Gold gains on dollar weakness, dovish Fed; palladium sets new record

Release Date:  Friday, January 11, 2019

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Gold and Silver Prices

Gold closed higher on Friday and took its fourth consecutive weekly gain as the U.S. stock market slipped and the U.S. dollar went lower on expectations that the Federal Reserve may not continue to raise interest rates.

"'With equities down slightly heading into the weekend, there is some flight to safety in gold,' said Bob Haberkorn, senior market strategist at RJO Futures.

An index of world stock markets eased on Friday after a five-day winning streak.

"'The equities are looking a little heavy up at these levels and yesterday's speech by Fed Chairman Powell felt like Fed might adopt a dovish stance on rates moving forward, which is lending a lot of support to gold,' Haberkorn added.

"Fed Chairman Jerome Powell said on Thursday the U.S. central bank could be patient on rate policy. Gold tends to gain on expectations of lower interest rates, as they reduce the opportunity cost of holding non-yielding bullion.

"'Recent inflation data from around the globe points to a tamer outlook on rising prices in the coming months,' Jim Wyckoff, senior analyst at Kitco Metals, wrote in a note. 'That should allow world central banks to be less hawkish on their monetary policies, which would be a bullish element for the precious metals markets.'

"Gold is up about 0.3 percent for the week, mainly supported by a weaker dollar, which slipped to about three-month lows on Thursday against the backdrop of dovish views from the Fed and a de-escalation in the U.S.-China trade dispute." ("Gold gains as stocks slip; en route to 4th weekly gain," Reuters, CNBC, 01/11/19.)

Gold ended the week up $6.50, closing at $1,286.80. Silver ended the week down $0.09, closing at $15.57.

Gold gains on dollar weakness, dovish Fed; palladium sets new record - Reuters

Dovish comments from the Fed caused the U.S. dollar to go down which in turn was a gain for gold which remains bullish.

"Gold rose on Monday, hovering near a more than six-month peak hit in the last session, as the dollar slid on reduced chances of further rate hikes by the U.S. Federal Reserve and the United States and China resumed talks to end their trade dispute.

"Palladium hit an all-time high as the market suffers from a sustained deficit due to high demand and a supply shortage. The metal, used mainly in emissions-reducing catalysts for vehicles, was trading at a premium to gold.

"Spot gold was up 0.25 percent at $1,288.03 per ounce as of 1:40 p.m. EST, having reached $1,298.42 an ounce on Friday, its highest since June 15.

"'The market is reconsidering its expectations for Fed rate hikes and as the expectations have been scaled back gold prices have been able to edge higher,' said Suki Cooper, precious metals analyst at Standard Chartered Bank.

"The dollar slipped following dovish comments from Fed Chairman Jerome Powell, making gold cheaper for holders of other currencies.

"Powell on Friday said the U.S. central bank would be more sensitive to downside risks in the market, adding that it was 'prepared to shift the stance of policy' if needed.

"Gold tends to gain when expectations of interest rate hikes ease because lower rates reduce the opportunity cost of holding non-yielding bullion ad weigh on the dollar, in which it is priced.

"'As the trade tensions have eased we've seen the dollar weaken somewhat and in turn gold prices have been able to benefit,' Cooper said.

"The United States and China are likely to reach a good settlement over immediate trade issues, U.S. Secretary of Commerce Wilbur Ross said on Monday.

"'The main trend remains bullish (for gold). From a technical point of view, traders are now watching the two key levels of $1,277 and $1,300, which are new support and resistance levels respectively,' ActivTrades chief analyst Carlo Alberto De Casa said in a note.

"Investor appetite for gold can be seen in the holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund..." ("Gold gains on dollar weakness, dovish Fed; palladium sets new record," Reuters, CNBC, 01/07/19.)

'Danger signals' in bonds foreshadow a recession by mid-2020: Sovereign wealth fund advisor - Clifford

Macroeconomic forecaster warns the "inverted yield curve" means a recession is coming.

"The bond market is warning a recession could start in the next 18 months, macroeconomic forecaster Komal Sri-Kumar told CNBC.

"There are 'danger signals,' the Sri-Kumar Global Strategies founder said on "Power Lunch" Tuesday, referring to the phenomenon known as the inverted yield curve, when rates on longer term bonds are actually lower than shorter term ones. That's happening at the shorter end between 2-year and 5-year Treasurys while the spread between the 2-year and 10-year is razor thin.

"The 2-year and 10-year spread should invert by the end of this year, predicted Sri-Kumar, whose consultancy advises multinational firms and sovereign wealth funds on global risks. That means 'we are talking about a recession, if not by the end of this year, by the middle of 2020 to begin,' he argued.

"Sri-Kumar on Tuesday was also critical of the Federal Reserve for raising interest rates last year with inflation still so tame, saying the market is 'yanking the Fed's chain' by telling central bankers to stop increasing short-term rates. He believes the Fed won't go through with the two rate hikes that it projected after last month's monetary policy meeting, which ushered in the fourth rate increase of 2018.

"'[But] even if they back off and don't increase rates anymore, that is not going to help because you've had the negative impact of the rate increases along with very little inflation,' he said. 'That's going to do enough damage to the economy and that's what I think we are witnessing right now.'" ('Danger signals' in bonds foreshadow a recession by mid-2020: Sovereign wealth fund advisor," Tyler Clifford, CNBC, 01/09/19.)

Gold Will Continue To Shine In the Face Of Growing Systemic Risks- WGC - Christensen

Analysts at the World Gold Council believe there's a potential for higher gold prices as investors will favor gold as a diversifier and hedge in 2019. 

