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« Our Performance Beats Gold 60 Times Over, Silver 100 Times and the HUI by 771.02% | Main | What Has Barrick Done Right Lately? »

Soft Payrolls and Seasonal Strength Could Lead To Gold Rally

Fed monetary policy has been the most significant driver of gold prices over recent years, and US employment data has been the main driver of Fed policy. Therefore the release of US Non-Farm Payroll data is hugely significant for gold investors and Friday’s release was no exception. We have been bearish on gold prices for all of 2013 and as a result our model portfolio is up nearly 60% year to date. However, there a couple of factors that are causing us to consider the possibility of a significant rally in gold prices towards the end of the year. Whilst our core view is that gold prices will head lower, we see a risk that softer employment data and delay of QE tapering triggers a rally in gold over the coming months.

Let us start by taking a look at most recent set of employment data that was released on Friday. Total nonfarm payroll employment increased by 162,000 in July, which was below expectations and saw a rally in US bonds and gold prices spiking higher. In addition to this the change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000. Although the most recent number missed expectations and we saw some backward revisions, we must keep the big picture in mind. Over the last year nonfarm employment growth has averaged 189,000 per month, much to the satisfaction of Bernanke.

It is this consistent growth that has caused the idea of tapering to be put on the table. Remember that the Fed is not concerned so much with one off sets of data, but more with the overall trend. As the chart below shows, the three month average employment gain has been solid recently.

 The strength in the US economy has no doubt removes any chance of additional QE in the foreseeable future, therefore talk of gold challenging its all-time highs any time soon is premature. However, the street expects the Fed to begin tapering in September, which is now little over a month away. Should we get another soft employment print before then, then there will be pressure on the Fed to delay tapering, at least for a month or two, to ensure that the data is not turning.

Gaining 150k of jobs each month is still good progress and 7.4% unemployment is much better than it has been; but 7.4% is still a high unemployment rate and therefore the Fed will be biased to urge on the side of caution when pulling back on their QE programs. The recovery is still fragile and there is a significant risk that the Fed moves to remove monetary stimulus too soon, whereas there is very little downside in waiting another month or two before tapering.

However, should the Fed postpone tapering in September, the market will overreact and view this as a dovish move from the Fed. For the gold market some traders may incorrectly presume that this means tapering is off the table, QE is back on and gold prices are going back to their old highs. The buying of gold that a delay in tapering could spark would cause a minor rally, which could gain steam given that we are approaching a seasonally strong time for the yellow metal.

The period from September to January has been the time when gold has performed the most over the last decade. Granted, the last decade was a bull market which we are arguably no longer in, but even so, we feel this could be a driver of a relief rally in gold – even if all it does is increase bullish sentiment.

Technically speaking, the $1350 resistance level held for gold this week and we would not expect gold prices to rise up through that level unless tapering was delayed or US economic data took a turn for the worse.

 We would also note that the MACD appears ready to make a bearish crossover, and the RSI is weakening with room to fall down to the 30 level. Gold is still in a downtrend, with lower highs, ($1650, $1600, $1480, $1350) and lower lows ($1550, $1350, $1200).

If we had to put some rough probabilities on the next moves in gold, we would say there is at 90% chance that the next $300 move in gold is down, but only a 65% chance that the next $100 move is down. Given our estimate of a one in three chance that gold can rally $100 from here, patience is the order of the day. Rallies in gold should be gradually faded, but short positions should not be taken with too much aggression. We still prefer a core short position on gold, as the chances of gold going below $1000 in the next six months are better than 50-50.

We are closing our subscriber service to new customers this week due to an excess of demand, but we are keeping our positions nimble and preparing to carefully manage our risk over the next month. Risk-reward dynamics are our main focus with every trade we make, this approach has generated a 727% increase in our model portfolio since inception, and we are simply pointing out that at this stage the risk-reward dynamics are still in favour of being short gold -  but they are not as strong as they have been previously this year. As such our short positions are not as aggressive as they have been.

