A bigger than expected drop in pending US home sales has increased bearish sentiment in America, knocking the dollar and sending gold and silver prices higher.
The Dollar Index (USDX) has now fallen back below 75. Significantly, the USDX is back below its 50-day moving average, which could encourage further selling. AsThe Wall Street Journal points out, more and more traders are seeking higher yields in other currencies. The gold price is currently over $1,530 per ounce, while silver is testing resistance at $38.
Today’s weak American home sales data comes after a string of disappointing economic data, as well as indications from the Federal Reserve that they will not meaningfully tighten monetary policy until the second half of next year. Personal income and spending figures for the US economy increased by just 0.4% in April – the smallest rise for three months.
Adjusting for inflation, however, presents a more negative picture. Adjusted after-tax incomes were flat for the second consecutive month in April, while orders for durable goods fell by 3.6%. Combined, durable and non-durable sales growth was flat for the month. Given that some 70% of US economic activity consists of consumer spending, any slow-down in this area can’t help but have a knock-on effect on growth and investor sentiment.
Furthermore, as economist John Williams’s website shadowstats.com points out (subscription required), housing starts and new home sales are 75% from their 2005 peak, and are remaining at levels that are “indistinguishable from historic lows.” Around 37% of April sales volume for exiting homes was foreclosure activity.
All of this is increasing the pressure for Ben Bernanke and the Fed to “do more” to support the economic recovery. This will increase the pressure on the Fed to keep interest rates at zero, and could lead to a third round of quantitative easing commencing before the end of the year.