A Strong Case For Gold As Recession Looms

Release Date:  Friday, February 15, 2019

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Gold and Silver Prices

Gold closed higher on Friday and hit a 2-week high after expectations that the U.S. Federal Reserve would hold firm on monetary tightening boosted following weak U.S. economic data. 

"While gold is on track for a small weekly gain, it was rangebound for most of the week, with gains on Friday stemmed by a rebound in stocks.

"'Gold (price action) is like watching oil evaporate. The market is continually bearish at lows and bullish at highs with actual breaks infrequent,' said Tai Wong, head of base and precious metals derivatives trading at BMO.

"'The end of the (Fed) tightening cycle now looms which improves the overall backdrop for gold significantly. With the Fed on hold, there is less pressure for the rest of the globe to keep pace.'

"The metal gained 0.5 percent in the previous session after weak U.S. retail sales data added to disquiet about slowing growth, which could prompt the Fed to hold interest rates steady for a while.

"Lower interest rates reduce the opportunity cost of holding non-interest bearing gold and weigh on the dollar.

"The disappointing U.S. data followed a spate of weak economic reports from China and Europe. This helped gold hold its ground amid a rebound in global stocks on hopes of a thaw in the U.S.-China trade dispute.

"'The world economy is slowing very rapidly and therefore monetary policy everywhere will be eased, so the outlook is a lot more inflationary, helping gold,' said Alasdair Macleod, head of research at GoldMoney.com.

"The world's two biggest economies reached a consensus in principle on key issues during ongoing talks, China's state news agency Xinhua said. Negotiations will continue next week in Washington." ("PRECIOUS- Gold scales 2-week peak; palladium matches record high," Arpan Varghese, Reuters, 02/15/19.)

Gold ended the week up $6.90, closing at $1,320.90. Silver ended the week down $0.05, closing at $15.76.

A Strong Case For Gold As Recession Looms- Bernstein-Christensen

Gold is more attractive amid ongoing geopolitical uncertainty and growing global as well as fears of recession.

"Gold could offer the best protection for investors as fears of a recession continue to rise, according to one research firm.

"In a report - 'a strong case for holding gold' - published Monday, international research firm Bernstein warned that due to growing global debt and ongoing geopolitical uncertainty, financial markets are entering a period where neither stocks nor bonds will perform well, making gold an attractive asset.

"'A material shift in geopolitical risk and a near-record buildup in government debt make other potential risk-free assets more questionable and also bring a temptation to create inflation, thereby further enhancing the case for gold,' the firm's global quantitative trading strategy group said in the report.

"The analysts noted that for the gold market, two important measures are at levels not seen since the World War II - global debt is at record highs and central banks are buying gold at unprecedented levels.

"The analysts noted that growing debt is an inflation risk while central-bank gold demand will likely continue 'for as long as the U.S. share of global GDP continues to decline.'

"According to data from the World Gold Council, central banks bought 651.5 tonnes of gold last year, the largest increase in global reserves since 1971.

"Many analysts have been positive on gold in the new year as recession risks have continued to rise. Sunday, Nobel Prize-winning economist Paul Krugman said that there is a significant chance that the world falls into a recession this year.

"Rising global debt also continues to attract market attention. According to data from the Washington-based Institute of International Finance, total world debt is hovering near a record at $244 trillion, more than three times the size of the global economy.

"Although gold prices are struggling to find new momentum, analysts have noted that global uncertainty and rising market volatility pushed prices above the critical psychological level of $1,300 an ounce..." ("A Strong Case For Gold As Recession Looms- Bernstein," Neils Christensen, Kitco News, 02/12/19.)

Only A Matter Of Time Before Gold Beats The U.S. Dollar- Analysts - Christensen

The dollar is on thin ice according to analysts and fears of recession exist while gold has momentum to move higher.

"The gold market is ending the week near the top of its two-week range and some analysts expect prices can continue to climb higher as the U.S. dollar is in its last gasps of a rally.

"Commodity analysts have noted that gold's recent bullish moves are impressive, as they have been made in the face of continued U.S. dollar strength. Although momentum has not been strong, gold has managed to hold above the critical psychological level at $1,300 an ounce. April gold futures last traded at $1,323.90 an ounce, slightly up from last Friday's settlement price.

"While it's not uncommon for the U.S. dollar and gold to rally together, the trend has never proven sustainable. Looking ahead, many analysts think that gold will eventually beat the U.S. dollar. Analysts expect gold prices to at least grind higher in next week's shortened trading week due to President's Day long weekend.

"Eugene Weinberg, head of commodity research at Commerzbank, said that he sees growing headwinds for the U.S. dollar, which will continue to benefit gold.

"'There are a number of factors weighing on the U.S. dollar: growing recession fears, weaker manufacturing data and a Federal Reserve that will not be raising interest rates anytime soon,' he said.

U.S. Dollar Is On Thin Ice

"David Madden, market analyst at CMC Markets also said that he thinks that despite gold's weak momentum, it will eventually win out over U.S. dollar strength.

