Gold is 3.6% higher this week and is now over 9% higher year to date. The dollar saw sharp falls this week on growing doubts that the Federal Reserve will be able to raise interest rates. The gains this week were due to increasing concerns about the U.S. and global economy.
The increasingly uncertain U.S. and global economic outlook has led to an increase in demand for gold and silver bullion. Sharp falls in stock markets globally (S&P down 6% and DAX down over 12% ytd), the Chinese slowdown and the collapse in oil prices (-0.9%), has seen safe haven demand for the precious metals.
Gold rose 5.3% in January and has now seen a further 3.6% gain in the first week of February. This has led to the precious metals being the best performing assets year-to-date, with gains of over 9 percent and 8% for gold and silver respectively.
Silver is 4% higher this week and silver buyers continue to accumulate silver in the belief that it remains great value at less than $15 per ounce. We share this view given the fact that silver remains nearly 70% below the nominal high near $50 per ounce in 1980 and again in 2011.
Also, the gold-silver ratio at 77 ($1,160/$15 per ounce) shows that silver remains great value at less than $15 per ounce.
Recent economic news has been poor with the U.S. Unemployment Claims disappointing after it climbed to 285,000. Manufacturing numbers were mixed, as Preliminary Unit Labor Costs posted a gain of 4.5%, well above the forecast. However, U.S. Factory Orders posted a decline of 2.9%, badly missing expectations.
In the heady days following the Fed’s rate hike, there was bullish talk of up to four rate hikes in 2016. We said this was highly unlikely and recent data and deteriorating economic conditions confirms this. We have been contending in recent months that the U.S. economy is much weaker than believed. Recent data has confirmed this weakness.
We continue to see a sharp recession as inevitable – both in the U.S. and globally. The question is more regarding the severity of the recession and the nature of the recession and whether it will be deflationary or stagflationary. Deflation remains the primary risk given the $200 trillion debt laden global economy.
Gold prices have been moving higher for most of the week, and have climbed above the $1150 line for the first time since the end of October.
All eyes are now on the Nonfarm Payrolls report later today. The markets are now expecting a drop compared to the previous reading and markets could react negatively and send gold prices even higher. However, a lower unemployment number may already be priced into gold and we may see a “buy the rumour, sell the news” reaction from gold.
Gold has broken above the 200-day moving average (1,129/oz) and is set to close above this important level on a weekly basis today. This is bullish from a technical perspective. Were it to close above this level this week, it would suggest we may see further gains in February.
At the same time, the scale of gold’s gains in a short period of time, could mean a correction and retracement in the short term. Weakness will allow value buyers to accumulate on the dip. Those seeking to allocate funds to precious metals should geometrically cost average into position by front loading their initial allocation.
LBMA Gold Prices
5 Feb: USD 1,158.50, EUR 1,035.58 and GBP 797.40 per ounce
4 Feb: USD 1,146.25, EUR 1,027.29 and GBP 782.16 per ounce
3 Feb: USD 1,130.00, EUR 1,034.04 and GBP 781.25 per ounce
2 Feb: USD 1,123.60, EUR 1,029.65 and GBP 780.01 per ounce
1 Feb: USD 1,122.00, EUR 1,032.86 and GBP 785.60 per ounce
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