Gold is heading toward its worst week since November after yesterday’s big sell-off that saw the yellow metal drop over $25 for a loss of about 2%. Despite this plunge, gold is still up about 7% in January, which would make for its best month in 1 and 1/2 years. Gold and silver were both up about 0.75% early this morning, while stocks opened mixed in the U.S. markets on this morning’s disappointing 4Q GDP numbers. The 10-year Treasury yield is all the way down to 1.67%; while global demand for a safe place to park investors’ money will likely continue to drive yields even lower, pangs of panic must accompany each time it falls further. This trend has also been spurred by the greater volatility on the markets of late, partly resulting from thin trading volumes.
Yesterday in the Markets
The precious metals tumbled as we saw a great deal profit-taking after the metals’ recent rally. The liquidation of many net long positions on gold and silver contributed to the slide. Meanwhile, the stock markets rallied after being bludgeoned the two days previous, as the Dow Jones rebounded some 225 points and the other U.S. indices gained about 1%.
Factors Affecting Gold Today
Two underwhelming bits of economic data are keeping the stock market down (and lifting the metals) this morning: fourth-quarter GDP was reported below expectations, showing a 2.6% growth for the economy last quarter. This, along with rising employment costs as reported in the Employment Cost Index, gave a less bullish outlook for the health of the U.S. economy. The dollar continued to be strong, pushing back toward 94.8 on the DXY dollar spot index.
In Europe, deflation fears are cropping up with the news that consumer prices in the Eurozone are at their lowest levels since July 2009. Prices in the euro area actually dropped 0.6% year-over-year in January, and declined by 0.2% over the course of 2014. This is pushing European shares lower across the board as falling prices show that the monster of deflation is already rearing its ugly head.
Greece isn’t helping matters, as the newly-elected government is taking steps to distance itself from the rest of Europe. The new prime minister, Alexis Tsipras, is already posing a challenge to his European counterparts by obstructing any further sanctions against Russia for the incursions in Ukraine. In fact, the first person the country’s new executive met with was not anyone from the European Commission, nor the European Central Bank (with whom the Greeks have an outstanding bailout loan), but none other than the Russian ambassador! The new Greek administration is sending clear signals to the international community: it wants nothing to do with the European Union.
Speaking of Russia, the country’s central bank unexpectedly cut its benchmark rates again, slashing it by a whopping 2 percentage points from 17% to 15%. This comes after rates were cut 6 separate times last year in an attempt to stave off rampant inflation. The move sent the ruble crashing even further, surpassing 70-to-the-dollar. The Russian government is hoping the move will help increase lending and investment in the economy, because the current levels were far too high to promote much business activity. The continued economic calamity in Russia and the deflationary spiral in Europe are being amplified by the Greeks essentially playing “monkey in the middle” with the two sides. This should continue to drive near-term safe haven demand for precious metals until a resolution to these situations becomes visible over the horizon.
Take a break from following the markets to plan or attend a Super Bowl party. Enjoy the big game this weekend!