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Daily Nugget – US Job Data affects on the gold price

Following a sharp increase of over $50/oz in the first 2 weeks of the quarter, the gold price is now steadily holding above the $1,300/oz mark. The price is slightly under pressure following strong US jobs data.

Gold is finding some support from the geopolitical tensions in both Ukraine and the Middle East, as well as weak global economic data.

The World Bank recently announcing its global growth forecast for the year would be a mere 4.8% rather than the 5.4% predicted. Other banks then followed suite by lowering their global forecast too. HSBC lowered theirs from 2.6% to 2.4%.

This was due to, “Bad weather in the US, tension in the Ukraine, the slowdown in China and political strife in countries such as Turkey will all delay an expected pick-up in activity, the bank said in its half-yearly Global Economic Prospects.”

This will now mean a third year of sub-5% growth in the developing world, which is thought to be insufficient in meeting the aim of eradicating extreme poverty by 2030.

Pressure on the gold price

After last Thursday’s stronger than expected US job data where unemployment fell to 6.1% from 6.3% in May. Speculators seem to be once again considering an imminent rise in US interest rates. So far the FOMC has shown little concern for low interest rates but have hinted that they may be put up this year.

As gold is non-yielding, an increase in US interest rate shifts investors from gold to dollars and, therefore, could arguably lead to a fall in gold price. Interest rates, according to some academics can have a greater impact on the price of gold than inflation or deflation rates.

In the meantime, US bond-yields have begun to climb, thanks to the strong jobs data. Bond yields are often seen by speculators as indicators of future FOMC decisions.

Last week the European Central Bank also confirmed that interest rates in the Eurozone would remain low for the foreseeable future. Gold has traditionally been positively correlated with the euro.

Fixing the gold fix

The World Gold Council (WGC) have stated that a thorough review and reform of the gold fix is needed. As we have argued previously, there is a distinct lack of independent overview and transparency over trades in the fix which is causing wide spread speculation that the five inclusive banks who are rigging the market. Such concerns have led to Germany’s Deutsche Bank pulling out of the fix earlier this year, due to ongoing investigations from German regulator BAFIN.

The gold fix is a benchmark price that influences trading in the precious metal markets and is agreed twice a four banks in London via a telephone auction. The process has changed very little since it was introduced in 1919 and is therefore now seen to be easily to manipulate.

In May, the FCA fined Barclays £26m after a trader at the bank attempted to rig the price in an attempt to profit at a customer’s expense, creating fake orders in an attempt to drive the price lower.