Gold's Resilience Strengthens In February

London (Mar 12)  Gold moved through the $1,200 level and showed resilience in February as a number of normally bearish factors failed to weaken prices. Federal Reserve Chair Janet Yellen's mid-February testimony to Congress indicated tighter monetary policies, and subsequent comments from regional Fed presidents reinforced Yellen's hawkish views. This lifted the market odds for a March Fed rate increase and in response the U.S. dollar strengthened considerably, with the U.S. Dollar Index (DXY)1 up 1.9% for the month. The weakness in Chinese and Indian demand for physical gold seen in 2016 continued into the new year, and January Swiss trade statistics showed that exports to both China and India are below last year's levels. In addition, markets in China were closed at the start of the month for the week-long Lunar New Year holiday. At the same time, U.S. equities had a strong month with the Dow Jones Industrials Average (DJIA)2 setting a record of twelve straight days of new all-time highs above 20,000 beginning on February 9. While none of these events would typically be supportive of gold, bullion nonetheless gained $37.68 (3.1%) for the month. In fact, through the end of February, gold is up 8.3% and has outperformed the DJIA by 2.5% in the first two months of 2017.

We attribute the recent resilience of gold to three factors: 1) a new era of geopolitical uncertainty since Brexit; 2) February saw the first significant net inflows to bullion exchange traded products since the November U.S. presidential election; and 3) upticks in inflation have caused a decline in real rates. The February releases of both the U.S. Consumer Price Index (CPI)3 and the Producer Price Index (PPI)4 surprised analysts with their largest monthly jumps in several years. Annual core CPI inflation is now at 2.3%, putting it at the upper bounds of where it has been trending since the 2008-2009 financial crisis.

Source: SeekingAlpha