CM: Gold prices bouncing back as U.S. recovery stammers
Gold prices rebounded abruptly late last week after three months of decline. Our ETFS Gold Trust fund ( SGOL , quote ) slid by almost 13% from a February 28 peak until the end of May. Then last Friday it jumped by 3.8%.
The immediate catalyst for the upward move was anemic U.S. nonfarm payroll statistics for May, which told markets that the recovery and an accompanying surge in the value of the dollar may be running out of steam.
Investors also seemed to be reacting to remarks earlier in the week by Eric Rosengren, president of the Boston Federal Reserve, that more monetary stimulus from the U.S. central bank is "appropriate and necessary."
Against that backdrop, markets may be betting that more weak economic numbers will push the Fed into a new round of "quantitative easing"; the long-rumored QE3. That would mean printing massive amounts of new dollars, debasing the world's reserve currency and prodding gold prices higher as one of the few available hedges.
Actually the situation is not that simple. The dollar continued to strengthen last week - threatened debasement or not - at least against the euro, whose problems are patently more dramatic than a fall-off in hiring.
From a global macro point of view, this creates the somewhat alarming situation where gold prices and the dollar are increasing at the same time. The two generally have an inverse relationship, and the fact that investors are fleeing to both simultaneously indicates extreme lack of trust in most other "safe" assets -- even short-term German sovereign bonds are now yielding zero.
From a gold investor's point of view though, all signs seem bullish. The May job numbers indicate that the wobble in the U.S. recovery is more than just a wobble. Added to the uncertainty of the coming presidential election campaign, one can expect less than robust confidence in the American economy.
Meanwhile a 20% drop in world commodity prices over the past 12 months has eased inflationary pressures in the U.S., making a new round of quantitative easing seem more probable. All that spells a weaker dollar and stronger gold prices.
The eurozone story is still more positive for gold prices, as possible tectonic shifts in paper currencies push a classic flight to the physical store of value. Euros may evaporate back into drachma, pesetas or lira, but gold will still be gold.
The other precious metal to watch is palladium. The ETFS Physical Palladium Shares fund ( PALL , quote ) gained 2.2% last week after losing about 12% over the previous three months.
One possible impetus was China's re-introduction of subsidies on new car sales for rural residents. Most Chinese autos run on gasoline, and palladium is the main metal used in catalysts for these cars. (Diesel cars use mostly platinum, which continues to be weak on slumping European auto sales among other reasons.)
The keys to the broader commodities outlook also lie with China and the abiding mystery of how dramatically its voracious economic growth is slowing. Investors should get some important hints toward the end of this week as Beijing releases data on industrial production, exports and inflation. We will be watching these numbers, and gold prices, very closely.
By Tim Harvey of ETF Securities for Emerging Money
