Gold Price Rebounds On Weak Consumer Confidence

February 23rd, 2016 by

After Monday saw the precious metals markets finally pulled back from their year-to-date rally, if only slightly, safe-haven demand again came into play on Tuesday. Between dwindling consumer sentiment and more uncertainty in the major Asian markets, the gold price got a boost during morning trading.

Spot gold was 1.5% higher (+$18) at $1,227/oz, while silver added 10¢ per ounce to $15.35/oz. Platinum also advanced 1.5%, settling near $945/oz.

Consumers Worried

many-questionsLast week, global stock markets predictably responded to a slew of encouraging economic data with undue exuberance, surging throughout the week to reclaim some of its steep losses from the previous 6 weeks. Especially when it comes to equities, even a small inkling of good news is usually enough to support a big rally if the market has been moving in the opposite direction for a significant amount of time. (Call it “selling fatigue.”)

However, this brief reprieve has done little to change the situation facing the global economy. Sluggish growth, a persistent risk of deflation, and a brewing crisis among central banks over how to combat the situation are all still looming with no solution in sight. Ineffective monetary policy and a series of ongoing violent conflicts around the world are only compounding the problem.

It’s no surprise, then, that investors and consumers around the developed world are skeptical and worried about the current state and future direction of their respective economies. In the U.S., this was reflected in the consumer confidence index: the February reading was just 92.2, down from 97.8.

China Cuts Yuan Again

Another development that has investors, traders, and consumers alike feeling uneasy is the unpredictable moves being made by China’s central bank, the People’s Bank of China. After seeming to pledge to target and maintain a consistent exchange rate for the national currency (known as the yuan or renminbi), the PBoC has not appeared especially committed to this goal.

CNY 5-year price chart. Source: Google Finance

CNY 5-year price chart. Source: Google Finance

In January, the central bank engaged in a series of cuts to the yuan’s fixing rate that saw the currency drop to nearly 6.6 per dollar—its weakest exchange rate in 5 years. After several weeks of allowing the currency to gradually rise again, the PBoC went back to the well on Tuesday (overnight). This has not only proven disruptive to the global economy due to the unpredictable nature of the bank’s policies, but it has also sparked fears that China may still be engaging in a “currency war” of devaluing the yuan in order to boost exports.

Impact on Gold Price

gold_priceSafe haven assets received increased attention from investors in response to the moves by the PBoC and the lack of consumer confidence in the direction of the global economy. The yen and U.S. Treasurys, traditionally seen as safe havens, didn’t respond that way: Treasury yields rose while the yen fell, although in recent weeks the Japanese currency has hit its strongest against the dollar (¥112 per $) since 2014. Instead, this spurred greater buying of precious metals as a form of safe haven.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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