More disappointing U.S. data propelling gold towards $1,350

(September 6, 2016 - by Lawrence Williams)

We have recently speculated as to how the gold price might perform now U.S. execs are back at their desks after holidaying in the summer sunshine.  Precious metals investors will no doubt recall the time in 2011 when the end of the summer holidays precipitated the beginnings of a prolonged period of precious metals price weakness and will have been worried that this year might see something of the same effect given gold and silver’s strong run over the first half of the year, but this year’s price performance has been very different from that of 2011.  Back then the gold price had soared throughout the normally weak July and August months – unsustainably so as it proved.  This year the gold price has been pretty flat to weak in July and August following a Brexit boost in late June.  Many analysts have seen this as consolidation, perhaps ahead of an upturn in the final four months of the year.  Early signs for this look good with the gold price today heading into the mid-$1,340s.  Will it hit $1,350?

Thus, on the first day of trading after the Labor Day holiday, initial portents for precious metals price performance will have been encouraging for investors.  Helped by weaker than expected PMI Services data and by a falling dollar, gold has risen around $15 at the time of writing.  Interestingly, like Friday’s nonfarm payroll figures, the latest Services PMI is not actually weak per se – remaining above the all-important 50 level – but was weaker than analysts’ expectations.  The U.S. economy may thus well be growing, but perhaps at a far slower rate than entities like the U.S. Fed would like us to believe.

The net result of the weaker than anticipated US data is for analysts and investors to assume the Fed is unlikely to restart interest rate tightening at the September FOMC meeting for fear of nipping any tentative economic upturn in the bud.  If this assumption is correct – and it may be dangerous to assume that it is, given Fed credibility could be at stake in that it had foreshadowed up to four interest rate hikes in 2016 back in December last – then that effectively rules out any interest rate hike announcement until the December FOMC meeting which takes place December 13-14.  And if US data follows its current weaker than anticipated course then even a December rate hike may be in doubt.  (November is effectively ruled out as a rate increase announcement then would only come about a week before the Presidential Election date scheduled for November 8th.)

Of course the Presidential Election itself could provide yet another huge degree of uncertainty in U.S. markets.  According to the latest CNN poll, Donald Trump and Hillary Clinton are running neck and neck – and the Donald is actually in the lead taking into account those who are most likely to turn out and vote, although the majority still anticipates a Clinton victory.  Voter turnout could be key with neither candidate being popular with the electorate and, if anything, the latest polls show that Clinton is less popular among registered Democrats than Trump is among Republicans.  As with Brexit, voter turnout may be key and with the two contenders being so unpopular even among their own party supporters, this could be hugely unpredictable.

With the election only two months away we will be seeing probably the most vitriolic, and personally antagonistic, campaign ever which will do nothing for any positive global perceptions on the US political system and could rebound on the economy and markets dependent on who is seen as gaining the upper hand. As someone who awoke on June 24^th to hear that UK voters had gone for Brexit, contrary to nearly all the polls, one cannot but help wondering if U.S. voters will be similarly shocked at the Presidential outcome on November 8^th.  Whoever is elected economic uncertainty will undoubtedly come to the fore and that could give a big boost to gold in the final two months of the year – and could see the dollar and the general equities markets take a substantial knock further hamstringing any Fed move to raise interest rates.

As we advised UK investors to invest in gold ahead of the Brexit vote – and those who did were rewarded well with the double whammy of a dive in the value of the pound against the dollar coupled with a rise in the gold price – US investors might also be well advised to buy gold ahead of the Presidential election as financial insurance against an unlikely result causing the dollar to fall and gold to rise (which many will see as effectively the same thing!