Gold Rises On Weak US Data

On Friday, a few disappointing economic reports were released. What do they mean for the gold market?

The last economic reports are really awful. First, December retail sales declined 0.1 percent. Please remember that December is usually strong due to last minute Christmas sales. Not in 2015. Moreover, ex-auto sales also fell 0.1 percent, so auto sales did not help the overall report.

Second, U.S. producer prices decreased 0.2 percent in December and 1 percent for the whole year, marking the biggest decline in wholesale prices in five years.

Third, the Empire State manufacturing index plunged to negative 19.4 in January. It was much more than expected and the index is at the lowest level since the March 2009. Importantly, new orders contracted for an eight straight month to negative 23.54.

Fourth, industrial production fell 0.4 percent in December, the third straight monthly decline. Moreover, November was revised lower from negative 0.6 percent to  negative 0.9 percent, while capacity utilization decreased 0.4 percentage points to 76.5 percent. Importantly, December vehicle production declined 1.7 percent following a 1.5-percent decrease in November, which means that the boom in the automotive industry has already peaked.

Following the weak economic reports, the GDPNow model forecast for real GDP growth in the fourth quarter of 2015 declined from 0.8 percent to 0.6 percent on January 15. Moreover, the odds for interest rate hikes in 2016 dropped significantly after Friday’s set of disastrous reports. For example, March hikes plunged from 50.3 percent last month to 28.4 percent. The futures suggest only one hike in 2016, not earlier than in July.

The take-home message is that Friday was full of awful economic reports. Following them, the forecast of GDP growth declined and the odds for rate hikes in 2016 plunged. The soften expectations for rate hikes will be positive for the price of gold. Actually, the price of gold (London PM Fix) rose to 1093.75 on Friday, from 1088.40 on Thursday. Moreover, in such an environment, it is unlikely for the U.S. central bank to further tighten its monetary policy. The higher chances for a recession in the U.S. and a more dovish Fed’s stance would also support the gold prices.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor