Morning Market Update May 1: May Day?

May 1st, 2013 by

Gold is seeing marked consolidation today on disappointing economic news and some profit taking ahead of the FOMC meeting press release this afternoon. A slowdown in Chinese PMI was notably bearish for industrial metals overnight, including silver.

With the May Day holiday in much of Europe and the last day of a three day Chinese holiday today, much of the physical buying in precious metals that has been supporting prices is absent. Many traders are also standing aside today, waiting on the FOMC announcement and the ECB rate decision tomorrow.

In the U.S., the ADP private payroll report was much weaker than forecasr – a 119,000 gain versus the 158,000 expected. Adding to the recent string of bad economic news, construction spending hit a 7-month low, and manufacturing activity slowed down in April.  This has stocks lower, and the dollar hit a two-month low. Oil prices are also down on fears of global economic slowdown.

The bad news should pretty much clinch a decision by the Fed to continue its $85 billion a month bond purchase program to inject liquidity into the market and keep interest rates near zero. However, the economy will have a hard time turning around if the banks continue to hold the cash instead of lending it to businesses and consumers.

The bad news from the U.S. combined with weak economic news in Europe to spark some profit taking. The euro currency rose above 1.32 against the dollar.

In Japan, the Nikkei was also down on bad earnings reports in the semiconductor sector and some profit taking. Markets in Hong Kong and China are closed.

With today’s lighter volume in precious metals, we may see some intermediate stops triggered. If so, the return of more physical buyers tomorrow may result in some bargain hunting. It is hard to imagine the Fed curtailing quantitative easing or raising interest rates in this environment. Ultra-low interest rates reduce the opportunity cost of holding precious metals, though gold ETFs are still seeing outflows as investors chase returns in the equities markets.

by David Peterson