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Gold Prices Retrace on Jobs Data

Release Date: 
Friday, November 2, 2012

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The price of gold fell sharply on Friday on better than expected U.S. employment data. Gold was $31 lower for the week, settling at $1685.00 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.25 lower, closing at $31.92 per ounce.

The U.S. economy added 171,000 new jobs in October, versus economist forecasts of a 125,000 increase, causing the dollar to move higher. The unemployment rate, obtained by a separate survey, rose one-tenth of a percentage point to 7.9%. "You're in that stronger dollar environment once again that's weighing on commodity prices across the board," said Dave Meger, director of metals trading at Vision Financial.

Gold traders are the most bullish in 10 weeks, with eighteen of twenty-seven analysts surveyed by Bloomberg expecting prices to rise next week. “Gold prices at current levels may elicit demand for gold coins by retail investors given recent declines,” said HSBC analysts led by James Steel.

The improved job data is unlikely to reverse the Fed's commitment to current monetary easing. "When you dig deeper into it, it's still not a robust number by any means," Charles Schwab fixed income strategist Kathy Jones said. "We're way short of where we need to be to bring down the unemployment rate to where the Fed would like to see, closer to 6 percent than 8 percent."

“It’s the right time for gold,” agreed Jamie Carrasco, an investment advisor with Macquarie Private Wealth. “In an environment where paper is getting devalued, it makes a lot of sense to own gold as cash,” Carrasco said. “I’m just protecting my purchasing power.” Carrasco added that people shouldn’t worry about how high the price will go. “Gold isn’t moving,” he says. “Currencies are declining.”

Pierre Lassonde, chairman of mining company Franco-Nevada, noted the emerging markets central banks are again net gold buyers, as they have been “relearning that all paper currencies are suspect.” Today, “cash is trash,” he said, with the value of euro, dollar and yen in question.

Stephen Lingard, managing director of Franklin Templeton Multi-Asset Strategies, said that with continued deficit problems in Europe and the U.S. and a threat of a Chinese slowdown, gold may rise. “Gold is a great hedge in this environment and that’s why we’ve seen such strong performance over the last few years,” he said. Lingard said investors should consider placing up to 10% of an investment portfolio in the metal.

After a recent string of disappointing corporate earnings reports, Eugen Weinberg, global head of commodities research at Commerzbank, said early in the week that "gold is holding up well due to a higher risk perception, because gold is often perceived as a safe haven.” He marked a key support level at $1,700 per ounce. "People are more negative on the economy and so are looking for somewhere to park funds."

The price of gold moved slightly higher on Tuesday following fresh stimulus measures from the Bank of Japan. The bank increased its monetary stimulus for the second consecutive month in response to mounting evidence the country’s economy is on the brink of recession. Deutsche Bank analyst Daniel Brebner said the central bank’s actions were supporting the gold price even though the move had been expected.

Brazil increased its gold reserves for the first time since December 2008, adding 1.7 tons last month to 35.3 tons. "If a central bank like Brazil decides to enter the gold market, it will keep buying for a longer time horizon until an optimal share of gold holdings to total asset is reached," said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. "This constant demand is price supportive."

“We expect strong buying by central banks to continue,” said Dan Smith, commodities analyst at Standard Chartered. “They will be encouraged by lower prices and continued worries about inflation and currency risks.” Central banks globally bought 254.2 tons of gold in the first half of this year and purchases could reach 500 tons for the year, the World Gold Council has said.

Global Hunter Securities said that gold prices can surpass $2,000 per ounce by early next year. “The U.S. Federal Reserve, through multiple initiatives and actions, consequently has become gold’s best friend during the past four years,” said strategists Jeffrey Wright and Richard Hastings in a report. And “the commitment from the Federal Reserve to maintain an accommodative policy until 2015…provides a strong foundation for what we expect will be continued gains in gold prices into 2014.”

Peter Krauth of Money Morning Global Resoures said that gold could hit $2,200 per ounce by April or May of next year.

Physical gold dealers in India cited a “notable pickup” in the past couple of sessions amid lower prices there, Barclays said in a report.

“PRECIOUS-Gold hits eight-week low after U.S. jobs data,” Reuters, November 2 2012; “Gold futures extend losses after jobs data,” Marketwatch, November 2, 2012; “PRECIOUS METALS: Gold Below $1700 on Stronger U.S. Data, Dollar,” Wall Street Journal, November 2, 2012; “Gold Traders Most Bullish in 10 Weeks on Stimulus: Commodities,” Bloomberg, November 2, 2012; “PRECIOUS-Gold rises in line with stocks, but gains muted,” Reuters, October 30, 2012; “The best way to buy gold,” MSN Money, October 29, 2012; “Don’t Fear a Normal Gold Correction,” International Business Times, October 29, 2012; “Gold Swings Between Gains and Losses on Physical Demand, Dollar,” Bloomberg, October 29, 2012; “Gold flirts with $1,700: Soft-landing or take-off?” Emirates 24/7, October 29, 2012; “PRECIOUS-Gold holds near $1,710 on global growth concerns,” Reuters, October 29, 2012 “Gold Traders More Bullish as ETP Hoard Sets Record: Commodities,” Bloomberg, October 26, 2012; “Brazil's gold reserves rise for first time since Dec 2008,” Mineweb, October 25, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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