The price of gold rallied above $1,500 on Thursday, as dismal U.S. data reasserted fears about the world’s largest economy heading for a soft landing.
Futures on December gold delivery peaked at $1,505.90 a troy ounce on the Comex division of the New York Mercantile Exchange, putting the yellow metal on track for its highest settlement since Oct. 9. The futures contract continues to hold above $1,505 at the time of writing.
While gold’s long-term catalyst continues to be the sharp decline in real interest rates, two additional factors triggered the latest round of buying on Thursday.
Dismal Economic Numbers
America’s manufacturing industry is showing little signs of recovering anytime soon, based on the latest economic numbers out of Washington and the private sector.
U.S. durable goods orders – a key gauge of manufacturing demand – plunged 1.1% in September, the Department of Commerce reported Thursday. That was worse than the 0.8% drop analysts had expected. It was also the fifth time in 12 months that orders for long-lasting goods fell.
The dismal trend didn’t just end with the headline number. Nondefense capital goods orders excluding aircraft – a bellwether of business investment plans – fell 0.5% in September following a 0.6% decline the month before.
A separate report from IHS Markit showed U.S. manufacturers recovered slightly in October, but that the underlying trend in overall business activity remained weak. Markit’s flash U.S. manufacturing purchasing managers’ index (PMI) improved to 51.5 in October from 51.1 the month before. The Composite PMI indicator, which includes manufacturing and services, ticked up slightly to 51.2.
On the PMI scale, anything above 50 implies expansion in economic activity.
Markit says the U.S. economy is on pace to grow just under 1.5% annually in the fourth quarter. The survey data also suggest monthly nonfarm payroll growth will slip below 100,000.
Chris Williamson, Markit’s chief business economist, offered somewhat of a silver lining:
“The overall subdued picture reflects a spreading of economic weakness from manufacturing to services, but encouragingly we are now seeing some signs of manufacturing pulling out of its downturn, in part driven by a return to growth for exports and improved sentiment about the year ahead, linked to hopes that trade war tensions are starting to ease.”
Earnings Under Pressure
The Dow and broader U.S. stock market have been defiant in the face of weaker-than-expected earnings, but that trend is unlikely to continue for very long.
Corporate America is mired in another earnings recession, its first since 2016, with S&P 500 companies so far reporting an annualized profit decline of 3% in the third quarter. Roughly 20% of S&P 500 companies have reported so far.
While the U.S.-China trade war has been blamed for the earnings downturn, companies are more likely to complain about foreign exchange rates. As FactSet reported a few weeks ago, several companies have cited FX rates “as a factor that either had a negative impact on earnings or revenues in Q3 or is expected to have a negative impact” in the future.
With the S&P 500 Index hovering just below record highs, a string of dismal earnings releases like we’ve seen this week could pour cold water on the bull market. In the near term, the loss of risk appetite will only fuel demand for gold as investors exit the more volatile segments of the market.