We’re less than a month and a half into 2014 and we’re already seeing the markets do an about face. At the end of the year, the equities markets were riding high following another positive year; highlighted by a record closing for the Dow and S&P 500 of 16,576 and 1848, respectively. Gold and silver were among the worst, if not the worst performing asset classes for the year, with losses of 28% and 36%. As we noted in a previous post, the experts have made their 2014 predictions for the gold market, and they’re not positive. While the average forecast called for a closing price of $1,209, the forecasts ranged from a low of $1,141 by Deutsche Bank to a high of $1,292 by HSBC. While we’re still early in the year, HSBC’s bullish forecast appears to be the most accurate, as the price of gold closed above $1,300 today, which is its highest close in over three months. We’ll explore in further detail below the reasons for gold and silver’s out performance and will analyze if this trend will likely continue.
The markets are influenced by a variety of factors, but one of the most, if not the most important monthly economic reports is the new jobs report. This is one of the best indicators of the health of the economy and a strong indication if the economy is growing or not. December’s jobs report stunned most of the investment community, as it was widely expected that 200,000 new jobs had been created. In fact, the ADP report announced just a couple of days prior estimated that 238,000 new jobs were formed. Actual BLS data indicated that a mere 74,000 new jobs were created during the month, which was the worst monthly performance in over three years. However, a large contingent of the investment community chalked up the poor jobs report to bad weather and was of the opinion that it was an anomaly to an otherwise growing and healthy economy. Four weeks later, market participants were eagerly awaiting January’s jobs data, and once again were disappointed to find that only 113,000 new jobs were created during January versus forecasts of 180,000 – 190,000 new jobs. Two months of poor jobs data could be the beginning of a trend, and an indication that continued stimulus is likely for the foreseeable future, which typically bodes well for the gold and silver markets.
It was recently announced that the House agreed to increase the debt ceiling to help avoid a debt ceiling crisis, and possible default, as we experienced late last year. While this decision was likely made in part to avoid uncertainty in the financial markets, this was also a clear indication that Congress has no intention of reining in our runaway national debt and annual deficits. With on balance sheet debt of over $17 trillion, the only way that we can continue to service our debt payments is if interest rates remain low. An increase in interest rates will result in a larger portion of the nation’s budget going toward debt servicing, in turn leading to higher taxes, reduced entitlement programs, or both. Additionally, a GDP to debt ratio of over 100% will lead to a devaluation of the dollar, which should help to bolster the gold and silver markets.
Recent Economic Data
We have been flooded recently with negative economic data in addition to the previously mentioned January jobs report. Over the past week, Goldman Sachs lowered its GDP forecast for the first quarter of 2014 to 1.9%. Additionally, retail sales for the month of December recently disappointed, with its biggest miss in a year and a half. Last but not least, new jobless claims recently increased, pushing jobless claims back above its 8 month average. Add to the fact that the Fed has recently reduced its monthly bond buying program from $85 billion a month to $65 billion a month, and you have a recipe for a struggling economy with less assistance from the Fed to support it.
The gold and silver markets are off to a stellar 2014 after being two of the worst performing asset classes in 2014. As of this post, the markets are up 8% and 6% respectively, while the equities markets are off to a rough start. As to if the gold and silver markets will continue to outperform is anyone’s guess; however, poor economic data and questionable political decisions are an indication that we may be in for a rocky equities market in 2014 and a major bounce back in the gold and silver markets. Be sure to “like” us on Facebook and follow us on Twitter to receive a feed to our blog to stay on top of all of the latest economic and political factors affecting the precious metals market.