He added that the U.S. dollar is benefiting more from weaker global currencies than legitimate strength. While the Federal Reserve has nearly established a neutral outlook on interest rates, other central banks have turned even more dovish.

"'This less-dovish sentiment will continue to support the U.S. dollar but it will be difficult for the currency to rally and I think this is where gold benefits,' he said. '... the upward trend in gold is here to stay."

"Mike McGlone, senior commodity strategist at Bloomberg Intelligence, said that he also sees the recent rally in equity markets supporting the U.S. dollar, but this will only prove to be a limited catalyst.

"'The dollar is on thinner ice, in our view, with its primary remaining support factor - the outperforming stock market - running into layers of resistance,' he said in a report Friday. 'A greenback rally likely requires the S&P 500 vs. world gauge to sustain above 2018's record high. We view mean reversion as the greater risk.'

The Federal Reserve On Hold For The Foreseeable Future

"For a lot of analysts, the Federal Reserve's 'patient' policy, officially established after last month's monetary policy meeting is the biggest hurdle that the U.S. dollar faces this year, and the biggest driver for gold prices.

"Economists are expecting the Federal Reserve to reiterate its neutral stance following the March monetary policy meeting. The CME FedWatch Tool market see the U.S. central bank on hold next month.

"Not only does a dovish Fed pose a headwind for the U.S. dollar, but it means that bond yields will also be lower and as inflation rises, real yields will be low.

"Maxwell Gold, director of investment strategy at Aberdeen Standard Investments said low real yields are positive for gold because it lowers the yellow metal's opportunity costs. Gold said that for investors, gold is an attractive alternative asset in an environment of low bond yields and volatile equity markets.

"He added that it will be difficult for the Federal Reserve to raise interest rates as global recession fears continue to rise.

"'I think we have seen a peak in real interest rates and that will be good for gold,' he said.

Two Nobel Laureates Warn Of Recession Risks

"According to some analysts, gold has been able to hold its own against the U.S. dollar because of growing recession fears. This past week saw two Nobel-prize winning economists warn investors about the growing threat of a recession.

"'It seems like there has to be an elevated probability of a recession this year or next year,' said Robert Shiller during a panel discussion during the InsideETFs conference in Hollywood, Fla.

"Earlier in the week, Paul Krugman said that there is a significant chance that the world falls into a recession this year.

"Jerry Hicks, sales & business manager at the Perth Mint said that gold is the best hedge against an impending recession because it is not strongly correlated to other assets.

Gold Has Momentum To Move Higher

"While gold is holding above critical support at $1,300, analysts have noted that market needs to push above initial support at $1,320 an ounce to attract new momentum.

"Colin Cieszynski, chief market strategist at SIA Wealth Management, said that a break above $1,320 could initiate a rest to long-term resistance at $1,360.

"'Technically, gold looks strong and momentum doesn't suggest that it is overbought,' he said. 'Gold looks good as it looks like all the tailwinds for the U.S. dollar have peaked.'

The Final Say

"It is a relatively quiet week for economic data with both Canada and U.S. markets closed Monday.  However, markets will be closely watching U.S. durable goods data Thursday to gauge the health of the manufacturing sector.

"Preliminary and regional manufacturing data will also be released during the same day. Followed by important home sales data. The housing sector has been a significant weak spot in the U.S. economy as fewer consumers have bought homes, driven away because of rising interest rates.

"Market players will also be anxious to read the minutes from the Federal Reserve's January monetary policy meeting to determine just how dovish the committee is after it acknowledged growing economic risks in the global economy." ("Only A Matter Of Time Before Gold Beats The U.S. Dollar- Analysts," Neils Christensen, Kitco News, 02/15/19.

Gold prices hold firm on trade, growth concerns - Reuters

Gold prices are steady and supported by uncertainties about the trade war with China and concerns of slowing global economic growth.

"Gold prices held steady on Monday, supported by uncertainties around Sino-U.S. trade war and concerns of slowing global economic growth, while a strong dollar weighed on the precious metal. Spot gold was steady at $1,313 per ounce...

"World stocks ended last week in the red amid uncertainty about global economic growth and trade tensions, posting their first weekly drop this year.

"Investors are looking ahead to trade talks this week with a delegation of U.S. officials travelling to China for the next round of negotiations. U.S. President Donald Trump said last week that he had no plans to meet with Chinese President Xi Jinping before a March 1 deadline to achieve a trade deal.

"Trump has vowed to increase U.S. tariffs on $200 billion worth of Chinese imports to 25 percent from 10 percent currently if the two sides cannot reach a deal by 12:01 a.m. (0501 GMT) on March 2.

"Trade tensions between the two largest economies of the world have rattled financial markets since last year.

"Adding to investor worries was the collapse in talks between U.S. Democrat and Republican lawmakers over the weekend amid a clash over immigrant detention policy, raising fears of another government shutdown.

"The European Commission sharply downgraded euro zone growth this year and next.

"Tighter financial conditions since last September make further interest rate hikes seem much less necessary than just a few months ago, San Francisco Federal Reserve Bank President Mary Daly said on Friday.

