Christmas seems to have come in early for gold as it finished the week on a strong note, ending a six-week losing streak and bouncing off a fresh 5 and-a-half year low.
After hitting a 5.5-year low earlier this week, Gold prices prepared to end Friday’s session on a very upbeat note, with the metal up 2% during the day.
The magic move happened despite a relatively in-line November jobs report that all strengthened the expectations that the Federal Reserve will raise rates after its monetary policy meeting December 16.
Gold’s rally started in earnest Friday, following the release of November’s nonfarm payrolls report, which was relatively in line with expectations.
Because expectations of a rate hike are close to fully priced into the markets, many investors and traders are starting to doubt whether the U.S. dollar can move higher under current market conditions, prompting them to take profits in their long U.S. dollar positions.
Good news for gold also came in when the Euro rebounded over the announcement of a minimum cut in its deposit rate over the disappointing market by the European Central. The central bank eased its monetary policy, dropping its deposit rate to negative 0.30% from negative 0.20% on Thursday.
The rebound in the euro, following the ECB’s monetary easing that was less than expected, pushed the dollar index down to 97.59, last at 98.30 and that seems to be helping to underpin the metals.
Markets eagerly awaited the US employment report that is likely to be the next directional influence on the dollar and markets generally.
The gold prices recovered after falling to fresh five-and-a-half year lows during Thursday morning trading after Asian participants reacted to the strong US job data from the previous session.
Spot gold was indicated $1,053.20/1,053.50 per ounce, down $0.80 from Wednesday and off its session low of $1,046.40, its lowest since February 2010 – market participants largely expect the US FOMC to increase interest rates this month.
The Bureau of Labor Statistics, on Friday, said 211,000 jobs were created in November, down from October’s upwardly revised number of 298,000; September’s employment report was also revised higher to 145,000, from the previous report of 137,000. The report noted that 35,000 more jobs were added in the previous two months as a result of the revisions.
According to consensus estimates, economists were expecting to see job gains of 200,000.
Over the past 3 months, job gains have averaged 218,000 per month. As expected the unemployment rate held steady at 5.0% last month; at the same time the participation rate was little changed at 62.5%.
As anticipated the U.S. labor market cooled off a little in November after seeing immense gains in the previous month; however, the job growth still managed to slightly beat outlooks, according to the latest employment data from the Labor Department.
It was one of last few data releases before the Federal Reserve meets in two weeks to decide whether to raise interest rates and these reports will play a significant role for the same.
This raises expectation that the Fed has a go ahead signal to increase interest rates on December 16 as long as other things remain steady globally over the next few weeks.
Yellen has been adamant about raising rates before the year concludes, citing concerns over an expedited tightening cycle if the policy-board waits until 2016.
With another two weeks to go before the Federal Open Market Committee meets to discuss raising rates for the first time since 2006 the market remains focused on the expected positive impact such a move might have on the dollar together with the subsequent negative gold impact. Taking a look at the past four rate hikes we actually find that instead of rising, the dollar has weakened in the weeks and months following the first announcement.
While this time round may be different considering the expected diverging trajectories of the ECB and FOMC it nevertheless raises the risk of a correction both on dollar longs and gold shorts. Not least considering the big jump in positioning seen in both markets during November.