Gold Heading Into Payrolls

It’s been another frustrating start to the year for gold investors. After racing up to and temporarily above the USD $1300oz mark in late January, the market has largely been in retreat, crashing below USD $1150oz by mid March.

The price of the yellow metal bounced back USD $1200oz week after the FOMC meeting, and a pause in the USD rally, though gains were capped around the USD $1220oz mark, with the market now some $35oz lower than there.

The price action isn’t entirely surprising in light of the confusing data we’re getting regarding the US economy, and the confusing lead from the Fed.

As to the former, with the exception of payrolls, US data has been overwhelmingly weak this year. Retail sales, durables, personal spending, industrial production and the like have all disappointed, yet payroll growth has been strong, and the unemployment rate continues to decline.

Indeed Bloomberg’s Economic Surprise Index for the US is almost back to early 2009 lows, which, if past is prologue, would suggest sharply declining US growth (if not a recession), something the Atlanta Fed projections would also indicate, with current Q1 growth forecast to be just 0.2%. Two months ago, they thought the number would be closer to 2%. You can see how their projections have declined over that period with the image below.

As to the Fed, officially they’re no longer ‘patient’, yet they’re still clearly dovish, with many market participants now expecting a Fed rate hike to be delayed to September 2015 at the earliest, whilst the more bearish analysts don’t think we’ll see any hikes until 2016, with QE4 a possibility too.

As to how this affects gold, it depends on what time frame we’re looking at.

Obviously, long term I’m a secular bull, as I think in the coming years there will be an eventual realisation that there is no easy way out from the 50 year credit binge we’ve been on in the developed world, and that the free lunch central banks are trying to give us actually has a price tag. When that happens, it’s only natural investors will increase their allocations to the asset at the bottom of Exeter’s pyramid.

Short-term (an area that is not my forte), with CFTC positioning showing huge net short positions for speculators, I think we might see another run back toward USD $1200oz.

Obviously a payroll number that blows it out of the water will invalidate that thesis, but unless that occurs, I wouldn’t be surprised if those long the metals get a little golden egg over Easter!