Jobs shocker, US interest rates and ‘sleeping’ gold
Quite suddenly, on June 3, the US Federal Reserve’s much vaunted rate rise for this month or next, and one it had been systematically priming the market for, looked seriously in doubt. Whether US rates go up or not may have little consequence for gold, which appears to be building for a major rally.
The June 3 event was the very poor US jobs number, which sent USD tumbling and saw gold rally.
May Non-Farm Payrolls contradicted expectations for 160,000 by coming in at just 38,000 – the worst number in six years – even excluding the distortionary effects of the strike by Verizon telecoms workers the number would have been around 70,000, a still poor showing. Also, figures from previous months were revised down indicating that jobs growth could be cooling rapidly in the US.
And even though the unemployment rate was only 4.7%, it was largely down to people giving up on finding work. This will surely give the US Federal Reserve pause for thought when it meets to decide monetary policy on June 14-15. Indeed, Fed boss Janet Yellen may give some indication when she speaks later on Monday (June 6). With the UK EU referendum on June 23 coupled with the jobs report, the Fed has two good reasons not to act this month.
The Non-Farm Payrolls number, for June, will be published on July 8, and if it is in a similar ballpark to the May one, then there might not be any rate rise, but if it manages to recover back above 100,000 – it could be back on, unless the Fed indicates otherwise in the meantime.
All this is particularly bullish for gold, which managed to absorb the December rate rise, and has even risen since then. There’s now a possibility that there will be no US rate rise at all this year, especially if the jobs numbers are now on a deteriorating trend. A much softer USD will also give other central banks an extra excuse to maintain if not escalate their ultra-lax monetary policies, another positive for gold.
However, gold’s apparent resuscitation since bottoming out in December 2015 at around $1,050 per troy/OZ might be less in anticipation of inflation, there’s been very little for years now, but because some market participants are anticipating turmoil in financial markets. Numerous prominent traders such as George Soros, have been warning of a market crash and tend to be bullish on gold.
However, there are a number of reasons why gold might not yet be about to take-off. For one, the market is very long on gold and very bullish, which will make upward moves challenging. Second, the Summer period tends to be lacklustre (though not always) for the yellow metal. Third, and slightly longer-term there’s the US elections in November the outcome of which could influence perceptions over GDP growth, jobs and inflation. A Donald Trump presidency would be a wild card seen by some as USD positive and good for gold no doubt due to his recent cavalier remarks about US government debt and the potential to increase geopolitical uncertainty.
Ironically, a good shake-out of the ‘weak longs’ in the gold market might be just what it needs to position itself for a big rally, which could eventually clear its old highs above $1,900.
TECHNICAL ANALYSIS: Gold – rescued by poor jobs numbers
Until the poor US jobs numbers came out on June 3, gold look well established in a short to medium-term downtrend, which would have put support at $1.190-1,200 per troy/OZ in serious jeopardy. As it turned out Friday saw the yellow metal leap to around $1,245.
Nonetheless, a further push upwards would encounter resistance at $1,258, $1,272, $1,293 and $1,304. However, sharp rallies are often followed by retrenchments and sell-offs where support can be seen at $1,190-1,200, $1,185 and $1,155.
On the plus side, the slow stochs have a buy signal and gold has bounced off the lower Bollinger band and for the time being the market appears to be still locked in a consolidation patterns of $1,190-1,304.
But for the short-term bullish scenario to play out, gold will need to at clear resistance around $1,258 or at least hold above $1,200. Important catalysts for this week include Janet Yellen giving a speech this Monday and she may give a reaction on the jobs number and its impact on monetary policy. On Friday preliminary consumer sentiment, which has been quite robust recently, is also likely to be watched. If it shows a deterioration, then this could cheer the gold bulls.
By Justin Pugsley, Markets Analyst, MahiFX