Gold Ended Sharply Higher as U.S Jobs Data Disappointed Investors and Boosted Safe Haven Appeal
| 06 Dec 2010 | 1st resistance | 2nd resistance | 3rd resistance |
| Today’s resistance US$ | 1424 | 1433 | 1453 |
| | 1st support | 2nd support | 3rd support |
| Today’s support US$ | 1394 | 1374 | 1364 |
| Today’s pivot point US$ | 1404 | | |
The Day’s Story:
Gold rose sharply higher and closed at its session high on Friday as U.S Non-Farm Payroll report disappointed investors by painting a grim picture of labor market. Gold's safe haven appeal was boosted soon after the jobs data was released as dollar nose-dived with the outcome. Dollar weakness provided further support for gold prices to push closer to its all time high. Gold prices rose for most part of this week, climbing over 3% making it the biggest weekly gain since April mainly due to European debt contagion fears, grim jobs outlook in U.S and fund buying in commodities across the board. Friday’s jobs numbers have opened the debate for another round of monetary easing; if that happens then no other asset but gold will be an absolute winner due to its status as a hedge against inflation and currency devaluation. Gold futures for immediate delivery could not finish above their previous highest close but spot gold finished at its highest level breaking past its previous all time high close of $1409.2 an ounce set on November 8th.
U.S indexes extended their gains from previous session after spending most of the session in negative territory. Stocks staged a comeback in final hour of Friday’s session as investors moved away from the disappointing jobs numbers and focused on what policy decisions could be adopted following the disappointing figures. The Dow Jones industrial average soared 20 points or 1% to close at 11,383. The S&P 500 jumped 3 points or 1.3% to 1,224. The NASDAQ added 12 points or 1.2% to 2,591. Stocks responded to shocking jobs numbers according to Non-farm payroll report which revealed only 39000 jobs were added in November against an expectation or around 160,000. Unemployment rate rose to 9.8% as a result which had been steady at 9.6% for last many months. Report clearly suggested that U.S economy was not out of the woods and recovery is still fragile. Some other positive data helped calm investors nerves later in the day with separate government report revealing less than expected fall in factory orders, dropping 0.9% against an expectation of 1.3%. The numbers followed a 3% gain in September. The ISM’s November index on manufacturing activity rose to 55.0, beating expectations. Stocks in Europe had a mixed close with Britain's FTSE 100 falling 0.4%, the DAX in Germany fell 0.1% while France's CAC 40 ticked up 0.1%.
In a separate development, Chinese official news agency reported on Thursday that as part of its battle with inflation, China will move to a more "prudent" monetary policy stance next year, the nation's Political Bureau said. China has already hiked its rate in October and raised Reserve Requirement ratio for its banks twice in November in order to curb rising inflation. More steps are expected from Chinese Government in coming weeks and months in order to cool things down a bit.
This week’s economic calendar is fairly light, with the trade balance and consumer confidence out on Friday. Consumer confidence could be given more credence, in a way to compare some of the early views toward holiday spending. European debt problems which were offset by some important economic releases last week may come to forefront once again. Bullion will remain well supported due to ongoing European debt saga and fresh talks about possible FED’s move after Friday’s job report and we expect it to land in uncharted territory in coming sessions. Although China’s move to stabilize inflationary pressure is bearish for gold as it reduces its appeal as a hedge against inflation but analysts believe any such move will not hurt gold prices to a great extent in medium term.
U.S. dollar index ended sharply lower against basket of six major currencies making it a 3rd straight day of losses. Dollar came under extreme pressure after Friday’s report as talks of QE3 started circling around as a possible move by FED to improve job situation which has been the biggest hurdle on the way to sustain recovery. Dollar was also affected by ECB’s Bond buying program to help Euro zone’s debt situation and common currency. Any relief in euro crisis, similar to what were seen during later part of last week, will push the euro higher and the dollar lower and be good for gold, as the two move inversely to each other. If a debt crisis flares up again and default is floated as an option for some countries, the euro could plummet in value and take gold with it. Safe haven buying, however, should create a floor of support for gold prices.
