The gold price fell $11.23, or 1.4%, to $1,081.97 in January as continued strength in the U.S. dollar versus the euro pressured the price of gold. Following its $1,226.50 high posted in early December, the gold price has declined 11.8%. The combination of weaker gold prices and softer global stock markets has weighed on the shares of gold mining producers. The Market Vectors Gold Mining ETF (GDX) finished the month down 11.9% to $40.72 - its lowest level since September 2, 2009, at which point the gold price was trading near $980 per ounce.
Many asset classes that have benefitted from a weaker U.S. dollar over the past ten months - equities, commodities, and the gold price - have been under pressure over the past month. Gold mining stocks, in particular, have underperformed virtually all market sectors. The GDX has now dropped 26.5% from its early December 2009 high. Meanwhile, the S&P/TSX Global Gold Index, the most widely followed basket of gold stocks in Canada, fell 10% in January to $300.37, a price 24% below its December high. The world’s largest gold producer, Barrick Gold (ABX) has declined 27.5% off its high and widely-held, Goldcorp (GG) lost 26.6%. The Market Vectors Junior Gold Mining ETF (GDXJ), which debuted in November of 2009 when the gold price was in the process of making new all-time highs, has fallen 23.5% from its record high to a new all-time low.
Friday’s positive report on U.S. GDP led to increased speculation that the Federal Reserve will have less flexibility to maintain its current crisis-driven monetary policies. Fourth quarter 2009 U.S. Gross Domestic Product (GDP) came in at 5.7% - greater than the 4.8% median forecast from a Bloomberg survey of economists. Subsequently, the U.S. dollar rallied. Stronger economic data out of the U.S. and concerns over the deteriorating fiscal position of Greece led to a 3.3% rally in the U.S. dollar versus the euro this past month - and an 8.5% move over the past eight weeks. Given the recent 0.83 correlation between the gold price and the euro/U.S. dollar exchange rate, selling in the euro has led to lower gold prices.
While the better than expected headline number fueled a rally in the U.S. dollar, a closer look at the data revealed some troubling undercurrents. David Rosenberg, Chief Economist and Strategist at Canadian-based Gluskin Sheff and former Chief Economist at Merrill Lynch, discussed several of these signs in his daily commentary. Rosenberg, who correctly predicted the credit crisis in advance, pointed out that the 5.7% gain in GDP was boosted by a significant inventory adjustment - without which GDP would have risen just 2.2%.
Rosenberg went on to point out several other concerning factors in the GDP report, including the fact that the 5.7% figure was helped by, in his view, an unsustainable productivity growth rate of 6%. Furthermore, despite the large inventory increase, import growth fell by 50% last quarter - an indication that “underlying demand conditions are still so benign more than two years after the greatest stimulus of all time.” The Canadian economist commented that the data provides additional evidence that “this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out.”
Lastly, Rosenberg mentioned that in spite of today’s better than expected Chicago PMI report and the positive revision to the University of Michigan consumer sentiment index, the “hard” data - consumer spending, housing starts, and home sales – signal that “there is little, if any, momentum heading into early 2010.” Moreover, the Gluskin Sheff economist stated that the potential for a considerable decline in the rate of economic growth is “non trivial” and that today’s GDP figure “represented not just a rare but unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won’t do.”
If Rosenberg’s call for five more years of credit-induced headwinds plays out, the current ultra-easy monetary policies being implemented across the globe would likely stay in place. Central banks would be faced with deflationary downside risks to the global economy and their policy response, using the past 18 months as a template, would be potent. Deflation appears to remain the number one fear of central banks such as the U.S. Federal Reserve in spite of a small, but growing contingent of inflation hawks.
Near-zero interest rates and quantitative easing programs would likely remain in place under Rosenberg’s outlook - a macro-economic backdrop that would lead to greater pressure on government balance sheets. The impact on all fiat currencies could be dramatic and the gold price would likely appreciate, as it has over the past decade, versus virtually all global currencies. Government policies would continue to debase their currencies, providing a strong tailwind to the price of gold. Gold mining stocks would appreciate with higher gold prices. As such, while the gold mining sector has experienced a severe correction in recent weeks, Rosenberg’s scenario would lead to even stronger longer-term fundamentals for gold producers.
