Gold longs get the green light as Fed minutes see downside risks
After last weeks meteoric rocket launch above $1,260, gold prices not unexpectedly pulled back this week as traders took profits. However, after dipping below $1,200, the yellow metal firmed once again Wednesday as the Federal Reserves latest minutes reflected a cautious outlook.
Potential drag on U.S. economy: Citing a greater-than-expected slowdown in China, the minutes to the Feds Jan. 26-27 meeting showed growing concerns about the global economic picture. Participants judged that the overall implications of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, the minutes read. Many saw these developments as increasing the downside risks to the outlook with a potential drag on the U.S. economy.
The Fed continued to stress that their interest-rate policy is not set in stone but remains data-dependent. While participants continued to expect that gradual adjustments in the stance of monetary policy would be appropriate, they emphasized that the timing and pace of adjustments will depend on future economic and financial-market developments and their implications for the medium-term economic outlook, the minutes said.
The Fed even broached the idea of delaying its plan for four rate hikes this year, as bankers discussed altering their earlier views of the appropriate path for the target range for the federal funds rate.
Bank says slow rate path to support gold: The gist of the minutes are that rate hikes are increasingly off the table. And that easy-money likelihood is one reason by the Singapore bank DBS Group Holdings Ltd. is maintaining an overweight outlook on gold.
Volatility in financial markets due to the Chinese/global slowdown and low oil prices and doubts regarding the effectiveness of monetary easing could continue, said DBS strategist Manish Jaradi. This could keep risk appetite in check and U.S. dollar rates low, supporting gold.
The sharp scaleback in U.S. Fed rate hike expectations and negative rates elsewhere suggests a low for longer theme is back in focus, Jaradi wrote. With inflation expectations stable in the U.S., declining real yields could aid gold. Having said that, gold looks overbought in the near term.
Gold proves value as haven: Despite Chinas extreme debt and banking problems, a more optimistic mood took hold among equities this week, thus dampening golds fire. And that makes sense, because gold has been surging as stocks have tumbled this year.
Gold reaffirmed its appeal as a haven, with the metals inverse relationship to global stocks the strongest in more than four years, Bloomberg noted. Its correlation to the MSCI All World Country Index over 30 days registered -0.487, the largest negative reading since 2011. A measure of -1 indicates the two values move in opposition to each other all the time.
The S&P 500 and other indexes rose Wednesday despite a host of recession-suggestive data on the U.S. economy, including a drop in housing starts and permits, a third consecutive monthly decline in industrial production, a spike in core PPI inflation, continued danger signs in the gold-oil price ratio, a plunge in homebuilder confidence, growing debt woes for oil producers, and the seventh straight decline in the Empire Feds manufacturing gauge.
Given the above avalanche of negative U.S. economic data, which is just a tip of the iceberg, investors have to ask themselves: Is the worst really over for the global economy and stocks in particular? Any objective interpretation of the financial landscape should produce the answer no. In that case, golds run isnt over, and investors should be fortifying positions in safe-haven assets while prices are still relatively low compared with their upside potential.