Although stuck in a trading range between $1,220 and $1,250 for the past week, gold defied expectations by rising in the face of a positive jobs report Wednesday and that bodes well for this Fridays potentially bombshell February employment number.
Automatic Data Processing (ADP) on Wednesday issued its private-payrolls report for February, and it beat forecasts with a print of 214,000 jobs created versus 185,000 expected.
Fridays jobs data could move markets: Although gold initially dipped, the yellow metal soon bounced back to top $1,240 for the session. That rebound is significant because ordinarily a positive ADP report would raise the likelihood of a good U.S. nonfarm-payrolls number this Friday. A good jobs number Friday in turn would up the odds of another Federal Reserve interest-rate increase at its March meeting, since the central bank has said it would lift rates as the employment picture brightens. Higher rates are generally seen as a headwind for bullion prices.
So golds resilient performance tells us that there is so much economic uncertainty on the horizon that bullion is either discounting a rate hike in March or else isn’t concerned by the prospect of one. Such unpredictability has been a hallmark of golds upside performance so far in 2016.
A solid jobs report Friday could still stymie golds advance, but with the growing prospect of negative interest rates spreading from Japan and Europe into the U.S., investors should consider using any such dip as a buying opportunity.
Bleak outlook for global, U.S. economies: Other news out Wednesday has bolstered the case for gold. The Feds Beige Book struck a downbeat tone, with none of the banks 12 districts reporting any dramatic improvements in the economy for the start of 2016. An announcement from Exxon that its cutting its capital-spending budget by 25% (or $23 billion) reinforced the notion that falling oil prices aren’t necessarily good for the economy, with Zero Hedge predicting a big hit to GDP in the U.S.
Globally, world trade is in its biggest slump since the financial crisis, the Financial Times reported, and manufacturing around the globe is in similar doldrums. And China isn’t climbing out of its hole anytime soon either, according to Moody’s, which downgraded the nations credit rating from stable to negative.
Without credible and efficient reforms, China’s GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavorable, it said. Government debt would increase more sharply than we currently expect.
Firm sees 13% gain for gold: One expert who called the bottom in gold in November 2015 is now expecting a sizeable advance from current levels, according to MarketWatch. I am looking for prices to continue to firm, predicted George Milling-Stanley of State Street Global Advisors. For several years the top of the trading range for gold has been around $1,300 to $1,350, and I would look to see gold approach that area this year. We could go higher if the speculative money starts to flow back into gold in any size.
Meanwhile, Bloomberg reported that Taurus Wealth Advisors of Singapore sees bullion running even higher this year to $1,400. That would be a roughly 13% gain from current levels and a 32% rise for 2016.
Why is Taurus bullish? Gold is the ultimate beneficiary when central banks run out of ammunition’and more stimulus and negative interest increasingly become counterproductive, said strategist Rainer Michael Preiss
The Fed might have two more interest rate hikes in store potentially, but even in such an environment gold could hold up and even rally further as the market narrative is changing, said Preiss. Long gold might be the best macro trade to the upside for 2016 and beyond.
$5 billion added to ETFs last month: With physical gold and silver purchases from the U.S. Mint already strong, ETF inflows also continue to increase. The two largest gold-linked ETFs snagged $5.073 billion in new investment capital for the month of February. The last time flows were higher, the S&P 500 had fallen more than 18% for the year and the U.S. Federal Reserve was just three months into its first quantitative-easing program, Bloomberg noted.
Those bullion purchases and ETF inflows could be just a drop in the bucket compared with what well potentially see as the new reality of negative interest rates (with its accompanying war on physical cash) seeps into the consciousness of Western investors. Now, therefore, is the time to up the ante on gold allocations.