Gold and Dollar’s negative correlation turned highly positive on Friday which has had a bumpy ride in recent weeks since European debt crisis drew attention once again.
Recent Price Recap:
Gold price was boosted by Federal Reserve’s $600 Billion QE2 package in early November and crossed above $1400 on November 8th as a reaction to that move. Price peaked to its all time high of $1424 but have since corrected around $100 as some profit taking and book squaring sent prices to early 1300 levels. After entering a shallow correction, gold found support at the back of European debt contagion fears. Further support came as tensions between North and South Korea escalated after North attacked a South Korean Island killing four marines. Gold has cut most of its losses in last few sessions but remain subdued due to concerns that China may raise its interest rate to curb rising inflation. Stronger US dollar also put a lid on gold’s gains but Friday’s jobs numbers proved to be catalyst bullion had been looking for as investors seek refuge in the safety of precious metal and dumped U.S dollar, lifting price within a striking distance of its all time high.
Gold prices could be more volatile towards the end of the year as profit-takers contend with "bargain-hunters" and those wanting to add gold to their portfolio before the New Year. During December, those traders selling
gold future contracts must also deliver physical gold and the longs must pony up the cash which increases
liquidity and volatility in the market.
Yesterday’s Price Action:
Gold price was quiet during Asian trading hours and was capped in a very tight range. Gold investors stayed on sidelines ahead of important Non-Farm Payroll report during early part of European session. Gold price fell to its intraday low of $1384.4 just before the data release. Bullion was boosted soon after the jobs numbers blasting past $1400 just before U.S market open. Gold continued its upward momentum during U.S session as safe haven demand pushed prices close to its all time high. Gold finished its day with 2.3% gains at $1413.9 an ounce, its session high and highest close ever.
Other Metals:
Silver futures for March delivery closed up 70 cent to $29.27 an ounce on Friday.
Platinum futures for January delivery rose by $15.40 to $1,728.50 an ounce on NYMEX.
Palladium futures for March delivery rose by $6.40 to $770.10 an ounce.
N.Y. Copper for March delivery closed up 2 cents to $4.00 a pound on Friday.
Gold (News and Views):
February Comex gold closed up $16.90 at $1,406.20 an ounce on Friday. The London P.M. gold fixing was $1,403.50 on Friday compared to its previous P.M fixing $1,389.00. The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings rose to 1293.891 tons on December 01 up from 1286.603. The dollar index, which measures the U.S. currency against a basket of six major currencies, fell 1.13 to 79.13 on Friday. Crude Oil for January delivery fell $1.19 to $89.44 on Friday on New York Mercantile Exchange. Gold hit its true peak on Jan. 21, 1980, when it rose to $825.50 an ounce. Adjusted for inflation in 1980 dollars, that translates to an all-time record of $2,184.08 an ounce, in 2010 dollars. Speculative trading activity in some Commodity Futures Trading Commission reports shows these participants increased net-long positions in gold and silver, halting a slide seen in the past several weeks. The amount of gold held by physically backed exchange-traded products around the globe has hit a record high, say analysts with Barclays Capital. The ETPs tracked by Barclays climbed 5.1 metric tons Thursday to a fresh peak of 2,151.20 metric tons, the bank says.Factors Affecting Gold Price Yesterday:
"The employment data today makes it more likely that the U.S. Congress is going to have to extend unemployment insurance and the tax cuts. The market sees that as more deficits spending, creating a more positive atmosphere for gold because the dollar is going down on it," said Tom Pawlicki, precious metals and energy analyst at MF Global.
Pawlicki said the job report hardened the view that the Federal Reserve would stick to or even extend its $600
Billion bond-buyback program to stimulate growth.
On Friday, however, “the flight-to-safety is alive and well,” said Frank Lesh, a broker with Futures Path in Chicago.
The jobs report and a weaker dollar were the day’s dominant influences, though gold could make more strides as concern about European sovereign debt hasn’t dissipated.
“It’s just simmering for the moment,” Lesh said.
After the disappointing read on jobs, traders were quick to think that “recovery is not around the corner” and, in turn, sought gold, said George Gero, vice president at RBC Wealth Management, in emailed comments.
