demand for gold. However, the central banks’ move is not novel. Over the past three years, these institutions have purchased about 1,000 tonnes of gold a year for diversification. According to the World Gold Council, gold’s share of central bank reserves has risen from 10% to 24% over the past decade. Total holdings (excluding the Fed) neared 30,000 tonnes at the end of June. A simple interpretation: trust in the dollar is eroding.

Secondly, both institutional and retail investors are piling into gold amid political and economic uncertainty. Gold is always a safe bet against inflation. Consumer prices in the US and other developed economies remain under control, but inflation could flare up if tariff wars intensify. The third factor is the retreat in the price of money. Recent central bank rate cuts have made gold more attractive than currencies. Government debt piles and the rising cost of servicing them provide another compelling reason to hold gold.

Of course, all of the above arguments and explanations for gold’s rally are made in hindsight. Few, if any, foresaw such a bull market 9–12 months ago. Yet, based on the plausible causes behind this unstoppable ascent, it is tempting to conclude that a correction, given elevated government debts, a weak dollar, and falling rates, will only occur when investors become unequivocally confident that inflation is under control and economic growth prospects remain strong.

And what about oil? Its relationship with gold is complex. The dollar and the hedge against inflation are the common denominators linking the two. A risk-off sentiment, however, can easily send them in opposite directions. This year’s divergence between the two appears to be driven chiefly by gold’s strength, though oil’s weakness, precipitated by oversupply concerns, has undeniably played a role. Unless supply falls and tightens the oil balance, the current gold-to-oil ratio of 67 is unlikely to narrow and could even widen further.

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