GLD: What's Behind The Recent Rally?

| About: SPDR Gold (GLD)

Summary

The recent decision to maintain rates unchanged didn't impact the price of GLD.

The market revised down its outlook about the Fed's cash rate.

The lower chances of a rate hike along with growing concerns for a possible recession are keeping up the price of GLD.

The FOMC concluded its first meeting for the year without any major announcement. In the past, the price of gold tended to react to the news from the Fed. This time, however, since the statement didn't present anything unexpected, shares of SPDR Gold Trust (NYSEARCA:GLD) remained nearly unchanged following its release. Nonetheless, the growing concerns over a possible recession could keep driving up the demand for GLD.

The FOMC referred to the global economic woes and low inflation expectations. And even though the statement was perceived as relatively balanced, the market still places lower odds for a rate hike this year. According to the latest by Fed-watch, the chances of a hike are down to 53% by the end of year - it was over 72% a week earlier - and the expected cash rate is, on average, only 0.55% by December 2016; this average suggests the market doubts there will be even one rate hike in 2016, let alone 4 hikes as the Fed anticipated back in December 2015.

The table below shows the updated Fed-watch probabilities in selected rate decisions in 2016 and the weighted average cash rate.

Source: Fed-watch

Furthermore, long-term interest rates have also dropped since the beginning of the year, which also helps pull back up the price of GLD: 10-year Treasury yields dropped by 0.43%, year to date; even the 30-year Treasury yields declined by 0.26%.

And if the odds of a rate hike continue to fall along with the weighted average cash rate, this could further boost the price of GLD, which so far this year benefited from the bearish market sentiment and concerns over a possible economic slowdown. According to Larry Summers, the chances the U.S. economy faces a recession are 1 in 3. Many investors, who are concerned about such a possibility, may consider stocking up again on gold investments - as was the case back in 2008-2011.

Looking forward, the main report of the week will be the non-farm payroll, which tends to move the price of GLD. In the past three months, the NFP presented strong growth in jobs, modest gain in wages and stable unemployment. And if the U.S. economy is slowing down, it could take time before it shows in the labor market - seeing that employment tends to be a lagging indicator. In any case, if the upcoming report shows a lower-than-expected growth in jobs, this could further pull up the price of GLD. Currently, the market estimates the NFP will show a gain of 192,000 jobs. A much lower figure than this estimate could suggest the economy is slowing down and further reduce the chances of a rate hike at all in 2016. According to a Bayesian analysis of the NFP reports over the past three years, the odds that the price of GLD rise if the NFP report shows a lower-than-expected headline figure are 72%.

Another important indicator is the changes in wages. Last time, wages rose by 2.5% year on year. But if this growth rate contracts, this could also suggest there is still slack in the labor market. Such a development could influence FOMC members to reexamine their outlook about the Fed's monetary policy.

Bottom line

So far, the Fed heavily relied on the progress of the labor market to justify raising rates. If the next NFP report shows lower job gains and, more importantly, lower growth rate in wages, this could further reduce the chances of a rate hike in 2016. And lower rates along with growing worries over the state of the U.S. economy are likely to fuel the short-term demand for GLD. For more please see: What's The Outlook for Gold in 2016?

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