U.S. employment figures batter gold

This article was submitted to Mineweb on Friday but as the site seems to shut down for the weekend as far as posting new articles is concerned, it was not published so have taken it upon myself to update it and release it here as the comment remains totally relevant.

Lawrie Williams

A higher than expected non-farm payrolls figure in the U.S. caused the gold price to dive on Friday as the view was that this would mean the Fed would raise interest rates sooner rather than later.

LONDON

The latest U.S. non-farm payroll figures showed an above-expectations rise of 280,000 jobs, while average hourly earnings rose by 0.3%, which again was higher than general expectations.  The immediate knee-jerk reaction on the gold price was to knock it down substantially below its recent $1175 to $1220 trading range and it remains to be seen whether Asian demand at the lower price levels will take it back up again.  So far there has been something g of a recovery back up to the $1175 level so it looks like the support at this kind of level remains with us.

Recent media reports have suggested that both Chinese and Indian demand for gold is slipping – fairly normal for the time of year.  The main early year festival boosts are behind us, as is the Indian wedding season and buying tends to fall in the latter pre-monsoon as well.  It doesn’t look to be an auspicious time for gold.

What really hit the markets though was the assessment that the latest U.S. employment figures would put a U.S. Fed raising of interest rates sooner rather than later back on the table – despite an earlier statement from the IMF effectively saying that the U.S. recovery is not strong enough to raise interest rates yet.  The feeling in the U.S., which for the moment seems to be setting the gold price, is that the stronger payroll figures would justify interest rate increases starting in September and might even put June back in the frame, although with the next FOMC meeting not scheduled until June 17th-18th when it will be coupled with a Janet Yellen Press Conference, the earlier date seems to be too soon to be implemented.  Thus the June FOMC meeting and ensuing statements, will be followed with particular interest by the markets.

There is something of a disagreement among analysts as to what effect the interest rates rise, when it does come, will have on the gold price.  A recent UBS analysis, which looked at the effects of previous U.S. interest rates rises suggested that an upwards move would indeed be negative for gold – with even the suggestion that continuing rises could push the gold price down well below the $1,000 level – disastrous for perhaps around half of the world’s gold mining industry where many producers are struggling to make profits even at current prices.

On the other hand, listening to a panel of gold experts at the recent Bloomberg Precious Metals conference and reading analysis by the major gold analytical consultancies, GFMS and Metals Focus, there has been the suggestion that once interest rate rises begin, they will be seen as being extremely modest with the result that real interest rates will remain negative and that, after an initial downturn, gold will recover quickly and make subsequent gains.  At least once interest rate rises are officially scheduled to begin it should release gold from the ever continuing upwards and downwards moves as economic data suggests that either the Fed will start to raise interest rates soon, or defer such a decision another few months.  Thus it should at least take some uncertainty out of the system.

At the time this article was originally written, the spot gold price had fallen back to around $1165 – a fall of around $12 on the previous day’s COMEX close. With markets closed over the weekend until Asian opening on Monday the price was subdued but pulled back to the $1175 level this morning.  This does suggest that buying does come in at the lower price range – for the moment at least.

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