In contrast to higher gold prices, stocks sank across the globe. S&P 500 stock futures fell 24.10 to 1173.70, following equity markets in Europe and Asia to the downside. WTI crude oil futures fell 4.3% to $83.15 per barrel on fresh worries over a double-dip recession in the United States. The euro-denominated gold price traded up to 1,200 for the first time ever after the European Central Bank hinted late Sunday it may be prepared to purchase the sovereign debt of Italy and Spain.
The gold price extended its year-to-date gain to 19.7%, surging over $200 in the past five weeks alone. The SPDR Gold Trust (GLD), a proxy for the gold price and the world’s largest gold ETF, advanced to $165.05 early this morning. Silver prices advanced higher alongside gold Monday morning, rallying $1.19 to $39.54 per ounce. Gold’s sister precious metal is now higher by 27.9% in 2011.
Strength in the gold price has unable to lift precious metals equities, however, as investors dump equities of any and all ilk. The AMEX Gold Bugs Index (HUI), a composite of the world’s largest gold companies, slid 3.0% on Friday – extending its loss in 2011 to 8.1%. Barrick Gold (ABX) and Goldcorp (GG), the sector’s two largest components, dropped 3.7% and 3.2%, respectively. Newmont Mining (NEM), the largest U.S. based gold producer and the only gold stock included in the S&P 500 Index, retreated 2.2%. Despite the weakness in broader market equities this morning, gold mining stocks traded in positive territory.
S&P’s downgrade and the debt ceiling debacle in Washington have certainly contributed to the record-setting run in the gold price. However, this is only half the story. A series of disappointing U.S. economic data has led to concerns over a new recession and to prognostications that the Federal Reserve will hold interest rates near zero as far as the eye can see.
Late last week, Jan Hatzius, chief U.S. economist at Goldman Sachs, lowered the firm’s GDP estimates in 2011 to 1.7% from 1.8% and to 2.1% from 3.0% in 2012. Hatzius also forecasted that the unemployment rate will rise to 9.25% by the end of 2012, and said there is a one-in-three likelihood of a renewed U.S. recession.
In a note to clients, the Goldman economist wrote that “Even our new forecast is subject to meaningful downside risk. We now see a one-in-three risk of renewed recession, mostly concentrated in the next 6-9 months. There are three specific issues that concern us. First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability, which would worsen the economic outlook globally. Second, our forecast assumes that the payroll tax cut—currently scheduled to expire at the end of 2011—is extended for another year, but if that failed to happen the fiscal drag in early 2012 would increase significantly. Third, increases in the US unemployment rate have historically had a tendency to feed on themselves, and this could happen again.”
While Hatzius did not specifically discuss the gold price, the implications of the firm’s revised economic outlook are supportive of higher gold prices. Although the firm did not suggest that a third round of quantitative easing is a certainty, it is clear that the odds of an eventual restart of the Fed’s quantitative easing campaign have increased substantially. Furthermore, Goldman’s forecast echoes recent predictions from a host of noted investors – including Marc Faber, Jim Rogers, Eric Sprott, and many others – that Chairman Bernanke and the Federal Reserve are prepared to fire up the printing presses for as long as necessary to combat the deflationary headwinds facing the U.S. economy. As long as deflation is enemy number one of central bankers, the gold price is likely to remain well supported.
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