Global Growth Worries Boost Gold Demand

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Includes: AAAU, BAR, GLD, GLDM, IAU, OUNZ, PHYS, QGLDX, SGOL
by: Clif Droke
Summary

Latest IMF global growth forecast strengthens gold's safety demand.

China's slowing growth rate also bodes well for gold's fear component.

Rising ETF demand is also supportive of gold's intermediate-term trend.

Just when it looked like gold’s “fear factor” might be fading, worries over the strength of the global economy have come to the rescue. In today’s report, we’ll examine the developments which should help keep gold’s fear component strong and allow its intermediate-term recovery to continue.

Concerns over global growth pushed equity prices lower while helping to boost gold on Tuesday. According to the latest economic data, China’s economy grew by “only” 6.6% in 2018, which was the slowest pace since 1990. The slowdown evident in China’s growth rate gave gold investors a reason to continue holding bullion based on safety-related factors. It should be noted, however, that China’s fourth-quarter GDP matched economists’ expectations and didn’t surprise on the downside.

Also helping to buoy precious metal prices in the latest session was Tuesday’s release of the World Economic Outlook report by the IMF. The report forecast that global economic growth would be 3.5% for 2019 and 3.6% in 2020. The 2019 growth forecast was downward revised from the previous forecast of 3.7%, a point which many market commentators noted with concern. In the wake of this news release, the gold price rose nearly 0.25% on Tuesday after Monday’s sharp decline as investors bought gold on global growth concerns.

Although the February 2019 gold futures price is still below its 15-day moving average as of Tuesday, it remains above the $1,275 level - a level which I consider to be key for maintaining its immediate-term (1-4 week) upward trend. More importantly, the gold price continues to trend above its 50-day moving average. This is one of the most popular trend lines for gold traders and investors, hence gold’s position relative to this moving average carries a special psychological significance. As I’ve argued in recent reports, gold’s intermediate-term (3-9 month) rebound should be considered safe as long as the gold price is above the 50-day MA.

February Gold

Source: BigCharts

As far as gold’s currency component is concerned, the U.S. dollar index (DXY) remains below its own 50-day moving average as of the latest session. However, as you can see in the graph below, DXY is getting closer to touching its widely-watched trend line. This is making things a bit uncomfortable for some gold bulls, although the main consideration here is that as long as the dollar index stays under the 50-day MA on a weekly closing basis, the greenback’s interim trend can still be regarded as weak. This in turn supports a bullish gold price outlook and keeps the metal’s currency component strong.

U.S. Dollar Index

Source: BigCharts

Another factor which is supportive of gold’s ongoing recovery since August is the rising demand for investment funds backed by the metal. According to the latest data, some 14.4 tons were added to gold-backed ETFs last Friday. This pushed total holdings to 2,253 tons, which is the highest level since 2013. Moreover, holdings of the SPDR Gold Trust ETF (GLD), the largest gold-backed ETF, rose 1.5% on Friday to 809.76 tons.

Rising ETF demand for gold in the early stages of a major recovery is actually a welcome sign, for the increased money flows help fuel the forward momentum of gold’s price. Rising ETF demand can be a concern from a contrarian’s perspective if gold has had a prolonged rally and attracted too much attention from small investors. While it’s true that it has gained over 10% since establishing a major low last August, the gold price is still well under its highs from last year. What’s more, my survey of financial news headlines doesn’t suggest that retail investors are exuberant over gold. In light of this consideration, I don’t believe investors should be too concerned by the rise in gold ETF demand.

Turning our attention to the gold trading vehicle featured in this report, the iShares Gold Trust ETF (IAU) remains under its 15-day moving average as of Jan. 22 but is still above the $12.25 level, which I regard as being pivotal for IAU’s immediate-term outlook. Even if IAU remains under the 15-day MA in the coming days, it should continue to benefit in the weeks and months to come from the residual worries over the global economic outlook discussed here. Moreover, odds are that IAU’s pullback will be short-lived as long as the dollar index (DXY) remains under its 50-day moving average.

iShares Gold Trust

Source: BigCharts

On a strategic note, traders should remain long the iShares Gold Trust ETF after recently taking some profit. I also recommend raising the stop loss for the remainder of this trading position to slightly under the $12.25 level on an intraday basis. A violation of $12.25 in the IAU would mean that price has fallen under the technically significant 15-day moving average, in turn signaling a shift in the immediate-term trend.

In summary, with the global growth outlook remaining soft, investors shouldn’t be concerned that gold’s fear component is getting weaker. Instead, the market’s worries over the economic futures for China and the emerging markets will likely serve to increase safe-haven demand for gold. Gold’s currency component, meanwhile, also remains strong despite a recent rally in the U.S. dollar index. Increasing demand for gold-backed ETFs is also a positive contributing factor behind gold’s intermediate-term recovery.

Disclosure: I am/we are long IAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.