What can provoke 20-30% collapse of the stock market?

Gold investors have reasons to cheer. The price of gold climbed to an all-time high on Monday, rising above $1,940 per ounce. Gold has gained almost 30% this year. The party should go on for a long time, as Bank of America foresees the yellow metal going to as high as $3,000 per ounce over the next 18 months.

Investors are pouring their money into the precious metal amid fears over the pandemic’s impact on the global economy and worsening tensions between the United States and China. Falling returns on U.S. government bonds and a weaker dollar are also driving the yellow metal higher.

This is not the first time that gold has received aid from central bank stimulus programs. From December 2008 to June 2011, the Federal Reserve bought $2.3 trillion in debt and kept borrowing costs near zero to support growth. Those efforts helped send gold to a record high of $1,921.17 in September 2011.

The gold rally signifies that the economy is in trouble, which is terrible news for the Dow. Rising virus cases and death spikes are threatening the fragile recovery. The economic recovery is slowing as lockdowns resume in many states. After declining for four months, unemployment claims are on the rise again. There are fears that the expiration of the additional $600 in unemployment benefit will deal another blow to consumer spending. Lower-income workers will feel the hit the most.

The stock market valuation seems too high relative to the uncertainties. Long-time market bull Ed Yardeni warned that new risks from the virus surge and increased tensions with China could trigger a 20% to 30% meltdown. The Dow, meanwhile, has rallied on hopes that a vaccine will become available soon.

Gold Hitting Record Highs Is Bad News for the Dow – Here’s Why, CCN, Jul 28