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Everything But The Kitchen Sink: Copper, January Barometer And Central Banks


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Everything But The Kitchen Sink: Copper, January Barometer And Central Banks

Friday January 29, 2016 11:05

Traders and investors today participate in a multi-dimensional global marketplace that is inter-related on a nano-second basis. If you are trading U.S. stocks, you are also trading crude oil. But, wait there's the Chinese growth data to consider and what did the Bank of Japan just do now? Throw a bunch of macroeconomic indicators and inter-related markets together and everything but the kitchen sink seems to matter to markets now.

Gold traders need to keep their finger on a lot of pulses these days. Here's a quick look at 3 factors that matter now.

  1. Central Banks: The Negative Interest Rate Club Is Growing. The Bank of Japan surprised global financial markets with a historic first-ever negative interest rate cut Friday. Tugging one of its interest rates on excess reserves to -0.1%, the central bank is attempting to convince markets of its resolve to stimulate inflation there. The BOJ joins a growing group of global central banks with negative interest rates including the European Central Bank, Sweden, Denmark and Switzerland.
Market reaction: Global stocks rallied on the news, which follows last week's equity market cheer in the wake of the ECB's suggestion it could ease monetary policy further in March.

What it means for gold: Global central bankers remain concerned about sluggish growth and below-target inflation. The ECB and the BOJ remain in easing mode, while the Federal Reserve may need to dial back on its forecasted 100 basis points of interest rate hikes in 2016. Global central banks remain tilted toward easing. Capital Economics forecasts ten out of the 20 central banks to ease policy in 2016, see Figure 1 below. Bottom line: Extremely loose monetary policy around the globe remains gold bullish.


Table 1 source: Capital Economics Global Central Bank Watch, Jan. 26

  1. Copper: This industrial metal is often called "Dr. Copper" as it is widely used across a variety of industries from construction to electronics. Demand for the metal is seen as a gauge of world economic activity. Rising demand is bullish for the global economy, while falling demand (and falling prices) is seen as a warning signal for the global economy.
What is Dr. Copper saying now? Nearby Comex copper futures have tumbled to their lowest level since April 2009. China's voracious appetite for copper has tumbled dramatically as their aggressive building and construction phase slows. Here's a look at what Barclay analysts say: "We believe that China is at an inflection point. Its empire is in decline, but unlikely to collapse this year. Our analysis of China’s copper demand profile shows a market that is facing structural headwinds that are likely to slow growth in copper consumption dramatically," according to a Barclays Metals research report.

What does it mean for gold? Weak copper demand signals global growth is likely to remain weak, which will keep global central banks with their hands on the easing button, which is gold supportive.

  1. Stock Trader's Almanac January Barometer. This venerable stock market indicator was devised by Yale Hirsch in 1972 and adheres to the idea: "as the S&P goes in January, so goes the year." The January Barometer has registered eight major errors since 1950 for an 87.7% accuracy ratio, the Stock Trader's Almanac says.
    Friday's trading day isn't over year, but the S&P 500 is currently down 6.5% and would have to post a tremendous market rally in the next few hours to prevent the January Barometer from flashing red. A negative S&P settlement for the month bodes bearishly for stocks throughout 2016.

    What does it mean for gold? A decline in stocks tends to be gold-bullish. According to the World Gold Council, research shows that over the long run holding 2-10 % of your portfolio in gold can improve portfolio performance. Why? Gold helps manage risk and volatility, through diversification. It has a low correlation to key asset classes, and helps protect portfolio losses in times of market stress as it acts as a high-quality and tail risk hedge. Gold's correlation to stocks decreases during economic contractions, the World Gold Council says.
Gold traders can't trade and invest in a vacuum. Today's markets are highly correlated and interrelated. Keep your finger on the pulse of key factors that matter for gold now.

By Kira Brecht, contributing to Kitco News;
Follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.