Fool's Gold Report: Gold Soars on Economic Slowdown Fears

Poor performance from China's manufacturing industry holds open the possibility of more economic stimulus. Find out why gold soared in response.

Jan 23, 2014 at 7:04PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

What's bad news for the stock market is often good news for gold, and today, that maxim held true as gold prices soared after preliminary indications from China that its manufacturing industry contracted slightly this month. The resulting drop in stocks led some to believe that further economic stimulus might be necessary from central banks around the world, and that sent gold prices up sharply. Spot gold jumped $28 per ounce to $1,265, its best level since November, sending the SPDR Gold Shares (NYSEMKT:GLD) up 2.2%. But the gains didn't flow through to the rest of the precious metals, as silver gained a less impressive $0.22 per ounce, to $20.02, leaving iShares Silver (NYSEMKT:SLV) up just 1.2%. Industrial metals were even less impressive, as platinum and palladium both lost $2 per ounce.

Gold And Silver

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

Gold analysts pointed to a number of positive factors boosting the market. A substantial drop in the U.S. dollar against the Japanese yen and the euro helped push gold higher. Some pointed to the possibility that the Indian government might reduce or eliminate some of the import restrictions it has placed on gold bullion, which could potentially increase demand for the yellow metal. At the same time, gold seems to have regained at least some of its flight-to-safety characteristics, especially in light of the possibility that the Federal Reserve could delay or slow its reduction of bond-buying activity through quantitative easing if the global economy shows signs of slowing.

There's also evidence that investors are starting to look at gold more favorably. Inflows into bullion ETFs like the SPDR Gold Trust last Friday hit their highest one-day levels in more than a year, and if bullion prices hold their gains, it could represent an important reversal of psychology for the gold market.

Gold-mining stocks also climbed nicely, with a 2.7% gain for the Market Vectors Gold Miners ETF (NYSEMKT:GDX). Barrick Gold (NYSE:ABX) jumped 2.7% after its CEO said that the company plans to take a charge after recalculating its reserves based on a bullion price of $1,100 per ounce, down from $1,500 a year ago. CEO Jamie Sokalsky referred to the move as a "conservative approach," but it will result in at least a slight reduction in reserves by redefining some of its more costly mines as being uneconomical for production. Barrick also said that it will likely take another charge against its Pascua-Lama mine on the border between Argentina and Chile, which it said late last year it would stop developing in light of political difficulties and falling gold prices.

Looking forward, gold's future path could depend on the direction that the stock market moves in the near term. If stocks finally give investors a long-awaited 10% correction, then gold could move higher as investors look for alternatives after a long bull-market run for the stock market.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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