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Gold Price Regains Its Shine as U.S. Economy Flashes Two Warning Signals

Last Updated September 23, 2020 1:13 PM
Sam Bourgi
Last Updated September 23, 2020 1:13 PM

The price of gold rallied on Wednesday and was making a fast return to $1,500 as investors weighed the multitude of risks facing the U.S. economy.

The latest warning signal came from the housing market after existing home sales tumbled much more than expected in September.

Gold Price Recovers; Silver Follows

Futures on December gold deliveries peaked at $1,499.40 a troy ounce on the Comex division of the New York Mercantile Exchange, the highest in almost a week. The contract was last up $10.00, or 0.7%, at $1,497.50 an ounce.

December gold futures
Gold for December settlement, the most actively traded futures contract, approaches $1,500 an ounce Wednesday. | Chart: barchart.com

Silver futures traded in virtual lockstep with gold bullion; the grey metal’s December contract climbed 9 cents, or 0.5%, to $17.59 a troy ounce.

Bullion’s trading range has chopped around the $1,500 mark for going on four weeks now, reflecting a substantial shift in investors’ sentiment. Over that period, U.S. stocks have regained their momentum, with the S&P 500 Index fast approaching record highs. Haven demand hasn’t entirely waned, though, as concerns over recession and geopolitics allowed gold to maintain most of its yearly gains.

U.S. Housing, Manufacturing Data Show Troubling Signs

The U.S. economy is trending in the wrong direction based on two key components of the market: Housing and manufacturing. The two sectors are among the most sensitive to changes in the business cycle, and their contribution to GDP growth  has been virtually zero.

On Tuesday, the National Association of Realtors said existing home sales – the largest component of the residential real estate market – fell 2.2% in September to a seasonally adjusted 5.38 million units. Sales had risen in the previous two months, but likely for the wrong reasons as the gains were largely driven by lower mortgage rates .

Home sales were lackluster in the years that the Federal Reserve raised interest rates. The federal funds rate has an indirect impact on mortgages as banks and other lenders pass on savings (or costs) to consumers.

The housing market is telling us that debt serviceability is the primary catalyst for homebuyer activity. In a healthy economy, real wages and savings should be the primary underpinning of home sales.

A recent report from the Commerce Department showed that housing starts are being supported by lower mortgage rates  despite a slowing economy. Starts fell 9.4% in September to a seasonally adjusted 1.256 million. They were at 12-year highs the prior month.

In addition to housing, U.S. manufacturing has been in a downward spiral for much of 2019, as evidenced by recent data on industrial production, durable goods orders and PMI. When taken together, there’s a strong case to be made that manufacturing is already in recession.

Industrial production declined 0.4% in September. Durable goods orders increased during the same month, but a key gauge of business investment declined.

The sector accounts for roughly 12% of gross domestic product, but its share has dwindled over the past four decades.

Reports on durable goods orders, manufacturing PMI and new home sales are scheduled for release on Thursday.