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).
If US growth slows further in the coming months, expectations of further quantitative easing will likely continue to rise, driving the gold price up with it.
As Spanish CDS levels hit record levels, a balancing factor in the nearterm, is the risk of further Euro weakness if Europe does not quickly find a solution to its spreading sovereign/banking crisis. Ultimately, if US growth slows and further QE is implemented, gold should benefit.
In the week ahead on the data front, Eurozone Q1 GDP will be the highlight, along with retail sales early in the week. It will also be interesting to gauge the Eurozone economic weakness on Germany via industrial production data.
However, the key for commodities markets will be a raft of Chinese data scheduled for release at the back-end of the week, including CPI, industrial production and export figures.
ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