"Federal Reserve Chairman Jerome Powell is expected to testify on U.S. monetary policy and the economy before the House Financial Services Committee on Wednesday.

"The dollar index was marginally higher and hovering near more than one-month highs touched in the previous session. A stronger greenback makes dollar-denominated gold more expensive for holders of other currencies.

"Demand for physical gold in India rose last week as jewelers stocked up for a major exhibition, allowing dealers to cut discounts to the lowest in two months, while the Lunar New Year holiday kept activity subdued in other major Asian hubs.

"Scrap gold supplies in India, the world's second-biggest consumer of bullion, may increase this quarter as a rally in local gold prices has prompted consumers to sell old trinkets and jewelry.

"Venezuela's most successful financial operations in recent years have not taken place on Wall Street, but in primitive gold-mining camps in the nation's southern reaches." ("Gold prices hold firm on trade, growth concerns, Reuters, CNBC, 02/10/19.)

Gold gains on Fed rate pause signals; strong equities limit gains - Reuters

The Fed appearing to be more dovish moving forward on interest rates gives support to gold.

"Gold prices rose on Wednesday on more signs the U.S. Federal Reserve will likely be patient on further interest rate rises, but rallying global equities kept the metal's gains in check. Spot gold was up 0.04 percent at $1,310.99 per ounce...

"Federal Reserve officials have indicated that they will support a pause in interest rate hikes from the U.S. central bank to assess its impact in economy.

"'It appears that the Fed is really going to be much more dovish going forward on their expectations on interest rates,' said Phil Streible, senior commodities strategist at RJO Futures in Chicago.

"'The Consumer Price Index could have added a small impact, inflation seems to be muted right now and as a result gold continues to rally on that.'

"U.S. consumer prices were unchanged for a third straight month in January, leading to the smallest annual increase in inflation in more than 1-1/2 years, which could allow the Fed to hold interest rates steady for a while.

"Lower interest rates reduce the opportunity cost of holding non-interest bearing gold and weighs on the dollar.

"'A jump above $1,325 could trigger a new climb,' said ActivTrades chief analyst Carlo Alberto De Casa.

"'Otherwise, this lateral move could continue while investors wait for news on the China U.S. trade talks and other macroeconomic data, confirming (or not) the economic slowdown forecasted for 2019/2020.'

"U.S. Treasury Secretary Steven Mnuchin said talks with China went well on Wednesday, as the world's two largest economies try to hammer out an agreement.

"While major gold Exchange Traded Funds (ETF) tracked by Reuters have eased more than 1 percent, mirroring a slight pullback in gold since the start of this year, the ETFs have risen about 5 percent since mid-August, tracking a roughly 13 percent gain in gold in the same period.

"However, inflows into the SPDR Gold Trust, the world's largest gold-backed ETF, continued to drop, down about 3 percent so far this month after four straight monthly gains.

"'This reflects an improving sentiment in financial markets overall, which is a little bit of a drag on gold,' Julius Baer analyst Carsten Menke said.

"'Yet I would not expect these outflows to continue given there is an overall consensus that gold is in a longer term uptrend.' ("Gold gains on Fed rate pause signals; strong equities limit gains," Reuters, CNBC, 02/12/19.)

Dollar drops after retail data suggests slowing U.S. economy - Duguid

Much weaker than expected retail sales show there's a sharp slowdown in economic activity.

"The dollar fell on Thursday after a report that U.S. retail sales recorded the biggest drop in more than nine years in December, suggesting a sharp slowdown in economic activity at the end of 2018.

"The Commerce Department said on Thursday that retail sales fell 1.2 percent, the largest decline since September 2009 when the economy was emerging from recession. Data for November was revised slightly down to show retail sales edging up 0.1 percent versus 0.2 percent as previously reported.

"The sharp drop suggested a moderation in the pace of consumer spending, which accounts for more than two-thirds of the U.S. economy, in the fourth quarter.

"'The dollar had been looking good until retail sales came in much weaker than expected. The data suggests there is less in the economy than people had thought, and has pushed the dollar lower,' said Daniel Katzive, head of foreign exchange strategy North America at BNP Paribas.

"The dollar index, which measures the currency against a basket of six rivals, was down 0.14 percent, last at 96.997.

"Following the retail data release, a forecast model by the Atlanta Federal Reserve revised downward the U.S. economy's expected fourth-quarter growth rate to under 2 percent. And JPMorgan Chase & Co cut its estimates of where the U.S.

Federal Reserve will leave interest rates over the next two years, with just one hike this year and another in 2020.

"Thursday's data is supportive of the Fed's current inclination toward patience in its rate-hiking cycle. After four increases in 2018, market participants are anticipating the central bank will hold off on raises for the next one or two quarters.

"The Fed is on hold for Q1 and by the time it needs to make a decision on policy again, we'll have a lot more data and we'll have a better sense if this is softness associated with equity market concerns, or whether there was something more profound going on," said Katzive." ("Dollar drops after retail data suggests slowing U.S. economy," Kate Duguid, Reuters, 02/13/19.)