Gold retargets $1,100 as North Korean bomb test boosts safe-haven appeal

Gold broke the $1,090 mark Wednesday to hit seven-week highs after North Koreas claim that it had tested a hydrogen bomb rattled global stock markets, as did news of another Chinese yuan devaluation.

This is a fear trade, Michael Smith of T&K Futures & Options told Bloomberg, referring to golds rise after the Korean news. People are taking this one very seriously.

The yellow metal reclaimed its 50-day moving average in a 1.5% advance and topped $1,095, its highest level since Nov. 16. Silver also rose early Wednesday, hitting $14.05 in a 0.57% gain before receding to $13.99 by midafternoon.

Average 4.4% gain in January: Gold is testing $1,086, the neckline of a head and shoulders technical pattern, CMC Markets strategist Colin Cieszynski told MarketWatch, saying that a move higher would confirm the start of a new uptrend with net potential resistance near $1,100, then a measured $1,126.

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Regardless of global geopolitical and economic concerns, gold is living up to its reputation as a solid gainer in the first month of each year. Bullion has advanced 4.4%on average in January over the past 10 years, climbing in all but three cases, Bloomberg noted. Its performance in the first month beats that in any other, thanks in part to strong Asian demand ahead of Februarys Lunar New Year holiday.

IMF sees disappointing growth: In the meantime, International Monetary Fund chief Christine Lagardes fresh warnings about slowing global growth in 2016 seem to be carrying newfound weight.

Global growth will be disappointing and uneven in 2016, she wrote, with China slowing down and the Federal Reserves expected interest-rate increases having potential spillover effects.

But can the Fed carry through with the three to four rate increases that Vice Chairman Stanley Fischer was projecting Wednesday in a CNBC interview? Even Fischer had to acknowledge that the Fed might slow that pace given growing uncertainties in China, the Middle East, and now North Korea. And the Fed meeting minutes from December revealed that some policymakers thought the decision to raise rates then was a close call.

Manufacturing, service sectors slowing: Meanwhile, U.S. economic data continue to paint the portrait of a tentative recovery about to tip over. Although the latest ADP private-payrolls job figure was positive, with 257,000 positions added, the manufacturing sector continues to wallow in recession-like numbers, with factory orders tumbling year-over-year for the 13th straight month and the Institute for Supply Managements manufacturing index contracting in December for the second month in a row.

Moreover, the economic slowdown is seeping into the nonmanufacturing services sector: The ISMs nonmanufacturing index fell to its lowest level since April 2014.

Commenting on its own recent economic reports, Markit observed that its PMI surveys show the service sector losing momentum alongside a stalling of growth in the manufacturing sector, pushing the overall rate of economic expansion down to the weakest for a year.

With the U.S. markets already weak in the knees as 2016 begins to unfold, look for the true values of stocks to manifest themselves that is, go lower if the Fed continues to remove monetary stimulus by hiking rates. If and when the recession is finally confirmed, the Fed might have to reverse course and save the markets. By then, investors might wish they had bought gold at lower levels.