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Manufacturing Goes Deeper Into Recession, Yet Gold Remains Muted. Why?

Commodities / Gold & Silver 2019 Dec 05, 2019 - 05:37 PM GMT

By: Arkadiusz_Sieron

Commodities

The ISM Manufacturing index fell 0.2 point to a reading of 48.1 in November. However, gold struggles to find momentum. What is going on exactly?

U.S. Manufacturing Sector Slumps Further

The Institute for Supply Management announced that its index of national factory activity dropped from 48.3 in October to 48.1 last month. The number was below expectations and it also remained below the 50 threshold, indicating contraction – shrinking for the fourth straight month. In other words, the manufacturing sector is still in recession.


We all know that. But what about the future and the broad economy? Well, situation looks better here, as the ISM index remains above the 42.9 level, which is associated with a recession in the broader economy. And the recent improvement in China’s PMIs prompt some to say that the ISM is bouncing along the bottom. Moreover, the strike at General Motors is over, while Boeing hopes to resume deliveries of its 737 MAX.

However, the decline in new orders – the New Orders Index registered 47.2 percent in November, a decrease of 1.9 percentage points from the October reading of 49.1 percent – suggests downside risk, if anything. The fact that Trump restored tariffs on steel and aluminum imports from Brazil and Argentina will not help the domestic manufacturing sector which already is struggling with higher tariffs, trade uncertainty, slowing profit growth and weak overseas demand.

Following shaky economic reports – besides data on manufacturing, the index of pending home sales dropped 1.7 percent, while the personal incomes were flat in October – the Federal Reserve Bank of Atlanta slashed its fourth-quarter GDP estimate from 1.7 to 1.3 percent annualized rate, reviving worries of a slowing domestic economy

Implications for Gold

What does it all mean for the gold market? From the fundamental point of view, weaker industrial production should support gold prices. This is because the manufacturing sector’ problems could not only translate into slower economic growth, but also force the Fed to adopt again a more dovish stance and cut interest rates further in 2020.

But the manufacturing recession failed to spur rally in gold in the fourth quarter of 2019, as the chart below shows. The gold prices are clearly struggling to find momentum, even in the face of disturbing data on the U.S. manufacturing sector.

Chart 1: Gold prices (London P.M. Fix, in $) from October to December 2019.

However, other economic data ended up better than expected. Investors also became more optimistic about the trade deal between China and the U.S. So, given where the general stock markets are, gold is actually not doing bad – but the key test will be yellow metal’s behavior in response to the recent greenback’s weakening. Stay tuned!

If you enjoyed the above analysis, we invite you to check out our other services. We provide detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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