Gold remains defensive, edging to a new 16-week low before rebounding modestly into the range. A firm Dollar and generally firm equities (S&P 500) have weighed on the yellow metal this week. However, it was a big sell order in the futures market on Tuesday, ahead of options expiration, that initially deteriorated the short-term technical outlook.
U.S. Q1 GDP second report came out this morning, confirming that the economy did indeed contract in the first quarter. In fact, it contracted considerably more than expected at -1.0%. Expectations had been running around -0.3% to -0.5%. Apologists continue to blame wintery weather during the winter, but rising growth concerns could explain the recent surge in bond prices.
“Concern that growth has not only slowed, but that Q1’s negative GDP may not be a complete anomaly, is becoming more pronounced.” – Brean Capital’s Peter Tchir, via BusinessInsider
Improving weather was expected to result in a rebound in pending home sales in April. There was a modest 0.4% rise from March, but pending home sales were off 9.2% from a year ago. There may also be some building expectations that the Fed will have to do something to goose the anemic housing market, and the recent bond gains have already driven mortgage rates to 9-month lows.
So, as the Fed tapered, growth slowed and the housing market stagnated. More importantly, as Spring sprung, the housing market has yet to show signs of redeveloping momentum. We’ll just have to wait and see what Q2 GDP brings. Again, I harken back to Jim Rickards statement that the Fed was “tapering into weakness.”
Mr. Tchir also posits that bond buyers are absolutely “salivating at the prospect of QE” by the ECB. The ECB meets next week and a rate cut is widely expected, but their has been a lot of groundwork laid for large-scale asset purchases as well.
Additinally, BoJ policy board member Sayuri Shirai contradicted BoJ governor Kuroda’s optimistic expectations today. Ms. Shirai suggested that the central bank may miss their inflation target deadline and have to continue with stimulus measures for a few more years. Ah, but what’s a few more years of extraordinary-measures when you’ve been at it for nearly two-decades?
I have suggested in previous commentary that as the Fed scales back asset purchases, the ECB (and BoJ) may have to fill the vacuum in order to keep global growth from stalling entirely. I find recent market action and comments from policymakers offering further evidence that this may indeed be the case.
If bond buyers are “salivating” at the prospect of more QE, so too should the gold buyers. The recent retreat in prices may prove to be an excellent opportunity.