While gold was logging its best weekly performance since August, stocks fell again, underscoring a new stark warning on the global economy issued by Citi.
The world appears to be trapped in a circular reference death spiral, Citi strategists led by Jonathan Stubbs wrote Thursday.
Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth) … and repeat. Ad infinitum, this would lead to Oilmageddon, a significant and synchronized global recession and a proper modern-day equity bear market.
Jobs creation falls short of forecast: Citis grim take was reinforced by Fridays U.S. Labor Department report showing that only 151,000 jobs were created in January. Although some analysts think the drop in the unemployment rate to 4.9% and an uptick in wages could re-energize the Feds rate-hiking path, others arent believing the positive spin served up with the report.
After all, just this week, the Institute for Supply Managements PMI report for the nonmanufacturing sector fell to 53.5%, logging a three-month streak of losses to hit its lowest level since February 2014. Likewise on Thursday, factor orders plunged 2.9% in December to hit a 14-month losing streak, and U.S. productivity dropped at its fastest rate in more than a year. Also Friday, U.S. exports fell in 2015 for the first time since the recession.
Another 5% to 10% gain for gold?: Gold broke above its 200-day moving average Wednesday and by late Friday had topped the $1,164. Its gained almost 4% on the week. Silver also advanced and was trading near $14.85 on Friday.
Golds next point is $1,181, Tom Lydon of ETF Trends told CNBC. If we hit, take out that recent high of Oct. 13 of last year, thats a very, very key technical signal. From that point, as long as were above the trend line, and economically speaking we see poor economic numbers and poor earnings numbers, its going to bode well for Treasuries and its going to bode well for gold. We could definitely see gold rise another 5% to 10% in the next three months.
Strong dollar killing profits: Meanwhile, the New York Federal Reserves president, William Dudley, warned that the strong U.S. dollar is having an adverse effect on the domestic economy, and his dovish message helped jolt gold higher.
The weakening global outlook, combined with the robust greenback, could have significant consequences for the U.S. economy, Dudley said, casting doubts on the Feds rate-raising timeline. It next meets in March.
Whats the strong dollar doing to the U.S. economy? Were in the middle of earnings season, and one of the themes I am hearing over and over from American companies is how the strong dollar is killing their profits, noted Tony Sagami of MaudlinEconomics.com.
Negatives rates mean gold beats cash: And thats one reason why were hearing increasing talk about negative interest rates, which would weaken the dollar. Negative rates are a taxation, a confiscation of peoples money, RJO Futures trader Phil Streible told CNBC on Wednesday, predicting that the metal is on its way to $1,200. What people are going to understand is that gold provides a store of value.
And also forecasting a breach of $1,200 soon, Boris Schlossberg of BK Asset Management added, Negative interest rates have finally given gold a fundamental reason to own it. Just think about it: If you own gold and it stays stationary for a year, thats going to beat cash in Japan, thats going to beat cash in Switzerland. That makes it a very, very attractive play.
CNBC conjectured that gold is showing its ability to rise without strong inflation, thanks to this growing negative-rate environment.
Perfect storm of supply and demand: Meanwhile, Barrons also weighed in on golds newfound luster in 2016 with an article titled Gold is winning believers in 2016.
Each passing day in 2016 seems to turn market watchers bullish, it wrote, citing a positive outlook from Pavilion Global Markets.
Prospects of normalized Fed policy weighed on gold prices, Pavilion commented. Now, uncertainty over the health of the U.S. economy, and concerns over the impact of the strong dollar on U.S. corporate earnings and global debt dynamics are raising questions as to whether the Fed will raise rates again this year or perhaps even cut them.
Supply and demand dynamics are also supportive of gold prices. Mine production, which has largely tracked demand, has slowed, as firms reduced output in response to lower for longer prices. However, demand is set to expand, widening the supply/demand gap as mine production takes time to ramp up.
Gold also a safe haven in deflation: A big hurdle for gold remains the lack of strong inflation, but the metals other attributes during the current risk-off times still make it a meaningful asset.
The case for gold has improved significantly this year as demand is beginning to recover and concern grows about financial worries and political flash points, said John Bridges of JPMorgan, quoted by Barrons. Given these global uncertainties, we feel the case for physical gold is good as a relative safe haven.
We remain convinced in these highly uncertain times that gold is an asset that deserves attention. The complicating factor is that most current investors experience with gold investing stems from the inflationary 1970s and 80s but we now appear to be in a deflationary world with some similarities to the 1930s. The gold/oil ratio was last at these levels in the early 1930s.
Gold performed well in the 1930s as the dollar was devalued against gold to help the economy. The world is more complex now with floating currencies and heavily indebted nations. The new [zero interest rate policy] and now [negative interest rate policy] have yet to create the economic growth and inflation that is being targeted so its right for gold and gold equity investors to be confused.
The world seems to be waking up to the fact that cash is increasingly trash as central banks devalue currencies to battle deflation. In contrast, gold is money only now supplies are tightening thanks to falling mine productivity. The perfect storm of supply and demand is forming as investors move to trade in their fiat currencies for gold before the reality of negative interest rates sets in.