Gold: What A Long, Strange Week

This has been a disheartening week for those in gold and silver investment. Following three consecutive weeks of gains and last week’s best performance since January 2012, the gold price has fallen to a fortnightly low following its worst daily performance since May 17. This is thanks to selling pressure ahead of the non-farm payrolls data later today and optimism over the US economic recovery.

The U.S. Doesn’t Control The Gold Price
This week the World Gold Council released a report which stated that analysts are increasingly using US-driven factors to evaluate the gold price. This is erroneous and instead a ‘dynamic framework’, which includes currencies, inflation and supply-side factors, should be used. However it seems that the report’s sentiments were not echoed by everyone.

At the beginning of the week we saw the gold price remain stagnant as markets awaited US jobs and GDP data, as well as the FOMC announcement. On Wednesday, when we saw a hub of activity, we saw evidence of this singular focus on US drivers and their effect on the gold price.

GDP And Jobs
An uptick in both US GDP and private jobs reports this week appear to have placed selling pressure on gold bullion. Today we expect similar positive data in the non-farm payrolls report. Not only is there purported to be an improvement on last month’s release, but the unemployment rate is said to have dropped from 7.6% to 7.5%.

How this news will affect the gold investment market is up for debate. Analysts appear torn over whether or not the positive data has already been factored in or not. The yellow metal has, however, been sensitive to the data for several months now, even when so much speculation surround it prior to the release.

This evidence which, for many, points to a US recovery suggests that the Fed are likely to start tapering soon. This is despite their non-committal comments on Wednesday evening. Many analysts now see little reason why investors should invest in gold when there is no need for a safe-haven, given the US data.

However, as the WGC say, there are so many other factors in play, all of whose influence and impact on the gold price are always changing. They suggest we pay more attention to investment gold demand as an indicator of the gold price. Last year jewellery and technology accounted for nearly 70% of global demand.

It is also worth noting that while the US is the proud supplier and printer of the world’s reserve currency, it accounts for very little gold demand – just 10% last year, compared to 70% for emerging markets.

Standard Bank attribute a fall in physical demand as another factor for the gold price drop. They cite lower premiums in both Shanghai and India as evidence of this. Whilst India’s import restrictions are likely to place pressure on gold demand, we believe that levels of smuggling and domestic premiums will continue to rise.

Change Is In The Air
As we have reported in recent research pieces, there is a clear change afoot in the gold market. Whilst traders, particularly on COMEX and in London, appear to be inward facing there is an entire continent (Asia) who still wish to buy gold. US payroll data does not matter to individuals outside of the US, or possibly not even to those in the US, they measure gold investment on factors which affect them. Factors such as inflation, real interest rates and how well they can protect their wealth.