Gold Back Above $1,100

The price of gold jumped back above $1,100. What caused this rise and what does it mean for the future of the precious metal market?

Yesterday, gold pushed above $1100 on safe-haven demand. The slowdown in the Chinese and U.S. economies, a weaker global growth outlook from the IMF in general, a slide in oil prices (which indicates a shrinking global economy) and geopolitical threats elevated the risk aversion among the investors. Therefore, they were selling stocks and buying gold. The flow of funds from equities to the gold market often happens in times of stock crashes (we have pointed out many times in our Gold New Monitor that the valuations of the U.S. equities are untenable, especially when the credit spreads are widening).

These shifts results from the investors’ lower confidence in the U.S. economy and the Fed’s monetary policy. The market is increasingly skeptical that the Fed will raise rates more than once (if at all) in the current economic environment. Investors do not believe that the Fed will hit its long-term inflation objective either.

The CPI declined 0.1 percent, while the core CPI rose only 0.1 percent in December. For the whole previous year, the CPI increased only 0.7 percent, the second slowest rate in 50 years (although the core CPI rose at a 2.1-percent annual rate). In other words, the Fed lost much of its credibility and the case for further hikes is much weaker than in December.

The million-dollar question is: how long could this safe-haven rally last? Well, the outlook for the precious metals market remains bearish. However, the increase in gold ETFs and the rise in the number of net long positions on Comex indicate that the sentiment towards gold is changing. As long as there is anxiety in the marketplace, the price of gold should be supported.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor