Gold Experiences First “Golden Cross” In Two Years

Strengths

• The best performing precious metal for the week was gold, by a significant margin. Gold experienced its first “golden cross” in two years, as the 50-day moving average moved above the 200-day. This week Georgette Boele from ABN Amro, who switched her gold outlook from bearish to bullish, noted that investors are now buying the metal on dips, rather than selling on rallies as they’ve done previously.
• Gold rose for a fourth day to head for its biggest monthly advance in four years, reports Bloomberg. Inflows into ETFs backed by the precious metal amounted to about 50 tons in two days, added a report from Commerzbank, the sharpest two-day inflow since the Greek crisis flared up in May 2010. 
• Extending gold’s rally this week, a private report issued Wednesday showed the worst reading on U.S. service-sector activity since 2013, with separate data showing new home sales fell more than forecast. As financial markets remain fragile gold has benefited. Commerzbank analyst Carsten Fritsch said by email this week, “It is a clear shift in investor sentiment and therefor an important sign.”

Weaknesses

• The worst performing precious metal for the week was silver, with a slide of 4.16 percent.  Palladium can apparently count itself lucky as it finally dodged a bullet with it not coming in as the weekly worst performer in the precious metal space, as it has consistently been shunned by investors. 
• China’s imports of gold from Hong Kong slumped to the smallest amount since 2011 in January, reports Bloomberg, with net purchases falling to 17.6 metric tons from 111.3 tons in December. In India the jump in bullion costs has dampened Indian demand, with price discounts widening from as little as $4 in November to $30 an ounce, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation.
• Core CPI gained the most in four-and-a-half years, up 2.2 percent year-over-year and exceeding the Federal Reserve’s 2 percent inflation target. Sputnik News says according to the regulator’s data-based approach to tightening monetary policy, the Fed will have to respond with another rate hike. The odds of a 2016 rate hike climbed to 44 percent from 11 percent on February 11, according to Bloomberg. The cost of living in the U.S. (excluding food and fuel) increased in January by the most in four years, adding to the prospects of the Fed raising rates.

Opportunities

• According to the World Gold Council, central bank gold sales have historically resulted in a market surplus. From the second quarter of 2009 through 2015, net gold purchases by central banks absorbed most of the surplus, reports Bloomberg, which may continue as reserve portfolio diversification is pursued. Bloomberg Intelligence estimates that central banks accumulated more than 2,448 metric tons of the metal versus gold ETF outflows of around 270 metric tons in the period.

• The San Francisco Fed is calling for a period of inflation overshoot, according to a note from UBS. Given economic slack, the Fed sees possible benefit in allowing inflation to rise above 2 percent for a short period (good luck putting the genie back in the bottle) to achieve a better balance between the Fed’s dual mandates. Investing.com reports this week that if negative interest rates come to the U.S., savers might park their cash under their mattresses. Or a better option may be in holding hard assets such as gold.
• Top gold forecaster Barnabas Gan called gold a “superhero” this week, saying the precious metal could rally as high as $1,400 an ounce amid the global equity downturn, low oil prices, and magnified risk aversion. Another bullish sign for gold comes from a Bloomberg report this week showing that, for most of last year, the volatility of puts exceeded that for calls. But now, the situation is reversed, indicating there is strong interest in higher gold prices.

Threats

• The market could be losing faith in the Fed’s current narrative, says ZeroHedge, with bets on negative interest rates reaching record levels (with 2017 more likely than 2016). The article noted investors were now turning to Eurodollar futures to lock in interest rate sensitive trades as puts on the S&P 500 were progressively becoming more expensive.  Further ZeroHedge noted, “We are at that inflection point where the Fed starts to waffle, the bear market beckons and they will not be able to stick with their interest rate guidance.”
• Concerns over diminishing liquidity dominated discussions at this week’s TradeTech FX conference, reports Bloomberg, namely because some say it is drying up during periods of turbulence. The worry over shrinking liquidity gripping fixed-income desks, due to higher capital requirements, is creeping its way into the world’s biggest, most liquid financial market of currencies, the article continues.

In a report from MacroStrategy Partners this week, Julian Garran argues that we could see both a significant margin contraction and a serious price/earnings derating of U.S. equities in 2016 and 2017. Such a combination could lead U.S. stocks down more than 40 percent, peak to trough. Mike Norman, writer for Real Money and TheStreet.com, thinks that quantitative easing and other monetary policies are nothing more than asset swaps, rather than printing as many believe. Norman says these operations are actually deflationary rather than inflationary since they reduce interest income.  Bond purchases by the Fed have also removed U.S. Treasuries – the most important global collateral around – from the world economy, which is like draining the oil that keeps an engine running.