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Fears of Emerging Market Meltdown Underpinning Gold Prices

The shift in sentiment in the U.S. Dollar Index suggests that investors believe wage inflation is creeping higher, but it has not accelerated as much as the market was fearing. Gold buyers are currently operating under the notion that the fear of a rising dollar is going to cause a huge rout in the emerging markets and investors are going to need gold to hedge that risk. Crude oil prices rebounded into the close as mixed U.S. unemployment data eased concerns about demand in the world’s top oil consumer ahead of a U.S. sanctions deadline on Iranian oil exports.
James Hyerczyk
Comex Gold

Despite another surge in U.S. Treasury yields on Friday, the U.S. Dollar fell against a basket of currencies after government data for September showed the economy added fewer jobs than expected. Wages increased last month, however, they slowed on an annual basis. This indicated to some dollar bulls an easing of concerns over a potential spike in inflation.

On Friday, the December U.S. Dollar Index settled at 95.305, down 0.107 or -0.11%.

To recap Friday’s key economic release, the headline grabbing nonfarm payrolls increased by 134,000 jobs in September, the fewest in a year. However, data for July and August was revised to show 87,000 more jobs added than previously reported. Average hourly earnings rose 8 cents, or 0.3 percent, in September after rising 0.3 percent in August. The unemployment rate fell from 3.9 percent to 3.7 percent.

The key issue for U.S. Dollar investors was with the average hourly earnings figure. In September 2017, wages increased 0.5 percent. When the September 2018 figure came in below this figure, it lowered the annual increase in wages to 2.8 percent in September from 2.9 percent in August. It was still the biggest annual rise in more than nine years.

The shift in sentiment in the U.S. Dollar Index suggests that investors believe wage inflation is creeping higher, but it has not accelerated as much as the market was fearing.

Bullish U.S. Dollar investors were looking for some kind of confirmation that wages were rising at a faster pace, however, this was not the case last month.

Gold

The price action in gold on Friday indicated that investors were paying more attention to the weakness in the U.S. Dollar rather than soaring Treasury yields which hit multi-year highs on Friday. Not only did gold finish higher on Friday, but it also settled the week up 0.79% at the same time the U.S. Dollar posted a 0.60% weekly gain. This suggests a decoupling of the two assets.

While rising Treasury yields tend to put pressure on non-yielding gold investments, the narrative is a little different at this time. Gold buyers are currently operating under the notion that the fear of a rising dollar is going to cause a huge rout in the emerging markets and investors are going to need gold to hedge that risk.

Crude Oil

U.S. West Texas Intermediate and international benchmark Brent crude oil futures finished the week with mixed closes on Friday. At the start of the session, crude oil prices eased slightly after Saudi Arabia and Russia said they would raise output to at least partly make up for expected disruptions from Iran, due to the sanctions that take effect on November 4.

However, prices rebounded into the close as mixed U.S. unemployment data eased concerns about demand in the world’s top oil consumer ahead of a U.S. sanctions deadline on Iranian oil exports.

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