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Gold Stages Huge Reversal, Here's Why




Gold staged a HUGE reversal in wake of today’s official US jobs report.


Heading into the data, market’s were enjoying heightened risk appetite (a result of 1) yesterday’s vaccine optimism, 2) yesterday’s strong US data 3) reassurances of further stimulus following FOMC minutes last night and 4) positive news that the US Congress is heading towards more fiscal stimulus), weighing on the precious metal.


I wake of the solid data (4.8mln jobs added in June, vs expectations for 3mln), we saw an immediate extension of these risk on flows, and thus gold was pushed to fresh lows of the day around $1758.


However, the gold bulls quickly regained composure and the precious metal quickly began to pick up. In less than one hour, gold was back at highs of the day around the $1775 level, an impressive, more than $15 turn-around (a few years ago, moves like these would have been considered insane).


The precious metal is enjoying even more support now, as risk appetite takes a turn for the worse following the latest US Covid-19 numbers.


But, nonetheless, the question remains, why the turnaround?


1) Strong data, but a long way still to go


Yes, today’s data was strong, but a serious dose of caution is warranted when adjusting your outlook for the US economy;


ING note that “even after today’s strong payrolls growth we have to remember that total employment is still 14.66mn lower than it was in February. So far extended unemployment benefits, including the US$600 per week Federal boost, are supporting incomes, but there are questions as to what happens after 31 July when this is currently scheduled to end?”

“We are becoming nervous about the July jobs figure, which could disappoint markets.” They note today’s somewhat deflating jobless claims numbers, which showed that over the course of the last week, 1.427mln Americans had filed for unemployment benefits for the first time, and 19.29mln are still claiming.


“Meanwhile, the Homebase data report suggests the small business sector has been shedding jobs since 18 June. One possible explanation is that many small businesses that took advantage of the loan forgiveness aspect of the Paycheck Protection Program have exhausted the money. In this regard, the National Federation of Independent Businesses reported 14% of members that took advantage of the scheme are expecting to fire staff in coming weeks given demand has not returned to pre-Covid levels.”


Basically, diminishing support for business in July might mean we get an ugly surprise in July’s data, and that’s not even mentioning the impact that the worsening Covid-19 pandemic might have on the US economy next month.




2) Dovish Fed vibes still fresh in the mind


All the while, traders still have the dovish message given off in yesterday’s FOMC minutes of the June 11th meeting fresh in the mind.


To sum up, yes the economy is improving at a slightly better than expected rate, but unemployment is still well above 10%, a huge increase on how things were back in February. Pretty much, the US economy still has a long way to go on the road to recovery and the Fed know this, that is why their message is more stimulus to come rather than less. Be that yield curve control, or outcome-based forward guidance, more stimulus is coming.


I feel like I say it every week but again, gold LOVES central bank stimulus, especially from the big daddies at the Fed.


These two factors combined appear to have kept gold traders in a buy the dip mentality. Expect bargain fishing (i.e. dips buying) to continue in the months/weeks ahead. 


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