Gold consolidates ahead of Fed as Morgan Stanley sees 30% recession odds

Caution about two major central-bank meetings later this week sent gold into consolidation mode Monday.

After golds push to 13-month highs last Friday, the pullback to about $1,235 Monday afternoon was not unexpected given that the metal is sensitive to interest-rate moves from the Federal Reserve, which is conducting a two-day meeting that ends Wednesday. The Fed is expected to stand pat on rates but hint that another hike could be coming in June. The Bank of Japan, which imposed negative interest rates in January, also meets this week.

Following golds lead, silver dropped about 0.8% to hit $15.35.

481 tons bought on futures market: The cooldown comes as the latest CFTC positioning data shows that as of March 8, hedge funds and money managers increased their bullish positions to the highest level in 13 months. This was the eighth increase in net long positions in the last nine weeks, Commerzbank said. Since the beginning of the year, the equivalent of 481 tons of gold have thus been purchased via the futures market.

Moreover, inflows into gold-linked ETFs also continue to surge, at roughly 18-month highs and enjoying the longest stretch of gain since 2012.

Negative rates are driving investors into physical gold as well. Manager Takahiro Ito of the Tanaka Kikinzoku Kogyo K.K.s store in Tokyo said his clients are buying even as the price soars.

Many customers are wagering that its better to turn their savings to gold as a safe asset rather than deposit money at banks that offer low interest rates, he said.

Buybacks keeping S&P afloat: Gold also has paused as the stock market shows some signs of life. However, that could be a mirage, because a new Bloomberg analysis found that stock buybacks among S&P 500 component companies are on track to hit $165 billion.

Anytime when youre relying solely on one thing to happen to keep the market going is a dangerous situation, Andrew Hopkins of Wilmington Trust Co. noted. Over time, you come to the realization, Look, these companies cant grow. Borrowing money to buy back stocks is going to come to an end.

The lack of sound fundamentals supporting the stock market is just one reason why Morgan Stanley is slashing its stock-index targets and setting global recession odds at 30%.

Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities, it said. The probability of a global recession has risen.

IMF fears global derailment: As more proof in the pudding that all is not well with the global economy, the International Monetary Fund on Sunday endorsed the unconventional monetary policies of Europe and Japan (that is, negative rates and quantitative easing), citing rising risks worldwide.

The world is heading toward economic derailment unless policymakers make tough choices to get the recovery back on track, warned top IMF deputy David Lipton, saying downside risks are clearly much more pronounced than at the start of 2016.

Trend now flipped for gold: The burgeoning global risks have turned an increased number of firms into bulls on the yellow metal. Ned Davis Research is one such firm.

Since 2011, gold has had a very tough time relative to other major asset classes, it wrote. Why hold an asset with absolutely zero yield when its losing ground to every other major asset class? That trend has now flipped. Gold is starting to beat T-bills, long-term bonds stocks and even housing. That brings in even more interest thats already been generated.

The early stages of the rally were likely fueled by speculators and traders. Gold beating other asset classes gets it on the radar for other, longer-term strategic asset allocaters. Weve already seen these massive inflows into physical gold funds but there could be more if the strategic crowd gets involved.

Gold could hit $4,212: And CLSA strategist Christopher Wood thinks the price could even hit new all-time nominal highs if this bull market gains significant further steam. He sees the price potentially reaching $4,212 an ounce, basing his prediction on the fact that gold hit $850 in 1980 and per-capita U.S. incomes have risen 4.5% a year since then. Adjusting for rising incomes, he computes $4,212 for bullion prices.

One factor that could get the price there is rising investment from pension funds in search of yield in a negative-rate world. Wood recommends these funds take a 70% stake in gold. If even a small number of these funds were to take Woods advice, the price of gold would skyrocket, needless to say.