2012-10-09

Recent sell-offs in gold have been muted by the extremely accommodative monetary policy

The gold price was weighed down on Monday by a stronger U.S. dollar as financial markets continued to digest the impact of last Friday’s better than expected U.S. employment report.  The spot price of gold fell $12.94, or 0.7%, to an overnight low of $1,768.34 per ounce, but pared its decline this morning as it bounced back to near $1,775.  The U.S. Dollar Index advanced 0.4% to 79.612 as markets around the world moved into risk-off mode to begin the week.

While the gold price advanced to an 11-month high of $1,798.03 last week, it turned sharply lower after the non-farm payrolls data showed that the U.S. unemployment rate fell to 7.8% – its lowest level since January 2009.  Although a portion of the improved jobs report was due to more workers dropping out of the labor force, the encouraging data was also the result of a better hiring environment in recent months.

Nonetheless, the recent sell-offs in gold have been muted by the extremely accommodative monetary policy environment that central banks around the world have maintained.  In particular, the Federal Reserve affirmed last week that it intends to maintain its quantitative easing programs even as the U.S. economy improves so as to not subdue the recovery.
Commenting on the implications of the jobs report for the gold price, Citigroup analyst David Wilson stated that “If we get slightly better U.S. data going forward, which gives more support for the U.S. economic recovery, we get a stronger dollar,” which will provide a headwind for the yellow metal.
Wilson went on to say that “Obviously, Europe is still continuing to struggle and that would suggest that the rally (in gold prices) is done for the time being, although I’m not saying gold won’t see more upside further out.”

Edel Tully, a precious metals strategist at UBS, also weighed in with her latest view on the price of gold.  “Although gold has lacked the appetite to overcome $1,800 – it’s clear that the buying momentum evident last month has undoubtedly slowed down – both Friday’s reaction and recovery post (the employment report) highlighted that sellers lack conviction while buyers are prepared to step in during pull-backs.”

“This doesn’t help gold break $1,800, but for sure it highlights that there is little conviction to get out, even if the data isn’t supportive,” Tully added.  “This highlights gold’s supportive backdrop.”

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