Gold Retreats Into Range, Despite Strong Haven Interest

Gold jumped to the 1288.80 level in early New York trading, underpinned by heightened global growth concerns. However, Selling in the futures market into the London PM fix pushed the yellow metal back down into the range.

While there does indeed seem to be a defense of the $1300 level occurring, the underlying fundamentals should ultimately carry the day. China reported weaker than expected industrial production and retail sales in April. Investment data were also a disappointment, reigniting concerns that the world's second biggest economy may be faltering.

It is widely acknowledged that an economic slowdown in China would have broad global implications. Of course everyone would then look to the PBoC to provide further accommodations. The central bank said today that they would remain "prudent". I don't think that suggests they will exercise caution, but rather provide additional liquidity if it becomes necessary.

A much weaker than expected NY Empire State Index for May initially provided additional buoyancy for gold. The index plunged to -9.0, well below expectations of 7.3, vs 9.6 in April. This further dimmed the prospects for any near term Fed rate hike.

— Jamie McGeever (@ReutersJamie) May 16, 2016

As a Bloomberg article pointed out this morning, one of the driving forces behind gold's stellar Q1 performance has been "concern about central bank policy making worldwide." It seems likely that thise concerns are only going to rise further as global economies continue to shrug-off increasingly extraordinary policy measures.

“Firstly, the negative interest rate environment and quantitative-easing policies are reducing the pool of suitable investment options, and making gold less costly to hold.”

“Second, lingering fears of competitive currency devaluations and potentially fresh bouts of market volatility encourage safe-haven demand.”

— Bernard Aw, a strategist at IG Asia Pte, via Bloomberg

Beggar-thy-neighbor competitive currency devaluations are already a reality, but those too could escalate once that first central bank takes the plunge on helicopter money. Despite claims by Governor Haruhiko Kuroda that such a measure is "impossible" under current law, I'd still bet the BoJ will be the first to take the policy ship into those uncharted waters.

Once that ice has been broken, other central banks will be forced to react. That may lead other CBs to launch helicopters of their own, but that reaction could also take the form of steady policy, where tighter policy was expected.