Lower Consumer Confidence, Expectations Drive Markets Lower: Morning Market Update Oct 1

October 1st, 2014 by

Consumer confidence in the U.S. dropped to a surprising 4-month low with a reading of 86 for September, down from 93.4 in August. The index had risen the four months previous, and August saw its highest mark since 2007, before the financial crisis. Consumer expectations for the next 6 months also plummeted from 93.1 in August to 83.7 in September. While this may indicate less consumer spending in the coming months, measures of consumer sentiment are notoriously volatile.

The fall in consumer confidence was the biggest drop in the course of one month since the stock-market-downgovernment shutdown last October. This sparked some safe haven buying, as gold jumped back above the $1,215 level early in trading. Stocks were mostly down Wednesday morning, with the Dow Jones losing over 100 points to slide below the 17,000 mark.

Yesterday in the Markets

The precious metals continued to fall, particularly silver and palladium:

Gold: $1,208.15 (-$7.66) -0.63%
Silver: $16.98 (-$0.52) -2.98%
Platinum: $1,301.00 (-$7.00) -0.54%
Palladium: 773.00 (-$17.00) -2.17%

Oil prices were sharply lower on Tuesday:

WTI Crude: $91.70
Brent Crude: $95.03

The major U.S. stock indices ended Tuesday largely unchanged:

Dow Jones: 17,042.90 (-28.32) -0.17%
S&P 500: 1,972.29 (-5.51) -0.28%
Nasdaq: 4,493.39 (-12.46) -0.28%

Economic News Affecting Gold

The strength of the dollar continues to push gold lower, as the yellow metal posted its steepest monthly loss since earlier this spring. It is poised to retest its lows of December and January, when gold dropped below $1,190. The dollar remains at 4-year highs; conversely, silver is stuck at a 4-year low, closing below $17 for the first time since March 2010. The weak performance of silver and copper have pulled the rest of the metals lower, as the slump in prices has sparked heavy trade volume on the markets.

News broke yesterday that after months of resisting doing so, the online auction site eBay will spin-off its subsidiary company PayPal. Many analysts and activist investors had been calling for eBay to take this measure as early as February, as most expect PayPal to grow considerably as electronic payment platforms become increasingly popular. After rebuffing the pundits, eBay came to the decision on its own time, and plans to finalize the split from PayPal sometime in 2015–although the two companies will retain certain synergies through a continued corporate relationship.

Geopolitical News Affecting Gold

gold-elephantIndia’s annual Diwali festival is slated to kick-off on October 23, beginning with Dhanteras. This is the number one gold-buying event in the world, as Indian tradition recognizes the Diwali season as the most auspicious time to purchase gold as gifts to ensure the recipient gets the maximum benefit and good fortune from the gesture. As is typically the case, premiums on gold in the Indian markets are expected to rise, perhaps by as much as 100%. This, however, is unlikely to deter demand.

In China, ScotiaBank has admitted (as many have long suspected) that the officially published demand for gold in the People’s Republic is far lower than real demand. Officials from the bank claim that China’s annual gold demand, excluding the central bank, is about 2,200 tonnes; this is more than twice the estimate put forward by the World Gold Council (1,000 tonnes)! The suppression of demand data from China fits with the idea that the People’s Republic would like to keep the full extent of its gold reserves under wraps until a time when it can potentially offer gold convertibility for the yuan.

The Hong Kong demonstrations are starting to take a serious toll on the local economy, as it is estimated that more than $5 billion in economic activity has already been lost at the shopping malls and office buildings disrupted by the protests. This is an especially important time for the Hong Kong commercial sector, as Chinese vacationers come to the commercial center to buy gold and other luxuries during the week of national holidays. In addition to demanding open and fair elections, the demonstrators are also calling for the immediate removal of the city’s head official, Leung Chun-ying (or C.Y. Leung).

In the Donetsk region of Ukraine, a school was shelled (on the first day of classes), killing four. Despite the ceasefire brokered by the two sides on September 5th, intermittent violence and attacks have continued. Naturally, each camp is blaming the other for the attack; what remeains clear is that the conflict shows no signs of being quickly resolved. As has been a theme with the war in Ukraine, gold spiked on the news of the shell before easing back on the absence of further concrete developments.

Looking Ahead

With no end in sight to the Hong Kong protests, and each side ramping up the rhetoric, the next development in the massive student movement will provide clearer indications of how risky or unstable the situation has become. While stocks have generally tracked with the tenor of economic data in evaluating the global recovery, disruptions to major economic players (as Hong Kong is) almost invariably drive safe haven demand for gold and precious metals.

 

by Everett Millman

Gainesville Coins Portfolio Tracker and Financial News