LAWRIE WILLIAMS: Big gold and silver takedown on ADP employment report
We said that the gold price was likely to be data driven, but the magnitude of the setback for gold and silver following the latest ADP private sector employment report still took us a little by surprise. The subsequent price falls for precious metals may have been too far too fast as markets often tend to over-react, but if the private sector job gains are confirmed by today’s official government employment data release, we could see further price weakness. The ADP report indicated that 978,000 jobs were created in May, which significantly beat consensus expectations of around 645,000 new jobs. However this does come after hugely disappointing April figures which may well, in their turn, have led to some of the recent precious metals strength.
There were also positive PMI data released Thursday, and the dollar index gained as well, so markets breathed a sigh of relief that the U.S. might be recovering from the virus pandemic more rapidly that had previously been envisaged. Even so the Dow was marked down at its opening and was quickly followed downwards by the other major stock indexes. It looks, therefore, as though an economic pick-up ahead might not be viewed quite so positively by the major market indexes. They have thrived throughout the pandemic related downturn, but conversely may be looking to return to normality if things really are getting back to anywhere near normal.
So far the gold price has been stabilising around the $1,870 mark and if this holds we should see a new base developing from which gold could once again attack the $1,900 resistance level. Indeed given past performance around other presumed psychological resistance levels, this would seem to be the most likely forwards scenario. The dollar index has turned slightly stronger, which has adversely affected the whole precious metals complex, and led to a slight weakness appearing in global equities.
As we have pointed out before, precious metals price strength, and renewed gains, will very much depend on whether the U.S. Federal Reserve will stick to its guns on keeping interest rates near zero (and effectively negative given they remain below the inflation rate) and continue with its bond buying programme. This will become clearer after the next FOMC meeting in just over 10 days time, but we suspect that although a possible tapering initiative will come under discussion, the U.S. central bank will hold firm on its current interest rate and QE programmes.
However, the very fact that such an agenda may be talked about by the meeting participants could move markets.. Anything suggestive that the Fed may bring its current easy money policy under consideration ahead of its stated timescale, however remote, will be seized on by the markets and perhaps lead to a small reversal in equity prices and positive moves marginally upwards in gold and silver. Whether this will create enough momentum to bring gold back above $1,900 and silver back to $28 is a little less certain, but one can rest assured that the potential for rising inflation, and possible Fed moves to combat it, will remain a subject of strong interest to the markets.
The latest data pointing to perceived gains in the job creation sector will encourage the Fed to believe it is following the right policy in what it considers its principal priority in bringing unemployment down to its pre-pandemic level. However it still has a way to go to achieve this, and until it does so we see it as unlikely to change Fed policy unless it sees inflation as rising out of control. It does not appear to be at this stage yet so we see the current easing and ultra-low interest rate programme as likely continuing. As long as real interest rates stay where they are this will remain positive for gold and silver, which we see as resuming their upwards paths before too long.