Gold futures surged following a disappointing U.S. jobs report that showed non-farm payrolls rose only 39,000 in November, when expectations were for a gain of around 150,000. A trader said the data was the catalyst to push gold prices through $1,400, although in the initial minutes after the report, the metal dipped from that region. “Gold is reacting to the sell-off in the dollar,” says another observer, Olympus Futures senior market strategist Charles Nesoss. In fact, the dollar index has fallen below its 10-day moving average for the first time since Nov. 25, he adds. “That has been pretty good support, and we cut through it this morning,” Nedoss says. Gold could rise further if the dollar index falls through its next chart support around 79.25, he says.
Gold is also supported by lingering concerns that the Euro zone debt crisis could spread to Spain and Portugal.
"The underlying issues haven't really been resolved and there's a general view that one way of resolving them is for the ECB to have a more accommodating monetary policy which is gold supportive," said Mitsubishi analyst Matthew Turner.
Gold Future Outlook:
Comex gold was buoyed when a weak U.S. jobs report spurred more safe-haven buying Friday, says a research note from MKS Finance. There may be more gains to come, MKS says. “As gold broke substantially above $1,400 today, helped by disappointing U.S. employment data, we would expect the yellow metal to edge higher next week, lifted by instability in the forex market and concerns over the possible contagion of the euro-zone debt to more countries,” MKS says.
"How much higher do we go when every other commercial on TV or in print publications talk about the importance of buying or selling gold," says Sam Stovall, chief investment strategist at Standard & Poor's equity research division. "Our view from a technical perspective is that we could eclipse the $1,500 [level] in the next couple of months and longer term we don't think that $2,000 per ounce is out of the question."
“It’s really not good news,” said Bart Melek, Global commodity strategist with BMO Capital Markets in Toronto. “It’s certainly positive for gold, though.”
Melek said the lower-than-expected jobs data might silence some of the critics of the Federal Reserve’s second
Quantitative Easing program. Because of that, the dollar might come under a little more downside pressure, he said, which will also assist gold’s rise. The dollar has come under pressure this week because the European Central Bank has been buying up bonds to quell concerns in the market about solvency of certain member states after Ireland received a bailout of its banks recently.
The worries about U.S. employment are likely to linger into next week and that could let gold retest its recent high of $1,426, Melek said.
Peter Thomas, director of business development at PFG Precious Metals, which sells sovereign coins and bullion, said now that the gold market has reached $1,400 there’s a bit of “now what” view. “A year ago we thought prices would hit $1,400 and they have. Now people don’t know what to think,” Thomas said.
He said investors are going to likely take some time to consider what to do next, which could lead to some sideways trade at these levels.
On the physical side, demand for coins and bullion is “rock solid” with few year-end sales to offset purchases. Normally at this time of year he would see customers look to book profits on metal bought earlier, but there’s hardly any of that happening, he said.
Because of the strong physical demand he doesn’t see prices dipping into year end. “We could go into 2011 at these levels,” Thomas said.
George Gero, vice president at RBC Wealth Management is looking for a wide range of $1,350 to $1,425 as traders may choose to allocate their assets on dollar weakness. He also pointed out that price swings on Friday can be deceiving as traders must even out their positions, cover shorts, and volume could be light.
Technical Analysis (By Phil Smith):
The upper Bollinger Band stopped gold quite effectively on Friday as you can see.
Importantly the weekly target from the longer term Fibonacci Projection is closer than the daily. See the weekly chart projection at 1,454 which we have already all but achieved.
Turnover has come right down so the market does not have legs. Falling turnover is coming alongside what might be a head and shoulders pattern forming on the daily chart. I’ve marked this with orange dots on the second chart and have drawn in the neckline. The target for this pattern, if it completes by dropping past the neckline is around $1230.
The correlations for gold normalized i.e. high negative with the dollar and high positive with the stock markets. But now the high negative with the dollar is coming off just as it is with oil.
Daily Gold and Silver Expected Range:
Gold: US$1398- $1430
Silver: US$28.83 - $30.10
