2011-07-09

Gold price surged higher to $1,544

The gold price surged higher to $1,544 per ounce higher Friday closing after the release of June’s dismal jobs report. After trading lower earlier, the price of gold spiked higher on the news that a mere 18,000 nonfarm payrolls were created last month – versus expectations of 105,000. The unemployment rate ticked up to 9.2%, higher by 0.1% versus the previous month. Both gold and silver moved lower heading into the jobs data, then ramped as the news hit the tape. S&P 500 stock futures swooned, falling 14.80 to 1336.90.

Employment data remains a crucial determinant of Fed policy, a fact outlined repeatedly by Chairman Bernanke and his colleagues. As long as the jobs market stays tepid, the Fed’s zero interest rate policy will likely stay intact. The central bank is betting that the wealth effect from higher asset prices will spark an economic recovery. However, savers are not only receiving no interest on their deposits, but after accounting for inflation, the purchasing power of their cash in the bank is eroding. This has driven the surge in investment demand for gold and investments tied to the gold price.

Goldman Sachs offered a similar take on the outlook for the gold price and interest rates. In a note to clients, the firm wrote that “We expect the low US real interest environment, combined with continued Central Bank buying will continue to provide support for gold prices in 2011.”

In light of its outlook, Goldman Sachs raised its three-month gold price target to $1,565 from $1,480 per ounce; its six-month target to $1,635 from $1,565 per ounce; and its 12-month target to $1,730 from $1,690 per ounce.

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