Latest U.S. jobs data marginally takes the pressure off the gold sell off

No great surprises from the latest U.S. non-farm payroll data, with 155,000 jobs created in December 2012 – in line with the average for 2011/12, and the unemployment rate was unchanged at 7.8%. Analysts were expecting 160,000 jobs or so to be created.

The lack of a really big surprise on the upside for the payroll numbers took the pressure marginally off the gold price, which is currently sitting at $1,640 an ounce down 2% on the trading session and compared to a day low of $1,626. A payroll number closer to the 200,000 mark for December would have made it even more likely that the Federal Reserve would have curtailed its quantitative easing programme sooner rather than later, meaning it’s role as an inflation hedge would be less likely to be needed. A resurgent dollar has also helped to conspire against gold in recent days and helped the dollar surge to a 29-month high against the Japanese yen.

A previous blog post highlighted the sharp sell off in the yellow metal following Thursday’s release of minutes from the Federal Reserve’s last meeting, which showed that several Fed officials thought the central bank would be able to slow or stop its bond purchases as part of quantitative easing by the end of this year. Gold has benefited from the Fed’s economic stimulus action over the last 2-3 years, being an inflation hedge against the impact of printing money and being priced in U.S. dollars then a weakening dollar, again precipitated by the Fed’s willingness to intervene to an unprecedented degree, has driven the price up.

At the December meeting, the Fed boosted its QE bond buying program by adding $45 billion of monthly Treasury purchases, potentially adding $1 trillion to the Fed’s balance sheet by the end of 2013. The potential of an early end to Fed purchases of US government debt had weighed on Treasuries prices with 10-year yields climbing to their highest level for eight months to 1.96 per cent.

The Fed also surprised analysts by deciding to keep rates near zero as long as unemployment remains above 6.5% and inflation remains subdued. That replaced the Fed’s prior guidance that rates would stay low until mid-2015.  The Fed’s balance sheet has now increased to $2.9 trillion from around $800 billion in 2007 to to finance the various stimulus and bail out measures.

Today’s payroll numbers are a clear indication that the U.S. economy is not stumbling badly, but rather growing moderately with the unemployment rate remaining stubbornly high. Though many of the Federal Reserve’s members appear to be voicing increasing concerns about the enormous size of the Fed’s balance sheet, with subdued economic growth, there appears to be little sign that stimulus in the United States is about to be turned off any time soon, particularly with the ongoing debt ceiling trials and tribulations and the uncertainty that will be rung in as the deadline expires at the end of February.

Contrarian Investor UK