After jumping nearly $20 during Monday’s session, gold is again climbing this morning in response to growing concerns about the stability of the global economy, as well as the divergent paths being taken by the world’s major central banks. While the rest of the world’s developed economies–particularly the European Union, Japan, and China–begin to implement fresh rounds of quantitative easing, the U.S. Federal Reserve (and the Bank of England) stands apart in its plan to raise interest rates sometime around mid-year. With crude oil continuing to fall, creating stark winners and losers on the international stage, these divergent monetary policies are defining the markets to start 2015.
Yesterday in the Markets
U.S. stocks took a beating yesterday, as the Dow plunged more than 300 points for its worst single-day loss in a month. The S&P fell by about 1.8%, while the Nasdaq lost over 1.5%. This coincided with an absolute bloodbath for crude oil shares, as both major benchmarks lost over 5% on Monday alone. This pressed WTI crude below $50, presenting the distinct possibility for oil to trade in the $40/bbl range in the near future. Meantime, the precious metals enjoyed moderate gains despite U.S. Treasuries gobbling up a significant portion of safe haven demand; investors poured funds into the 10-year T-note, driving yields down 6 basis points to just 2.03%. Nonetheless, gold managed to add almost $19, while silver also gained 42 cents, or over 2.5%.
Factors Affecting Gold Today
Stocks opened in the green this morning as the markets look to slowly replace Monday’s steep losses. The flight into Treasuries is continuing, as U.S. bonds seem to be the only government debt that anyone feels safe with. This brought 10-year yields down even further, breaching the 2% threshold to sit at 1.98% on Tuesday morning. If yields remain at this level by today’s closing bell, it will be the lowest since May 2013.
Similarly, gold has hit a three-week high after closing at $1,205 on Monday and continuing to rally Tuesday morning. The desperate flight into bonds has driven yields so low that there really is little room left for these assets to protect against a collapse in stocks; yet gold’s capacity as a hedge is unlimited in this regard. If the bond markets get any more overcrowded with investor funds, expect to see even greater demand for gold as a safe haven.
Interestingly enough, gold’s performance as an asset during 2014 was in no small measure obscured by the dollar’s interminable strength. Although the gold price was largely flat in terms of USD during the year, it actually posted gains in every other major world currency in 2014. These gains were simply hidden by the rising dollar, which counteracted the actual rise in the gold price. This also means that, everywhere besides Canada and the U.S., gold outperformed each major country’s stock market in local currencies last year.
This coincides with rising volatility on the equities markets. While stock market volatility has been historically low over the least three years, the past month has seen a 50% increase in the volatility of the market’s undulations. The Dow Jones and the S&P 500 have swung somewhat wildly in the last month, touching quarterly lows in mid-December before rallying to new highs, and now sinking back to earth. The VIX, an index measuring market volatility, spiked 12% after yesterday’s losing session for stocks.
While the global outlook for equities is uncertain, gold is beginning to shine brighter and brighter as an attractive asset to hold in the current economic environment. Gold buying–and, consequently, premiums on gold–are climbing in Asia, where Chinese demand has been picking up steam in anticipation of next month’s celebration of the Lunar New Year. This adds fuel to the long-standing trend of gold flowing from West to East; in fact, the new Shanghai Gold Exchange saw greater trade volumes in gold futures in 2014 than did the entire COMEX. On top of it all, the ongoing disarray in Greece, until resolved, should also stoke some demand for the relative safety of gold.