GOLD PRICE NEWS - The gold price traded near unchanged at $1,237.50, as stocks and commodities came under pressure Tuesday morning. After tumbling $16 yesterday, the gold price was steady today against a backdrop of worries over a slowing Chinese and broader global economy. While COMEX gold futures were lower by $3.00, S&P 500 stock futures declined over 1%, sliding 13.90.
China’s Conference Board cited a calculation error saying that the nation’s April leading economic index was only up 0.3% versus the original 1.7% it reported on June 15. Slower growth out of China would lead to less demand for commodities and consequently, the prices of oil and copper are lower by 2.3% and 3.2%, respectively this morning. The gold price has outperformed both oil and copper in 2010 due to its counter-cyclical nature. During times of economic stress, gold acts as a store of value and receives fund inflows as investors seek to preserve their capital.
Gold stocks have benefitted from the strong gold price and have been one of the best performing sub-sectors of the market in 2010. The Market Vectors Gold Miners ETF (GDX) is up 15.6% this year, led by a 29.9% gain in Newmont Mining (NEM). Despite the surge in the gold price and the strength in Newmont, out of the 22 analysts that cover NEM, only 11 have “buy” ratings on the stock. This suggests that sentiment toward the gold sector remains relatively subdued despite calls from some quarters of a bubble in the gold price.
A new onslaught of deflation worries has entered the market in recent months as economic data has softened and the sovereign debt crisis in Europe has dampened confidence. The gold price has been one of the few assets to gain in value amid a backdrop of heightened concerns of a double-dip recession. The price of gold has risen as investors speculate on how aggressive central bankers will be in their fight to stimulate the economy. Federal Reserve Governor, Kevin Warsh said during a speech in Atlanta this week that any decision by the central bank to expand its balance sheet must be subject to “strict scrutiny.” In order to pass the strict scrutiny test, Warsh said that the economic benefits must, “outweigh any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility.”
At the conclusion of last week’s Federal Open Market Committee meeting, the communication accompanying the interest rate decision contained language acknowledging weaker economic conditions in the U.S. In noting that financial conditions had become less favorable for growth, the FOMC kept their zero interest rate policy in place and maintained their commitment to keep rates near zero “for an extended period.”
According to Avery Shenfeld, chief economist with CIBC World Markets and J. Alfred Broaddus, former Richmond Fed President, the slumping economy increases the probability that the Fed will continue to expand its balance sheet - which already has ballooned to over $1.25 trillion. Since the announcement of the Fed’s quantitative easing program in March of 2009, the gold price has soared on investors’ concerns over the integrity of fiat currencies. The U.S. Fed has been followed by the Bank of England, the Bank of Japan, and most recently the European Central Bank in a money-printing campaign designed to stabilize and kickstart their sluggish economies. As a consequence, the gold price in terms of U.S. dollars, British pounds, and euros has gone on to set all-time highs.
Deflation fears have been re-ignited as soft retail sales, a stagnant housing market, and high unemployment have combined with ongoing sovereign debt worries in Europe. Yields on U.S. Treasury bonds and notes have plummeted, evidenced by the two-year bond yield dropping to 0.58% - its lowest level since the time period surrounding the collapse of Lehman Brothers. In a survey conducted by Bloomberg News earlier this month, analysts predicted that policy makers will not raise interest rates until the first quarter of next year. All evidence points to a continuation of central bank policies aimed at fighting deflation, a backdrop that will likely support the case for higher gold prices.
