With each passing trading session, the anxiety about economic weakness and instability seems to spread further and further across the global markets. Who—or what—is the primary benefit of this widespread anxiety? Gold and silver, of course.
After a strong showing yesterday, spot gold added another $25 (+2%) on Wednesday morning, leaping above $1,250/oz. This is a fresh one-year high. Meanwhile, silver added 25¢ per ounce to $15.60/oz.
While there are an array of factors that are helping lift the safe-haven appeal of holding gold, the main drivers for this positive movement can be broken down into three main areas at the moment: crude oil, the stock markets, and the Federal Reserve.
News has been swirling around whether or not Saudi Arabia would coordinate with the rest of OPEC and Russia in order to cut their crude oil production, thus supporting higher oil prices. These rumors, however, have been largely dismissed by the Saudi side, as the country’s oil minister has made repeated comments that the country won’t be cutting any of its oil output.
Weaker demand from China, with its heavy emphasis on manufacturing and energy-intensive industries, has also placed a considerable drag on the price of oil. Crude oil prices fell again on Wednesday, trading below $31/bbl.
By and large, shaky stock markets in the U.S. and abroad have been responding acutely to changes in the oil price. These fluctuations have reflected how spooked traders and investors are regarding the slump in the crude market, always a key indicator for economic activity and growth.
There are many observers who believe that last week’s bounce-back for equities in the U.S. is actually the “last straw.” It could prove that stock indices are reaching a ceiling, and are poised to continue a more general negative trend. In fact, one of the world’s preeminent investing advisors, Tom DeMark, has suggested that last week’s 5-day rally for the S&P 500 (its best performance so far this year), has pushed the index to “topping out.” Could it be all downhill from here?
There is also the matter of monetary policy. The Federal Reserve has been forced to back-track on its plans to gradually raise interest rates due to the sorry state of the economy, reflected in dwindling consumer confidence. Nonetheless, this hasn’t stopped the central bank’s governors from trying to talk up the markets the best they can. Esther George (pictured, left), president of the Kansas City Fed, has urged her colleagues to keep a March rate hike “on the table.” Betting markets responded by increasing the odds of such an event from 4% to 10%, with an 18% and 28% chance (respectively) for rate hikes at the FOMC’s successive meetings.
What Does It Mean for Gold?
The combination of these factors, among others, seems to have solidified gold as the “superhero” of the financial markets. The yellow metal has been the best-performing commodity so far this year, advancing an impressive 15% year-to-date. Assets tied to gold, from exchange-traded funds to shares of mining companies, have also generated strong positive momentum in response. Some analysts see an upside as high as $1,400/oz for the metal this year.
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.