Gold Torpedoed By U.S. Housing Data

As George Harrison sang, “Little darling, I feel that ice is slowly melting.” And now, if the huge jump in both sales and prices of existing homes are any indication, the American economy is in for the spring ride of its life.

Existing home sales rose 6.3%. Prices rose for existing homes by 7.8%.

The National Association of Realtors was happy for the rises, needless to say.

"After a quiet start to the year, sales activity picked up greatly throughout the country in March," NAR chief economist Laurence Yun said in the NAR’s report. "The combination of low interest rates and the ongoing stability in the job market is improving buyer confidence and finally releasing some of the sizable pent-up demand that accumulated in recent years."

In a separate view, the Mortgage Bankers Association revealed that mortgage applications swelled by 5% for the week ending April 17, marking its fourth increases over the last five weeks. A decrease of four basis points in mortgage rate compared with the prior week helped boost demand. The decline in basis points is important because it means banks are looking more aggressively for customers. They may also be preparing for a Fed rate hike – bumping lower so they can then bump higher.

Why does this matter for gold?

It matters because it is an opening shot across the Federal Reserve’s bow, which may respond with a rise in interest rates. (Never mind if you think we’re still not out of the woods and inflation is still not a problem.) The Fed may likely see the housing spike as the leading edge of something larger.

Higher interest rates are bad for gold bulls because non-interest-bearing investments suffer as rates go up.

However, the Fed has a lot of complicated calculus to do. The U.S. can’t outrun Europe or Japan in interest rate rises by too much. The U.S. dollar is already on steroids and a rate rise would simply strengthen its position to the point where American exports become too pricey.

A rate hike would also drive up borrowing costs, something that the U.S. system isn’t quite ready for.

The U.S. dollar was of no help to gold today, treading water against the euro – first down, then up, then down again.

The two major crude benchmark prices diverged today. Brent North Sea was up on news of more bombing and tension in Yemen, which abuts the world’s most important oil-shipping lanes. West Texas Intermediate floundered this way and that on a further decline in production coupled with a rise in inventories. Both crudes are being held down by lackluster demand.

Next Tuesday the FOMC meets again and we will be saddled with a landslide of news, opinion and interpretations. But, the housing news released today could be a flash point that will give rate hawks just the momentum they need going into June, the next meeting after this month’s.

Wishing you as always, good trading,