Gold riding high as recession-like misery in Texas pressures the Fed

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The biggest economic report for Monday delivered a Texas-size shock and helped gold prices trade near 12-week highs above $1,100.

Falling oil prices continue to pressure U.S. stocks, and declining equities in turn bolstered gold. The painful effect of collapsing oil prices on the overall economy is felt perhaps nowhere as acutely as in Texas, and the Dallas Federal Reserves most recent economic-activity report confirmed that all is not well in that major energy-producing state.


Manufacturing activity in the Lone Star state suffered its biggest monthly contraction in nearly seven years as the fallout from the collapse in global crude prices ripples across its industrial sector, the Financial Times reported.

The headline general business activity index fell to -34.6 in January, its weakest level since April 2009. … This compares to the revised -21.6 reading in December and is far worse than economists expectations of -14.5. The drop marks the 13th consecutive month in which the index has languished in negative territory. A reading below zero signals contraction. The last time the index suffered a longer negative streak was the last U.S. recession when it endured 25 straight months.

Depression is far-reaching: One Fed respondent lamented, We expect thecontinued depressionin the oil and gas industry to negatively impact our customer base and result in significant demand reduction.

Lindsey Group analyst Peter Boockvar was expecting a bad report and we got that and then some, he wrote. Bottom line, the data speaks for itself and reflects the major recession the energy patch is in and the ripple effect on other industries.

Accordingly, all the major U.S. stock indexes were down by Monday afternoon trading. The losses in equities bode well for gold. The metal was trading near its 200-day moving average of $1,109.

Given the turbulence in financial markets, the Fed might not be able to hike interest rates too many times in 2016, Mark To of Wing Fung Financial Group told MarketWatch. If gold can stay above $1,100 in the coming days, it may signal a further rebound, maybe even to $1,200 in the coming months.

Gold could target $1,140 on Asian buying: And staying above $1,100 is an achievable feat given the approach of Chinas Lunar New Year holiday, which is celebrated in Asia by purchasing gold. Standard Bank, for one, is predicting that the bullion price could run up to $1,140 as the holiday approaches, although its since added that that target has become more of a challenge.

Meanwhile, the Federal Reserve is set to meet Tuesday and Wednesday this week, after which it will announce any changes to its interest-rate policy. However, since market turbulence has followed in the wake of its December decision to raise rates by a quarter point, its not expected to act again this week.

Although it was planning to hike rates as many as four times this year, the risks to that outlook are rising, Reuters reported. Investors have already pushed their expectations for a second rate rise deep into 2016, and Fed officials have begun to air their concerns about factors such as the recent drop in inflation expectations. If the steady drumbeat of bad news about the markets and the global economy continues, it could force the U.S. central bank to rewrite its plan for more rate hikes this year.

Summers says 4 hikes unlikely: Former Treasury Secretary Larry Summers, himself a former potential candidate to replace Ben Bernanke as head of the Fed (a job that eventually was awarded to Janet Yellen), is among those critics warning against the idea of four rate hikes this year.

Ive thought consistently that it was not a confident bet that the economy could withstand four rate increases this year and continue to grow robustly and continue to provide support for a very weak global economy, Summers told CNBC. Certainly the way markets have moved this year has done nothing but support the view.

The markets have never believed the Fed on the Feds expansion [on rates], he argued. I think the Fed has quite been very unwise when it has criticized markets for not believing it because … markets reflect the collective judgment of a number of people. It seems to me there was substantial grounds for concern.

Bottom line: The cracks in the economy are showing. Just look at Citis Economic Surprise Index, which is in negative territory, thus indicating that economic news has been worse than expected. With the U.S. economy increasingly falling susceptible to deflationary winds, the Fed is likely to hold off on another rate hike for the near future, and the central banks loose monetary policies will continue to support gold prices, which tend to thrive in low-rate environments.