16-May (USAGOLD) — Gold slid modestly lower within the range in early New
York trading, following better than expected U.S. housing data. However, the
downside was limited amid ongoing geopolitical tensions and a surprise drop
in consumer sentiment.
U.S. housing starts surged 13.2% to 1.072 million in April, well above
expectations of 0.980 million. However, all most the entire gain is
attributable to multi-family housing starts. Single family housing starts
were up just 0.8%. “A combination of rising mortgage rates and prices, and
slow growing earnings, has pushed homeownership out of the reach of many
Americans, helping fuel demand for rental and condo units,” according to a Reuters
article.
According to BankRate.com, the average 30-year fixed rate is 4.16%, down
from 4.21% last week. That’s historically quite low; more than 200 basis
points below the pre-housing-crisis level of 6.41% (2006 average). It’s just
further confirmation that the Fed — and other central banks — are going to
have to prevent rates from reverting to the mean, or risk a return to
recession.
Yields on ten-year Treasury notes did indeed collapsed this week to
2.498%, challenging seven-month lows. And yet, both the DJIA and S&P500
notched record high closes on Wednesday, before succumbing to corrective
pressures later in the week.
Based on the marked drop in yields, something just doesn’t feel right.
German ten-year bund yields also have plunged, reaching a one-year low of
1.307%. I concur with market analyst Jim
Wyckoff, who said today, “something is amiss either in the U.S. economy
or regarding other major world economies, or geopolitical fears.”
PIMCO’s Bill Gross quipped via Titter this morning:
Gross: Let’s see — The market expects Fed Funds at 3% in 2018 but wants to
buy the 10-yr at 2.5% or lower today?
— PIMCO (@PIMCO) May 16, 2014
Gross believes that the drop in yields reflect a growing realization that
the Fed is going to keep rates near zero for some time to come, amid
lackluster economic growth, even as they wind-down their asset purchase
program.The Wall Street Journal reported yesterday:
“Five years after the financial crisis ended, soft growth in Europe, a
stop-and-start U.S. recovery and waning momentum in China have policy makers
groping for what to do next.”
I have maintained since the announcement of the taper that it was being
driven by the “declining efficacy” of the program, rather than any true
conviction that economic growth is accelerating. But even as the Fed
pulls-back from quantitative measures, the BoJ seems prepared to double-down
yet again, and the ECB may be on the verge of its first foray into true-QE.
This week BoJ Governor Kuroda said, “If the 2% inflation target is not met
in the way we have expected, we would adjust monetary policy accordingly.”
With Japanese rates locked near 0% for nearly two-decades, when Kuroda says,
“There are many ways, measures and options if necessary to further ease
monetary conditions,” he assuredly is referring to additional asset
purchases.
In Europe, many are convinced that the ECB will act when it meets in June,
cutting the refi rate from its record low of 0.25% to 0.1%. They may also opt
to take the deposit rate negative. While ECB President Mario Draghi has
repeatedly said that every option in on the table, including large-scale
asset purchases, that measure may still be down the road a piece.
This may be as simple as a changing of the guard: The Fed may be signaling
that in ballooned their balance sheet to $4 trillion, they are no longer
comfortable with carrying the water for the entire global economy. It’s time
for someone else to step up, an that ‘someone else’ may just have to be the
ECB.
The take away here is that seven-years after the financial crisis struck, the
world remains rife with economic uncertainty. As our own Mike Kosares wrote
in an excellent
piece earlier in the week, “We live in an imperfect world, and because it
is imperfect there will always be a market for gold.”
“…gold continues to offer its owners what it always has –
shelter from the gathering storm and some welcome peace of mind.” – Michael
J. Kosares
In “groping for what to do next”, global policymakers risk grabbing a
fist-full of trouble. You’re going to want to have your portfolio properly
diversified and protected, before any such ‘trouble’ strikes.
While the yellow metal has been confined to a narrow range in recent
weeks, it is in such periods of relative-calm that you should be taking a
serious look at gold. The recent surge in bond prices is reflective of a
flight to quality. Gold is lagging for now, but that likely won’t last for
long if there is indeed trouble brewing.
And while I would argue that the safe-haven aspects of sovereign bonds
have become increasingly dubious, gold remains the classic safe-harbor
against whatever form of economic duress might be lurking just over the
horizon. Buy gold in physical form and take delivery.