However, if US data remains strong, and the Fed push ahead with tapering then gold prices are only going south. Shorting gold at any level above $1000 is a good trade in that scenario. However, under any scenario we still do not see the value in buying gold mining stocks. All will fail to deliver on the massive investor expectations that have been built up over a decade of constantly rising gold prices. Many will struggle to meet event the reduced expectations and we have no doubt some will be forced out of business completely.

Do not be fooled by the recent dead cat bounce in gold stocks, the chart below shows the true picture.


The relief rally has run out of steam above 250 on the HUI and it is our view that we will see 150 before 350. Therefore we would not be holding any gold stocks whatsoever and even though we are not holding any short positions on this sector currently, we are looking at shorting a select few miners that we feel are particularly vulnerable. Visit to find out more information how you can sign up to receive such trading signals and our model portfolio, but please be advised that we are closing the service to new customers after this week due to excessive demand.

In conclusion we are still bearish on gold, but concede there is a risk of a rally back in the latter part of 2013. Therefore, whilst we maintain a core short position on gold, this position is not as aggressive has trades we have held previously this year when then risk-reward dynamics were more in favour of being short gold and we acted aggressively, banking triple digit returns using put options. We will be monitoring the situation closely over the coming weeks and adjusting our model portfolio accordingly. Best of the luck out there.


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Reader Comments (4)

What's solid about the employment situation recently is that it's been solidly CRAPPY. These are, in fact, terrible numbers, made worse by the fact that the great majority of these new jobs are:
1) Conjured into existence via the birth/death model. They dont really exist.
3) Lousy low-wage jobs people taken out of desperation by people who used to have REAL jobs.
4) Not enough to keep up with the increase in population
5) Less than half of what they should be in "recovery' following a recession

If we could somehow generate a true picture of employment in the US, it would show flat to declining employment, not all. The government is LYING. Imagine that.

The unemployment RATE is a complete fiction, heavily skewed by the fact that the number of people working is dropping precipitously and relentlessly. The denominator is shrinking, so the rate comes down.

The idea that they will EVER "taper" in any meaningful way for any serious length of time, much less end QE is fantasy. They are well and truly stuck. Inflate or die. And they aren't that keen on dying from what I can see.

I have a couple of questions for you:

1) Do you think these numbers are honesty derived and truly reflective of the employment situation? Given the facts listed above, do you really think they're "good" numbers that should excite anybody about the robust state of the economy, even a cretinous central banker? Remember, before god made idiots, she made central bankers...for practice.

2) Do you think gold is being manipulated by JPMorgan and other bullion banks?

If you think gold is being manipulated by massive short selling (mostly of the naked variety), your charts dont mean very much. Sorry. The Powerz are leading you around by the nose, having you see what they want you to see.. If not, you must be smokin' the loco weed. The evidence is of a criminal comnspiracy...probably underwritten by the Fed, the BIS and other central banks... is undeniable to anyone who cares to look.

Yes or no? Your credibility is on the line.

I probably read 500-600 pages a day from a very wide range of sources. I don't need to be wasting my time here if you don't get the elemental fact that the gold and silver markets are rigged.

August 6, 2013 | Unregistered Commenterfallingman


I'll attempt to answer your questions as follows;

No I don't believe the figures and agree with you that they are not good enough, however, its not my opinion that counts its the perception of the market participants that counts and any figure around the 185k level, part-time or not, low paid or not are being thought of as good enough to consider tapering.

All markets are being manipulated one way or another.

I don't think God is a 'she'

Our credibility lies in our performance and no I don't smoke anything.

Have a good one,

Bob K

August 7, 2013 | Registered CommenterGold Prices

Oh, now you've got her mad.

August 7, 2013 | Unregistered Commenterfallingman

Yip - i should have steered clear of that one eh!

August 7, 2013 | Registered CommenterGold Prices

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