Gold is little changed to start the week, trading just below $1200. With oil tumbling to another five-year low, the market seems to still be unsure if this is a net-positive for growth, or a net-negative due to heightened deflationary pressures.
Oil prices continued to fall on Monday following signs of economic weakness out of China and Japan. Chinese exports slowed to a +4.7% annualized pace in November, well below market expectations of +8.2%, versus +11.6% y/y in October. In Japan, Q3 GDP was negatively revised to -1.9%, where an upward revision was anticipated. China and Japan are the second and third largest oil consuming nations, behind the United States.
While one might reasonably conclude that Abenomics has been an abject failure, Europe seems destined to head down the very same path. Last week, ECB President Mario Draghi gave strong indications that QE was coming to the EU, despite reports that fully half of the executive board refused to sign the statement.
Italy, the EU’s fourth largest economy, was downgraded to just a single notch above junk by S&P on Friday. Today, the Italian 10-year bond fell to a record low yield of 1.943%. In what world does that make sense? Only in a world where fixed income traders fully anticipate the ECB buying Italian sovereign bonds…
Make no mistake, the age of easy money isn’t going to come to an end anytime soon. While last Friday’s U.S. jobs data beat continues to stoke expectations of a 2015 rate hike by the Fed, I still think it’s more likely that they hold steady amid further easing in Europe, Japan and China.
Trust me, our Fed doesn’t want a stronger dollar any more than the BoJ wants a stronger yen, or the ECB wants a stronger euro. The Fed has reportedly already expressed concerns about the dollar strength. As the currency wars continue to heat up, gold will likely become increasingly appealing as a means of preserving wealth.
Despite continued dollar gains, we’ve seen gold rebound smartly from the November lows. The uncertainty stemming from oil’s precipitous drop, alluded to in my opening paragraph, is almost assuredly a contributing factor. Gold is above all else a form of portfolio insurance.
Strong demand for physical gold out of China offers support as well. Even YahooFinance is now reporting on SGE withdrawals as a proxy for demand. And demand is strong.