After stocks were on the decline all week, a leak from the Fed made the markets feel all better. It was reported on Wednesday that last week, in a private meeting, Federal Reserve Chair Janet Yellen had expressed confidence in the outlook for economic growth. Stocks almost immediately stabilized and ended the day only slightly in the red.
This "coincidentally" well-timed leak was followed by comments from St. Louis Fed President James Bullard that the central bank should consider delaying the end to quantitative easing in order to halt a potential decline in inflation. Bullard touted the U.S. recovery, citing that economic numbers remain strong, and suggested that the U.S. would be largely insulated from the instability in Europe. How those assertions would warrant an extension of QE--of which Bullard is widely credited as the architect--remains unclear.
Yesterday in the Markets
Dow: 16,117.24 (-0.15%) S&P 500: 1,862.76 (+0.01%) Nasdaq: 4,217.39 (+0.05%) DXY: 84.93 (-0.25%) 10-year Treasury yield: 2.16% (+2 bp)
Gold: $1,238.90 (-0.18%) Silver: $17.37 (-0.46%) Platinum: $1,241.00 (-1.04%) Palladium: $738.00 (-3.15%)
Economic News Affecting Gold
The dollar was pulled out of negative territory this morning by the report that housing starts were up for September after a drop in August. These numbers were helped mostly by growth in multi-family unit construction. Homebuilder sentiment for October fell to 54 after the index came in at 59 for September, a nine-year high. Any reading over 50 indicates that builders generally see positive conditions.
Oil was able to halt its slide on some short covering, but remains at four-year lows. WTI crude is below $84 and Brent crude is under $87. If oil stays this low, it will likely contribute to keeping inflation low. In Europe, Treasuries yields have been rising, as the German bund is up 6 basis points to 0.82% and the Greek 10-year note continues to skyrocket, rising 318 bp over the last month to sit at 8.64%.
Thursday saw expanded profit-taking in gold as stocks continued to struggle. The Fed comments did help the markets recover a bit of their gusto, but they could only tame the fears over Ebola and Eurozone deflation. Gold has been steadily rising while silver is mostly unchanged. Palladium has hit a six-month low, and the platinum price fell below gold earlier in the week for the first time in 18 months. Although gold is up in a variety of currencies, the rest of the precious metals have not quite followed along.
Volumes of credit default swaps have been surging this week to over double their normal rate as hedge funds have been buying up distressed junk bonds due to the lack of liquidity in the market. Credit default swaps (CDS) are a risk hedge but also a means of speculating on creditworthiness. This is the exact same behavior that we saw with the defaults of Lehman Brothers and AIG, as the markets continue to look more and more like they did in 2007-2008 in the run-up to the financial crisis.
Geopolitical News Affecting Gold
India is seeing its gold demand increase ahead of the beginning of Diwali (the traditional gold-buying festival beginning October 23) despite a weaker rupee. The Directorate of Revenue Intelligence (DRI) has said it has put all air, land, and sea entry points into the country on alert for smuggling of gold ahead of the holidays. The Indian government claims that gold smuggling has tripled this year. Between April and September of last year, there were 550 gold seizures totaling 153 crore rupees, or about $25 million. (A crore is a South Asian unit of measure equal to 10 million units.) This year over the same period, there have been 1,780 seizures of gold at India's borders, totaling 470 crore rupees (~$76.5 million). In addition to strong seasonal demand from India, gold is currently trading at a +$5 premium in China, indicating robust demand in the People's Republic, as well.
There is some safe haven demand for gold and especially Treasury bonds as fears about a possible Ebola outbreak escalate. Not only has a second nurse tested positive for Ebola in Dallas, but she has also said that she called the CDC about a fever before boarding her return flight, and was told it was okay to fly. She also stated that the hospital was unprepared to treat the virus and handle the unique circumstances of containing an Ebola outbreak.
The spin-off stories from the spread of Ebola into the United States keep coming in. One of the Texas healthcare workers who handled Ebola specimens is now being quarantined in the cabin of a cruise ship, as the Belize government has refused to let any passengers off the ship despite the man not showing any symptoms. As a result, the ship will have to turn around and return to the States. Meanwhile, in Ohio, two schools have suspended all classes because it came to light that each had a staff member flew on the same plan as the nurse who contracted the virus--but on a later flight. We're not even certain that either of the school staff members sat in the same seat as the infected nurse, but with the narrative that Ebola is now spinning worldwide, precautions that would otherwise border on paranoia are now the norm. Some analysts predict that there could be as many as two dozen new Ebola cases in the U.S. within two weeks' time.
The gold price appears to have strong fundamental drivers in addition to seasonal demand pressures, making it unlikely to reverse direction again and drop below support levels. The poor outlook for Europe and flurry of Ebola news may keep the stock markets down again next week in the absence of another series of "Hail Mary" comments and rumors from the Fed.