Gold Price Soars to New Record as U.S. Economy Stalls

The gold price soared to yet another all-time high Tuesday morning, rising $21.50 to $1,640.80 per ounce.  The price of gold dipped briefly following the deal to raise the debt ceiling, but quickly bounced back amid concerns that the United States would lose its AAA credit rating.  Helping to further boost gold prices was a fresh batch of economic data showing the U.S. economy was slowing materially.  Weak Q2 GDP data, downward revisions to previous quarters, and softer June manufacturing figures has fueled a surge in investment demand for gold and investments tied to the gold price.

News this morning that consumer spending fell 0.2% in June was weaker than market expectations of a 0.1% gain.  The gold price has begun to significantly outperform cyclically-sensitive stocks and commodities as a series of disappointing U.S. economic reports has been released.  Gold has also outperformed its sister precious metal, silver, in recent months.  Silver – which sits 20% below its spring all-time high of $49.79 per ounce – is following the gold price higher Tuesday morning, rising 2.0% to $40.11 per ounce.

Precious metals equities outperformed the price of gold and silver yesterday as the Philadelphia Gold & Silver Index (XAU) rallied 0.6% to 206.99.  Barrick Gold (ABX) and Goldcorp (GG), the world’s two largest gold companies, climbed 1.0% and 0.3%, respectively.  Among silver shares, Pan American Silver (PAAS) and Silver Wheaton (SLW) advanced 0.7% and 0.4%, respectively.  Gold mining stocks moved higher early this morning on the back of fresh record highs in the gold price.

The primary catalyst for the gold price rebound yesterday was news that the Institute for Supply Management’s (ISM) manufacturing index for July came in at 50.9 – well below the 54.9 consensus estimate among economists.  The ISM index fell to its lowest level since July 2009 and has now posted its worst three-month stretch since September-November 2008.

The index is calculated by asking manufacturing supply managers if they are seeing rising or falling activity compared to the prior month on a host of economic topics.  It is considered a key leading indicator of the U.S. economy and the 50 level is the barrier between expansion and contraction.

Coupled with last week’s worse than expected GDP report, the disappointing ISM data added to mounting evidence that the U.S. economy is slowing significantly.  Meredith Whitney – the analyst famous for her bearish call on financial stocks in 2007 and 2008 – said in a CNBC interview that she is seeing increasing signs that the U.S. economy is headed for a double-dip recession.

With few fiscal stimulus options likely, support for the economy is now likely to turn back to the Federal Reserve and Chairman Ben Bernanke.  While the Fed’s second round of quantitative easing (QE2) ended in June, calls for QE3 have escalated in recent weeks.

Bernanke and his fellow central bankers undoubtedly paid close attention to Monday’s ISM data, and will be keeping a close eye on Friday’s non-farm payrolls report.  The next Federal Open Market Committee (FOMC) meeting will be held next Tuesday August 9 and although most economists and investors do not expect the Fed to launch QE3 at that time, a more dovish tone is expected from the policy statement.

This trend has been reflected in recent weeks by the rising gold price, which is signaling that the Fed is expected to maintain near-zero interest rates for the foreseeable future.  In recent weeks, the Fed Fund futures market has pushed out the chances of a rate hike from mid 2012 to 2013.  With real interest rates remaining firmly in negative territory for the foreseeable future, the price of gold is likely to remain well supported.

Source: goldalert.com