Gold ETFs in Focus on Weak Jobs Report, Central Banks

ETF Trends

Gold and silver prices rose from multi-month lows as US payrolls surprised to the downside, strengthening the case for on-going Federal Reserve stimulus to support the economic recovery.

This development comes close on the heels of last week’s announcement by the European Central Bank (ECB), highlighting greater potential for downside risks to the Eurozone economy.

Indeed, with the Cyprus bailout fresh in investor minds, coupled with the uncertain Italian political environment and difficulty reaching an agreement on how Portugal will meet its fiscal consolidation targets, more monetary support rather than less is likely to come from the ECB.

These trends, together with the Bank of Japan’s announcement it plans substantially increase its quantitative easing program, should help support ‘hard currency’ alternatives such as gold and silver in the medium to longer-term.

Elevated short positioning boosts the gold price’s positive reaction to the weaker than expected US payrolls data. CFTC data showed a 17,273 decline in net longs in the week to last Tuesday, mainly on the back of a build-up of short positions. It is likely the reversal of those elevated short positions served as a catalyst for positive price movement when the weak US job data was released and the BoJ announced that it will double its monetary base within two years.

Silver remains tied to gold, as inventories reach highest level in 15 years. The direction of the silver price remains firmly tied to the price of gold as correlations between the two metals remain elevated (although it has moderated) as investment demand remains the main support for the price. While a significant proportion of demand comes from the industrial sector, rising COMEX stocks, which have reached the highest level since 1997, have kept the downward pressure on prices. The gradual price decline as investment demand has waned in line with that of gold has pushed volatility down to the lowest level in 2½ years. An upturn in US economic activity (see graph below) should begin to eat into stock levels as industrial demand returns to the market. Near-term jitters, though, are likely to keep gains firmly linked to the fortunes of gold.

Key events to watch this week.  In light of the weakness of the US jobs data last week, the market will be all ears for any hints regarding timing of stimulus withdrawal from the FOMC minutes from the March meeting. Investors will be closely watching developments in the tensions between North and South Korea following threats of nuclear testing. Key releases of Eurozone industrial production and US retail sales are likely to highlight the on-going divergence in fortunes between the two economies.

This week several European economic releases are due. After Draghi’s “ready to act” statement last week, further signs of economic weakness in the Eurozone might be the trigger the ECB is waiting for to intervene in the markets. In light of the weakness of the US jobs data last week, the market will be all ears for any hints regarding timing of stimulus withdrawal from the FOMC minutes from the March meeting.

ETFS Physical Swiss Gold Shares (SGOL)

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