CNBC: Gold may rise to $1,280 in post-payrolls bounce

January 14, 2014
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Source: CNBC

Author: Sri Jegarajah

Gold will likely continue to profit from a flight to safety in the aftermath of a surprisingly weak December U.S. jobs report, with the metal set to extend gains from a one-month high as equities lose ground, CNBC's latest survey of bullion market sentiment shows.

Friday's U.S. jobs report for December – which showed the creation of just 74,000 new jobs, well short of the 200,000 that analysts had expected – blindsided many in the financial markets. Gold caught a bid on fears that the economy may not be on as sound a footing as previously thought, potentially forcing the Federal Reserve to re-think the pace of its stimulus wind-back.

The payroll numbers were a "huge miss and will give pause to all of this talk about tapering," said Scott Carter, CEO of Lear Capital. Additionally, labor participation rates are at their lowest level in more than three decades, which will give Fed Chief Janet Yellen "all the ammo she needs to keep the printing presses going in 2014."

Gold "will perform well in this environment," Carter said, finding strong support around the pre-payrolls level of $1,230.

However, some gold bulls appeared guarded about their projections for higher prices. "Gold prices could rise modestly," said Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint. "A weak labor market and dwindling gold supply due to miners reducing capacity support a bullish outlook this week."

Moy stressed that the future course of the Fed's taper depends on whether weather-related distortions continue to color subsequent jobs data. "We will start to hear talk from the Fed about how they've not committed to tapering and will wait to see how the data plays out," he said.

Gold bulls said that the metal may test $1,280 in the near-term after posting its third consecutive daily rise on Monday, hitting a one-month high at $1,254.50 an ounce, and gaining 4 percent year-to-date.

'Downward drag'

CNBC's latest survey of market sentiment showed 57 percent of respondents (16 out of 28) expect prices to gain this week, 32 percent (9 out of 28) forecast prices will fall while 11 percent (3 out of 28) expect prices will trade at current levels.

However, some believe the rally in gold prices to one-month highs may stumble towards $1,300 an ounce if upbeat economic reports stifle the perception created by the December jobs numbers that the economy is stumbling.

Gold may also come under pressure if selling in exchange traded funds backed by physical gold does not abate. Almost $43 billion was withdrawn from commodity exchange traded products (ETPs) in 2013, with gold ETPs accounting for $40 billion of those outflows, asset manager BlackRock said this month. The SPDR Gold ETP lost $25 billion, the single biggest ETP outflow in 2013.

"The downward drag on the gold price is likely to come from a further reduction in ETF holdings and speculative accounts building net-short positions in gold futures," said UBS analysts Dominic Schnider and Giovanni Staunovo. "We believe the physical market will have difficulties in absorbing another 400-500 tons from ETFs over the next 12 months at the current price."

A decline in the gold price to as low as $1,050 is needed "to balance supply and demand," they added.

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