(Kitco News) - Gold prices rose to six-month highs on Thursday after the market received the news of new monetary stimulus from the European Central Bank, but now the market awaits the results of another key event, the monthly U.S. non-farm payrolls.
The report detailing the August employment situation is slated for release at 8:30 a.m. EDT Friday. Private estimates of payroll growth vary, but a survey of analysts by MarketWatch expects that 120,000 new jobs were created and that the unemployment rate will stay at 8.3%. In July, 163,000 new jobs were formed.
Gold prices pushed above $1,700 an ounce in overnight trading in anticipation that the ECB would either cut interest rates and/or announce stimulus measures. The bank left rates unchanged at 0.75%, but ECB President Mario Draghi announced an “outright monetary transaction” plan, which would allow the ECB decide when to start, continue or suspend bond purchases.
In a press briefing after the ECB meeting, Draghi said this plan allows the central bank “to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro."
The bond purchases would be “sterilized,” meaning that the amount of money put into the market via bond buys would be taken out taken out of the system in equivalent measures by other means. Also at the meeting, the ECB lowered its forecast for European growth.
Since Draghi spoke, gold prices came off of their six-month high, but have held above $1,700.
Comex December gold futures were up $13.20 an ounce at $1,707.20 as of 11:15 a.m. EDT
Part of gold’s retracement might be tied to the U.S. dollar rising at the time, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. During Draghi’s news conference, other U.S. jobs data were released which gave the dollar a boost. Weekly jobless claims fell by 12,000 to 365,000, the largest in more than a month, and payrolls-processor ADP said private-sector job growth in August was the highest in five months.
The combination of the U.S. jobs figures and the ECB’s downward growth revision helped the U.S. dollar recover from earlier weakness, Chandler said. Thursday’s jobs data reinforces his expectations that Friday’s monthly payrolls report from the Labor Department will more in line with July’s higher-than-expected jobs growth.
“The ADP data pushes in this direction, though (ADP’s) month-to-month track record is not great,” Chandler said.
There is heightened interest in Friday’s payrolls data because it comes on the heels of Federal Reserve Chairman Ben Bernanke’s speech at Jackson Hole, Wyo., where he said quantitative easing could play a role in reducing unemployment, a situation he called “grave.”
Market participants have said that depending on the outcome of the report, it may give the Fed additional fodder to embark on more stimulus to help prop up the economy. More stimulus would be bullish for gold and commodities in general. The Federal Open Market Committee, which sets monetary policy, meets on Sept. 12-13, and some market participants said the Fed could announce stimulus as early as next week. That’s why Friday’s report is so critical.
DEBATE OVER FED’S DECISION
Chandler said looking at Thursday’s ADP figures and the weekly claims data, he doesn’t see the need for outright stimulus. “On balance, this still favors guidance adjustment over new asset purchases, we think,” he said, referring to the Fed’s announcement to keep interest rates at historically low levels.
Edel Tully, precious metals strategist at UBS, said Friday’s payrolls data will have a stronger influence over the price direction for gold than Thursday’s ECB action, particularly for gold priced in dollars.
UBS is looking 135,000 jobs to be created and an unemployment rate of 8.3%. If the jobs figure comes in above 150,000, it would be negative for gold prices and the market could fall to the $1,650-60 area, she said. That’s where gold was when it rallied off Bernanke’s Jackson Hole comments.
“The retracement depends on how much above consensus the number is, as arguably a very good print significantly lowers the potential for the Fed to act at next week's FOMC meeting. In that case, gold needs to lose some of its QE premium. A very good result, somewhere close to 200,000 would like leave gold scrambling back to the low $1,600's,” Tully said.
Conversely, if the payrolls data comes out under expectations, then gold could rise on thoughts that QE will be a done deal at next week’s FOMC meeting. The next area of focus for gold would be $1,750, she said.
Robin Bhar, metals analyst at Societe Generale, said the market is pricing in that the Fed will conduct QE, perhaps as soon as next week, so it would take a much higher than expected jobs figure to change that perception. “It’s a slowing economy and it’s not creating enough jobs; it’s a jobless recovery,” Bhar said.
Not only would the jobs figure have to come in far above expectations, say above 150,000, but there would also have to be upward revisions to previous data to call into question the market’s expectation for more monetary stimulus, he said.
Bhar said Thursday’s ECB data helped to spur gold over $1,700, but for the metal to retain those gains, it will need confirmation of stimulus, rather than just talk of stimulus.
“The big catalyst will be the FOMC,” he said.
