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European markets were weak on Thursday with investors still shooting first and asking questions later as it relates to the automotive sector and the emissions testing scandal. The STOXX50 and the German DAX were both down by around 2%. US markets were also lower, but to a lesser degree. It has been though a much better day for Asia with the Shanghai Composite up 0.86% and the ASX200 posting a strong day, and closing up around 1.5%. There was also a significant move in the gold price which rallied 1.9% to push above US$1150 an ounce. The A$ price of gold is now around A$1640 and we should see some strong gains in the sector today.
The quandary for markets seems to be that Janet Yellen continues to talk about raising rates but the reality is likely to be somewhat different. The Fed in my view remains wary of dollar strength and competitive devaluations occurring elsewhere, meaning they are going to place much more weight on tepid economic data in deciding when to tighten. A weak durable goods number on Thursday highlighted the issue, and will I think, mean that a rate rise this year is now firmly off the table.
The fact that the US is likely to keep interest rate settings low for an extended period (with an increases fairly measured) is starting to be reflected in the gold price in my view. The fact is that fiat paper is continuing to be debased, and even more so in currencies other than the US$. Many central banks around the world are actually still lowering their interest rates with the Norwegian central bank the latest so do so on Thursday. I also think that there is a very good chance that the ECB will extend their quantitative easing program, which will see the gold price in euros continue to push to the upside.
The technical action in gold is starting to look pretty constructive with the gold price pushing above US$1150 an ounce on Thursday. I think we could well see upside pressure continue to build as the long term inflationary consequences of sustained monetary easing are priced in. Targets above US$1350 and then US$1500 are realistic in the medium-term, and prices are likely to push even higher in other currencies, including the AUD.
