Since the beginning of the year, shares of SPDR Gold Trust (NYSEARCA:GLD) rose by over 16.6%. Some of the factors behind the recovery of the gold market include: The weakening of the U.S. dollar against major currencies; the ongoing sell-off of equities -- in part following the latest concerns over the quality of Deutsche Bank's balance sheet; the decreased chances of the Fed raising rates this year; and the ongoing fear of a possible global slowdown. As long as this bearish sentiment persists, GLD is likely to maintain its stride.
Will the Fed revise its policy?
In her recent testimony, Chair of the FOMC Janet Yellen maintained her position that the Fed will evaluate its monetary policy based on the available data. This response wasn't what the markets were looking for. People expect more clarity with respect to the Fed's policy, especially in these times. But this uncertainty helps drive up the demand for gold in general and GLD in particular.
So if the next few non-farm payroll reports keep showing growth in both number of jobs and wages and core inflation slowly picks up, the Fed could still, in theory, consider raising rates in June.
For now, it seems very unlikely that the Fed will raise rates in March. But since the markets aren't stable and there are rising concerns for a possible recession, the Fed may opt out and not raise rates at all this year. According to Fed-Watch, the odds of the Fed raising rates by the end of 2016 are only 33% -- well below the odds recorded only a few weeks ago. And the upcoming minutes could reduce these chances even further if they show FOMC members are concerned over the state of the U.S. economy -- another piece of information that could feed the frenzy in the markets.
The drop in the probability of a rate hike and the higher chances of a global economic slowdown have driven up long term interest rates; this trend also coincided with the latest recovery in the price of GLD, as indicated in the following chart.
Source: U.S Department of Treasury and Google finance
Furthermore, the linear correlation between the percent change in the price of GLD and changes in the 10-year Treasury yield has strengthened and currently stands at -0.43. This serves as another indication that the rise of GLD and fall of LT interest rates are related to the bearish market sentiment.
U.S. dollar and GLD
The weaker dollar has also contributed to the latest rally of GLD: Since the beginning of February, the U.S. dollar lost nearly 4% from its value against the euro and 6.5% against the yen. Although the BOJ and ECB stepped up -- the BOJ cut its rates to negative levels and the ECB hinted of possible additional stimulus in the coming months -- the demand for these currencies kept rising as they are considered safe haven currencies. If the U.S. dollar continues to lose its standing against these leading currencies, the price of GLD will have further ground to gain.
The gold market tends to benefit in times of economic woes and high uncertainty. For now, these conditions are ideal for GLD to rally. And while this rally could quickly change direction once the wind shifts, for now the current economic climate -- which includes falling long term interest rates and a weaker dollar -- will keep pushing GLD higher. For more please see:" Gold and Inflation - Is there is relation?"
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