Weekly Gold Update – Gold In Dollars Lower Despite Poor US Jobs and Other Data

Gold in US dollar terms ended the week down 0.75%. Gold’s decline was likely primarily due to a stronger US Dollar Index (USDX) which was up 1.1%.

Gold rose after the worse than expected non farm payrolls on Friday before reversing the gains and then bouncign to close the day marginally higher. US job growth increased less than expected last month with the US economy adding just 164,000 jobs in April. This was less than the 193,000 jobs expected.

The USDX started the week strong, and once it pushed past its 200 dma in early trading Tuesday, both gold and silver were unable to hold up with selling pressure in the futures market.

A stronger US dollar came despite a backdrop of weakening economic data, US Pending Home Sales, ISM PMI, and the Non Farm Payrolls on Friday all came in below expectations.

The US economic outlook is clearly deteriorating but it appears to be still outperforming it’s global peers including the struggling UK and fragile EU. This served as a reflection point, as traders recognised the relative US strength and bid up the dollar, squeezing the long standing shorts out of the market. However, while a strong dollar is traditionally not a friendly environment for the precious metals, on-going uncertainty in the stock and bond markets have served to limit the downside in gold this week.

For holders of gold in EUR and GBP and other fiat currencies, many say gains with EUR and GBP gold buyers seeing their holdings gain in purchasing power by 0.7% and 0.9%, respectively.

On monetary policy, the Federal Reserve left rates on hold Wednesday, and acknowledged building inflation pressures, signalling their willingness to allow inflation to move around their 2% target ‘symmetrically’. In addition, they removed the wording “The economic outlook has strengthened in recent months”, perhaps in response to the weaker than expected economic data.

So with inflationary pressures building, and economic growth slowing, one has to ask how long the Fed can stick with their ‘dot-plot’ for future rates hike particularly when the Central Banks of Europe, UK, China and Japan are looking to reverse the tightening course and in some cases outright ease.

Perhaps this admission by the FED on a higher inflation, lower growth environment outlook is acknowledging the fact they will need to realign to global policy sooner rather than later.

Geopolitical risks have eased since last week’s symbolic meeting between the North and South Korean leaders. The stage is now set for the US to meet with the North Koreans later this month in the Demilitarized Zone (DMZ). However, tensions still persist in the Middle East with almost daily events occurring in Syria and Iran with little or no reaction from the markets so far.

It’s almost as if the world has become slight desensitized by the uncertainty and risks in the region. However, the Middle East remains a power keg and should there be a significant escalation in the region, gold will quickly erase any short term weakness and catch a safe haven bid in a heartbeat.

There were bullish developments in the latest Commitment of Traders (COT) report, released for the week ending Tuesday May 1st. Large speculators (historically the dumb money) reduced their net long position in gold by 29,867 contracts, while the commercials (historically smart money) reduced their net short position by an almost identical amount of 29,928 contracts.