Gold spiked to a 5-1/2-month high in today’s open in London, touching above $1,290/oz before easing back slightly. It remains well above yesterday’s close. The yellow metal has been buoyed not only by the shocking move by the Swiss National Bank last week, but also by tempered expectations for the global economy. The IMF has cut its projection for global growth by the most in 3 years, prompting many to believe that 2015 will be characterized by rampant central bank intervention in their country’s economies. There are, however, certain advantages to chronically low oil prices and a surging dollar, as cheaper energy costs may allow broad expansion in certain sectors of the economy. Brent crude fell by 89 cents by 10:30 am EST, while WTI crude was down nearly 5%. The DXY index moved above 92.75 this morning, while U.S. stock indices opened modestly higher, with the Nasdaq leading the way.
Yesterday in the Markets
While U.S. markets were closed all day for MLK Day, the precious metals traded mostly sideways on the international exchanges, holding essentially all of their gains from the previous week’s ferocious rally. Funds did pour into the various gold ETFs yesterday after gold ETF holdings dropped to their lowest since September 2008 as recently as last Wednesday. The inflow pushed global gold ETF holdings to their highest levels since October 2012.
Stock markets in Europe and Asia were in the green as both regions are anticipating new rounds of economic stimulus from their respective monetary authorities. After both crude oil benchmarks were able to push back above $50/bbl, both WTI and Brent shed about 2.5% yesterday.
Factors Affecting Gold Today
While the IMF has scaled back its projections for economic growth in 2015, the world’s second-largest economy did get some encouraging news about 2014’s performance. Despite posting its worst year of growth since 1990, China’s stimulus policies aimed at “rebalancing” their economy seem to have helped, as a strong December helped the People’s Republic post a 7.4% gain in GDP last year, right in line with the government’s target of 7.5%. The news sent the Shanghai index about 2% higher.
In addition to gold’s ongoing rally, silver has probably been the biggest beneficiary (among the precious metals) of the calendar changing over to 2015. After ending 2014 around $16 per oz, some 28% off of its yearly high of $22, silver has returned with a vengeance in the new year. Despite weakness in copper futures, which continue to plunge, silver is up 12% so far this year, approaching $18/oz for the first time since mid-September.
Meantime, the sharp drop in palladium prices remains inexplicable, save for concerns over global growth. Yet, with oil prices remaining so low, the auto industry has been seeing a nice bump, which is bullish for palladium. (Some 70% of all palladium production is involved in making catalytic converters for automobiles.) Some analysts are projecting an even rosier sales outlook for automakers in 2015, which should help pull palladium prices back up. Not only has gold now crossed above the platinum price, and remained there for several trading days, but palladium is also in historically close parity with its Platinum Group cousin. Palladium advanced about $20 in early trading on Tuesday, but is still shy of the $800/oz mark.
Precious metals will likely continue to see safe haven flight until the mess in Europe becomes clearer, though still far from being resolved. In fact, ECB President Draghi is now under pressure to find some compromise in implementing the central bank’s ambitious stimulus plan. The eurozone’s biggest creditor nations–Germany, the Netherlands–are not keen on yet again footing the bill for their southern neighbors, so Draghi must somehow negotiate the opposition to his plans. The brink of a deflationary crisis in Europe appears to be one of those classic damned-if-you-do, damned-if-you-don’t scenarios; whatever actions Draghi is able to push through the ECB will likely be unsatisfactorily large to the austere Germans, while the fledgling nations along the Mediterranean will probably deem whatever actions are taken to be insufficiently small.
Tomorrow morning at 8:30 am EST we will see housing starts for December released, as well as the Red Book, which gives a loose gauge of consumer spending and retail sales.