Two days ago, housing starts jumped 20.2 percent, while building permits hit seven-year high in April. What do these strong numbers mean for the U.S. economy and the gold market?
According to the government report released on Tuesday, housing starts rose by 20.2 percent to an annual rate of 1.14 million, which was the biggest monthly percentage gain in more than 24 years. Construction started on new U.S. homes jumped to the strongest level since the onset of the Great Recession, while building permits increased by 10.1 percent, the most since mid-2008 and much more than expected.
The strong housing numbers sparked an intense excitement in the markets. The U.S. dollar surged, while the gold prices dropped from $1220 to almost $1205. Many analysts say that strong housing numbers strengthens the view that weakness in first quarter was largely transitory and likely caused by harsh weather condition. Some economists expect also that the robust reading may prompt the Fed to soon hike interest rates.
However, we suggest taking the April data with a grain of salt. Monthly data are very volatile, so the 3-month moving average, especially with a population adjustment, shows very distinct picture. It seems that after a string of disappointing data, investors want to find at any price some positive data, which could restore hope in the strong recovery of the U.S. economy, perhaps only to take profits.
Moreover, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index, released on Monday, builders lost some confidence in current sales of single-family homes in May. The reasons are increasing home prices and weak income growth. This housing recovery is historically soft, because Americans simply do not have the sufficient income. New home sales are typically sold only to the more well-to do buyer, because the median income to median home price is too low for average citizens to afford the loan for a new home.
To sum up, the April data on housing starts and building permits were surprisingly strong. After a string of disappointing news, this robust reading was an exception, which led to appreciation of the U.S. dollar and decline in gold prices. The strong numbers may, thus, lead to negative sentiment toward gold in the nearest future. However, historically speaking, the recent recovery has been the weakest housing recovery in American history, so the future may be better for the gold market.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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