The Dow industrial average reached the 20,000 mark last week for the first time in history. It’s all very exciting. But what does that actually mean? Is it something that really matters to investors? Would that matter whether you are investing in stock or precious metals like gold? The answer to the last two questions is a resounding yes.
The Milestone Points to a Healthy Economy
The Dow reaching 20,000 mark means that the economy is doing better than it did following the crash in 2009 and 2010. The stock market indices are doing better now than ever. In the last handful of years, the private sector has reaped enormous benefits and added a whopping 15.6 million jobs to the market. Consumer confidence levels are also on the rise following the recession. Things are so rosy; the Federal Reserve even initiated an interest rate hike back in December.
What’s in a Number?
The 20,000 figure is based on the share prices of the 30 largest companies in the U.S. Though it’s tempting to think of Dow as a measure of the U.S. business landscape, It’s not. The rival Standard and Poor standard represents more than ten times that number of companies and shares. What the Dow actually represent are the large companies that make up the market. Smaller ones are mostly ignored. So, it’s not wise to take Dow as a reflection of the market as a whole.
Also, though 20,000 mark means a milestone, its impact is less influential upon a closer look. Dow first reached its 1,000 point milestone in 1972. Back then, the points affect stocks by 10 percent. Dow reached the 2,000 point mark in 1987. But it reached the 19,000 mark last November. And a month later, it has hit the 20,000 mark. This milestone means only a half a percent influence to stocks.
A Largely Psychological Effect
The Dow’s milestone mark means little to the actual economy, but traders and investors like big numbers like this. So, the positive physiological response has the biggest effect on the stock. Short-term traders, and algorithms, are more likely to move stock a bit because of this effect.
The Real Effect on Gold
If the Dow is doing well, then that means the dollar is strong. If the dollar is strong, then that means the value of gold should go down. But that’s not what’s been happening in the past few weeks. The spot price of gold actually risen by fractional percentages in the final days of January. In February, the price of gold was high against a weakening dollar. Value of precious metals overall were inching high as the Dow hit 20,000.
As mentioned above, the 20,000 number does not reflect economic reality. What’s really driving the investment sector right now is the political climate of the country. Investors were hopeful that the Federal Reserve would hike interest rates come March. But thanks to a less than positive jobs report, that seems unlikely to happen. The low interest rates affect investments far more than Dow milestones.
Traders expect gold prices to remain solid over the dollar for the first half of 2017 because of political uncertainties in the U.S. and Europe. Gold buyers, therefore, don’t have anything to worry about.
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