AGE's Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. Register for free email delivery. View archives.
February 15, 2016:
Why gold gained $100 last week
Gold is off to a fantastic New Year. Last week it surged 7.1% for its best weekly performance since December 2008, when the financial crisis crippled markets and sent panicked investors scurrying for safety. It has been one the best-performing assets in 2016, gaining more than 14% to a one-year high as fears about slowing global growth have gripped the markets.
Stocks, meanwhile, have been rocked by volatility and losses. The Dow has fallen more than 8% in the past six weeks, the Global Dow more than 9%. All told, more than $7 trillion has been wiped from equity markets worldwide so far this year, with more to come. No wonder safe-haven assets like gold and silver are suddenly—and aggressively—back in demand.
What's driving all the risk-off sentiment? To begin with, China. After slowing for years, the world's second largest economy has become alarmingly weak. Growth last quarter was the lowest since the financial crisis in 2008, and full-year growth for 2015 was the worst in 25 years. Rising consumer and corporate debt, too much housing, factory overproduction, tumbling exports, and shrinking international demand for goods have combined to put the brakes on the global juggernaut, throwing its financial markets into chaos, destabilizing its currency, and raising questions about Beijing's ability to manage a solution.
China's equity markets have seen the lion share of carnage, with the Shanghai Composite Index losing more than 23% this year. The dramatic losses have triggered a contagion-effect in Asia, Europe, and the U.S., pulling shares lower in all markets. The IMF has lowered its global growth forecast because of China's economic turmoil, warning last month that 2016 will be "a year of great challenges" that threaten to derail global growth, largely because of financial contagion spreading from China.
The Fed, too, is taking notice. Leading up to the January meeting of the FOMC, several members voiced concerns that China's economic turmoil could spill into the U.S., slowing growth and causing downward pressure on already-too-low inflation. In its policy statement following the January meeting, the Fed noted the rise of "global economic and financial developments"—read, China and plunging stocks—that it will be "closely monitoring" as it weighs future rate hikes.
Negative interest rates
Adding to stress in the markets, and helping to fuel gold's stunning rally last week, Sweden cut interest rates deeper into negative territory on central bank deposits, raising new concerns about the stability of the Eurozone banking system. The next day, Fed Chair Janet Yellen told Congress that she will not take negative rates "off the table" as a U.S. policy tool "if the Fed needs to assist the economy."
Intended to increase liquidity and spur growth, negative interest rates undermine the traditional ability of banks to profit from the difference between borrowing costs and lending returns. Japan went to negative rates in late January, joining the ECB, Denmark, and Switzerland. While their currencies, banking and financial stocks were hammered by the moves, gold saw inflows from investors seeking to hedge against the risk of cheaper currencies.
Unfortunately, the U.S. economy's need for assistance appears to be growing. GDP increased just 0.7% in the fourth quarter; manufacturing has been in contraction for months; and the ISM reported that the services sector, comprising 80% of GDP, is growing at the slowest pace in two years. Consumer sentiment has fallen in February, according to the University of Michigan survey, with Americans growing more pessimistic about the economy. Inflation expectations also took a hit as import prices fell 1.1% last month, putting additional pressure on the Fed to forestall deflation.
With the Fed's preferred measure of inflation, the PCE Index, falling to merely 0.1% in Q4, interest rates are unlikely to rise again soon. The long drumbeat to December's quarter-point increase was the primary reason for gold's underperformance last year, and many economist were predicting four more hikes this year, with the next coming in March. No longer. The market now sees the next rate hike coming no sooner than December, according Fed fund futures contracts, if another one comes this year at all.
Let's take a look at the latest gold chart.
After hitting $1,050 in mid-December, its lowest price since October 2009, gold has been grinding consistently higher, boosted by safe-haven buying and expectations that the Fed is unlikely to raise interest rates again this year.
After the ISM reported growth in the services sector falling to the lowest level in two years, the metal surged through major resistance at $1,133 (its 200-day moving average) to a 15-week high on February 3. Two days later, after a disappointing jobs report pressured stock markets, gold finished the week at $1,173, comfortably above its August 2015 high of $1159. Once it broke over the October 2015 high of $1,183.90 on Monday February 8, gold was off to the races, rocketing to a one-year high of $1,247.
As you can see by the blue trend lines on the chart, gold has now broken through both downward trend lines going back to March of 2014, entering a technical break-out above $1,140. Its move over $1,200 signaled a reversal of trend. This is very bullish!
As we go to press, gold is correcting lower, trading between $1,205 and $1,210 on low volume with most major markets closed for President's Day. We expect prices to consolidate around $1,200 in the short-term, holding most of these strong recent gains. Going forward, support should be established at $1,180 and again at $1,140, with upside resistance at $1,225 and again at $1,250.
Once again, gold is off to an exceptionally strong New Year. Tumbling stock markets, falling growth, and cheapening currencies have driven gold to the highest level in a year. Add in rising geopolitical turmoil in the Middle East and plummeting oil prices, and it is no wonder global investors are flocking back to safe-haven gold.
We are offering several specials that represent great values in the current market.
In bulk gold, we have a limited number of British Gold Sovereign “Kings” in Brilliant Uncirculated condition available at lower premiums over their gold content.
In Classic U.S. gold coins, we are offering a special on $20 Saint-Gaudens in Mint State 65 at $25 off per coin. With premiums near historic lows, these gem-quality double eagles are a fantastic value right now.
And in silver, we have U.S. Peace silver dollars in BU at new, lower prices. Minted between 1921 and 1935, these are the last true silver dollars produced for use as currency. They are now at the lowest prices in five years!
If you are interested in adding to your holdings, please visit us at www.amergold.com or call 1-800-613-9323 and speak to one of our account managers.
That’s it for now. As always thank you for your time and your business.
Dana Samuelson, President
Bill Musgrave, Vice President
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