Gold takes center stage amid global rut

As world financial markets recalibrate amid extreme volatility investors are not wasting any time tightening up their tolerance for risk.

The S&P 500 (^GSPC) and oil have tumbled in recent weeks and that shift is sending money into safer assets says Mark Sebastian, founder of Option Pit LLC. “Gold is starting to look real interesting here especially now that the dollar appears to no longer be strengthening and views of the Fed and the 10-Year are starting to change. The 10-Year is at 2% that points to the dollar weakening.”

Along with the safety of government debt, such as the 10-Year Treasury, investors are flocking to gold. The SPDR Gold Shares ETF (GLD) has erased its losses for the year. The risk-off trade may create a technical floor for gold says Sebastian, who predicts the metal could return to 1300 an ounce amid choppy trading. Volatility in gold as measured by the CBOE Gold Volatility Index (GVZ) is hovering at annual highs.

As for oil, although it has entered a bear market, briefly dipping below the $80 level, Sebastian says the commodity could still trend lower. “I don’t think a lot of people saw below $85 and that’s what caused this second leg down. There was a real ugly sell-off on Tuesday that really, we think, potentially was somebody liquidating. The guys who really got caught long have basically been forced out. So now it's all about where does it find a technical floor? I think we are getting close.”

While Sebastian is not a buyer of crude at these levels he see some opportunities in dividend paying oil service stocks Halliburton (HAL), Linco (LNCO) and Linn Energy (LINE). Shares of the trio have lost nearly 30% a piece in the past three months and Sebastian doesn’t see much downside from here.

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