How Could Precious Metals React to Non-farm Payrolls?

Precious metal prices rose Thursday after witnessing two days of losses as traders bought gold ahead of Nonfarm Payrolls, a key event from US, scheduled to release today. Gold prices gained near 2% for the month of January while silver prices covered 1.5% gain for the same period as equity markets halted their rally while Chinese demand kept supporting the prices. Precious metal disturbed the 12 year Bull-Run during the year 2013 due to investors luring towards other investment avenues as economic outlook at developed countries improved. Nonfarm Payrolls, the monthly indicator of US job market would be a key event for precious metal prices as it determines the Federal Reserve’s decision to further trim the pace of monthly asset purchase in near future.

Also Read: Spotlight on ECB, BoE and Friday’s NFP Data

Gold prices entered the year 2014 with near 28% losses for the year 2013 while silver witnessed 35% loss for the same year, decline in demand considered to be the main reason for the precious metal’s drop. Though, recently there has been a talk that India, the largest consumer of gold till 2013, is into discussion of lowering the bars for gold imports, a positive for gold prices. India, introduced three hikes in customs duty to a record high of 10% in addition to putting strict regulations for purchases relating to exports. China, the world’s largest consumer of gold, is about to enter into their new year, the year of horse which is auspicious for gold buying, on January 31.

Exchange Traded Funds (ETFs) continued witnessing selling pressure as SPDR, the world’s largest gold-backed ETF registered its first outflow for 2014 yesterday, making its holding to test five year low of 793.121 tons. Last year the fund witnessed the decline of 500 tons in gold holdings, first annual reduction in their holding since its launch in 2004. Gold ETPs witnessed only six out of 52 weeks of net buying during 2013, with 869 tons of outflow for the same year. Silver, also witnessed nearly the same amount of ETP holding liquidation during 2013 with 870 tons.

Various global banks have started signaling the weakness of gold prices. Bank of America Merrill Lynch cut its average 2014 forecast for gold prices by 11% to $1,150 an ounce on Thursday. Barclays, MKS Group and HSBC were amongst others who also signaled further reduction in gold prices.

US economics has been taking the center stage since the Federal Reserve’s announcement of tapering. The central bank of world’s largest economy reduced the monthly asset purchases by $10 billion to $75 billion, a sign that US economy is improving which in turn signals decline in safe haven demand for precious metals. As per the recently released minutes of FOMC meeting held on December 17-18, the day of tapering announcement, majority of FOMC members were in the support of the tapering, although further tapering is only dependant on incoming economic data, the labor market conditions and inflation expectations, which further increases the importance of labor market indicators and inflation numbers.

ADP employment change data, released on Wednesday, which market participants view as guidance to the US Labor Department’s nonfarm payrolls, was much welcomed as it signaled improvement in US labor market. The release signaled a huge rise into the private sector employment change to the tune of 238K surpassing the previous revised figure of 229K and the market forecast of 199K. Yesterday’s US Jobless Claims’ data also indicated improving job market in US by tipping below forecast and prior revised figure. US Nonfarm Payrolls and Unemployment Rate, scheduled to release later today, is expected to signal a halt to improving US labor markets. Nonfarm Payrolls indicates an addition of 196K new jobs in December as compared to an addition of 203K jobs during the month of November. Unemployment Rate is expected to remain at 7.0%.

The improvement in jobs data released so far fuelled market expectations that US Nonfarm Payrolls can surpass the consensus figure. Further, as the Federal Reserve has said that the future of tapering monthly monetary stimulus is depended on incoming economic data and labor market conditions, a strong employment signal can fuel renewed concerns that Federal Reserve can further trim the pace of monthly asset purchase in its next FOMC meeting scheduled for January 28-29. This move can provide additional strength to the US Dollar and reduces the safe haven demand for precious metals. Should the data matches consensus of decline, precious metal prices can gain a short-term support. Market participants should wait for the actual release of US Nonfarm Payrolls and Unemployment rate in order to better forecast near-term outlook for precious metals.

Original Article: Admiral Markets