Update On Gold

Gold prices remain trendless.

Update On Gold

Our Commodity strategists expect to maintain an underweight precious metals position within the commodity complex. The above chart shows that the key drivers of gold since 2008 – real interest rates, the dollar and investor risk aversion, proxied by the U.S. equity risk premium – have stabilized. Our view is that these drivers will remain trendless in 2014H2, although an equity correction could cause an intermediate-term shift. However, ETF volumes already have adjusted downward, minimizing any downside for gold (and silver).

What could make us wrong and begin a gold bull market? Ironically, a growth scare rather than an inflation scare is the most likely candidate. It would put pressure on central banks to boost liquidity “at any cost”, just like in 2008-2011. But we view that probability as unlikely.

Bottom Line: Gold will ebb and flow with the dollar against a flat trend.

A U.S. Recession Is Unlikely

The annualized 2.9% contraction in first quarter U.S. GDP was among the worst of the postwar era and the only one of its size that did not occur during a recession. But coincident and leading indicators suggest that a recession is highly unlikely.

A US Recession Is Unlikely

From the coincident perspective, the pickup in the pace of hiring, modest as it has been, contrasts with the deceleration of payroll gains that have regularly preceded recessions. Year-over-year movement in the leading economic indicator has been a solid recession predictor, and it is nowhere near contraction territory now. Stocks agree, as they typically begin to lose ground in the latter stages of expansions, and there has been no sign of the overheating in cyclical segments that typically precedes recessions.

Looking through three-month-old GDP data from the first quarter would therefore seem to be the right investment approach.

The silver lining for investors is that soft growth will preserve accommodative policy settings. As long as recession is avoided, any pullback in stock prices should be viewed as a correction, not the end of the bull market.