"Geopolitical risks that weighed on global economic growth in the second half of 2018 will carry through to 2019 and that uncertainty will be a boon for gold prices, according to the latest research from the World Gold Council (WGC).

"Although the WGC didn't provide a price forecast for the yellow metal, the analysts said in their 2019 Outlook report that they see potential for higher prices as investors look for safe alternative assets. The comments come as gold prices hold near six-month highs and are in striking distance of $1,300 an ounce...

"'We believe that in 2019 global investors will continue to favor gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics,' the analysts said.

"Some of the risks investors face in the new year include: elevated market valuation, the rising threat of a global recession, and higher inflation pressures as nations implement more protectionist policies.

"Although markets saw a major correction in the last quarter of 2018, the WGC said that the U.S. equity market remains overvalued. They added that gold will be an attractive asset for investors looking to diversify.

"'In the U.S. the 10-year Treasury yield is 1.5% below its 2008 pre-Lehman crisis level, providing investors less cushion in case of further market volatility,' the analysts said.

"Looking further at the bond market, the analysts noted that the market is signaling a growing risk of a recession as the yield curve flattens, meaning the spread between short-dated and long-dated bonds narrows.

"'The 2s/10s curve currently stands at 13bps, a level of curve flattening last seen before the 2008 financial crisis, with some economists predicting its inversion in the first half of 2019. While an inverted yield curve does not cause recessions, it has generally preceded them - albeit with a long lead,' the analysts said.

"The WGC also sees potential for gold to rally this year as an inflation hedge, with global protectionist policies expected to raise consumers prices around the world.

"Protectionist policies are inherently inflationary - either as a result of higher labour and manufacturing costs, or as a result of higher tariffs imposed to promote local producers over foreign ones," the analysts said. "They are also expected to have a negative effect on long-term growth." ("Gold Will Continue To Shine In The Face Of Growing Systemic Risks- WGC," Neils Christensen, 01/10/19.)

The US could lose its crown as the world's most powerful economy as soon as next year, and it's unlikely to ever get it back - Martin

Research indicates the U.S. could lose its position as the world's largest economy to China who may later be joined by India.

"The United States of America could lose its position as the world's biggest economy as soon as next year — and once that happens, it is unlikely to regain the top spot as developing Asian economies power ahead.

"According to research released this week by Standard Chartered Bank, China is likely to become the world's biggest economy at some point in 2020, when measured by a combination of purchasing-power-parity exchange rates and nominal gross domestic product.

"Using PPP alone, China is already considered the world's largest economy, but on a nominal basis the US remains in the lead.

"Not only is China likely to overtake the US in 2020, but by 2030 it will be joined by India, Standard Chartered said in its report, with annual GDP growth set to accelerate from about 6% now to almost 8% in the coming decade.

"India will likely be the main mover, with its trend growth accelerating to 7.8% by the 2020s partly due to ongoing reforms, including the introduction of a national goods and services tax (GST) and the Indian Bankruptcy Code," Standard Chartered said.

India's rise would also reflect Asia's becoming the dominant economic region of the planet as the size of its output starts to match the size of its population.

"Our long-term growth forecasts are underpinned by one key principle: countries' share of world GDP should eventually converge with their share of the world's population, driven by the convergence of per-capita GDP between advanced and emerging economies," a team of economists from the bank wrote in a note to clients.

By 2030, the bank said, Asian GDP will account for roughly 35% of global GDP, up from 28% last year and 20% in 2010. This would be equivalent to the combined output of the eurozone and the US.

"By 2030, six of the 10 largest economies could be in Asia..." ("The US could lose its crown as the world's most powerful economy as soon as next year, and it's unlikely to ever get back," Will Martin, Business Insider, 01/10/19.)

Goldman raises gold forecast for 2019 on recession fears, sees 10% gain - Li

Goldman Sachs forecasts gold higher, up to $1,425 an ounce in the next 12 months as it believes gold will grow as a defensive asset.

"Goldman Sachs has found the safe haven gold more attractive after a volatile December.

"The bank on Thursday raised its gold forecasts to $1,325, $1,375 and $1,425 per troy ounce over the next three, six and 12 months, respectively, from $1,250, $1,300 and $1,350 per troy ounce. Based on gold's current price, that forecast represents a 10.7 percent increase over the next 12 months.

"Going forward gold will be supported primarily by growing demand for defensive assets. The same is also true of central bank buying, with rising geopolitical tensions incentivizing more central banks to re-enter the gold market,' Goldman's Jeffrey Currie said in a note to clients on Thursday.

"Fears on slowing economic growth and the uncertainties around the Federal Reserve's monetary policy have stirred the financial markets for a few months. Risk assets took a big hit in 2018, with the stock market suffering the worst December since the Great Depression. But during this volatile time, gold has outperformed the markets, returning more than 4 percent since the start of December, according to Goldman...

"'The last few weeks have seen a sharp deterioration in risk sentiment following soft macroeconomic data in December and renewed concerns about the future direction of growth, particularly the risk of U.S. growth catching down towards weaker economies,' Currie noted.

'Fear of the next recession'

"The double whammy of weaker economic outlook and the Fed's policy uncertainty has spooked the markets. The U.S. manufacturing PMI (Purchasing Managers Index) hit a 15-month low in the same month. Manufacturers' confidence in business also slipped to the lowest level in nearly two years.

"The Fed had been tightening monetary policy aggressively. But on Jan. 4 Fed Chairman Jerome Powell signaled Wall Street that policymakers will be patient with policy moves and are attuned to the messages coming from markets. That pause may be the time for gold to outperform, Goldman said." ("Goldman raises gold forecast for 2019 on recession fears, sees 10% gain," Yun Li, CNBC, 01/11/19.)