A rally in gold exchange traded funds on Friday after the weak May payrolls reports hints at what may lie ahead for the precious metal.
Gold prices climbed back above $1,600 an ounce as the jobs disappointment raised expectations of additional quantitative easing from the Federal Reserve. [Gold ETFs Jump 4% as Metal Tops $1,600 an Ounce]
In particular, it is interesting to note the strong immediate positive reaction of the gold price to the weaker than expected US May nonfarm payroll data (69K vs 150K expected) reported on Friday.
In the first few hours after the report the gold price surged 5%, breaking through the key barrier of $1,600 an ounce.
It appears that investors are taking the view that weaker than expected US growth will cause the Fed to move ahead with further quantitative easing, or QE (this view is supported by comments by Fed Boston president on Friday highlighting the Fed’s mandate to ensure full employment).
Over the past few years the gold price has tended to have a strong positive correlation to perceptions of potential US quantitative easing as gold is viewed as one of the few hedges against US dollar debasement (i.e. a fall in the real purchasing power of the US dollar).