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Gold To Start Week With Swiss Referendum, End With U.S. Payrolls

By Allen Sykora of Kitco News
Friday November 28, 2014 1:58 PM

(Kitco News) - Gold trading next week will be bookended by a pair of major potentially market-moving news events – a Swiss gold referendum on Sunday and the monthly U.S. employment report on Friday.

In between, traders will also be watching oil prices and a meeting of the European Central bank.

Traders will be on the lookout over the weekend to see if the Swiss populace votes in favor of a measure that would mean the Swiss National Bank would have to increase the portion of gold in its reserves. If so, analysts have said the central bank would have to buy 1,500 or more metric tons over a five-year period, based on current foreign-exchange reserves and gold prices.

The monthly U.S. jobs report is always closely watched as an indicator of the health of the U.S. economy, which in turn will determine how quickly the Federal Open Market Committee might eventually start hiking interest rates. Fed officials meet again Dec. 16-17, and whereas no change in rates is expected, traders will be watching for any subtle wording changes that could hint on future policy.

As of the pit close Friday, gold for February delivery was $22.90 lower for the week at $1,175.50 an ounce on the Comex division of the New York Mercantile Exchange. March silver was down 90.3 cents to $15.556 an ounce.

In the Kitco News Gold Survey, five participants said they see prices up next week, while 11 see prices down and three see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

Sunday’s Swiss gold referendum would require all of the SNB’s gold to be held within the country and forbid the future sale of central-bank gold. The provision capturing the most attention is one requiring at least 20% of the central bank’s assets to be held in the precious metal. Investment banks have estimated that the SNB would have to buy between 1,500 and 1,750 metric tons over a five-year period.

“A lot will depend on what the decision will be,” said Afshin Nabavi, head of trading with MKS (Switzerland) SA.

Polls so far suggest the public is opposed to the referendum, and the government and SNB have lobbied aggressively against it. Since markets generally react most strongly to surprises rather than expected outcomes that might already be factored into prices, observers say gold is more likely to rise sharply on a “yes” vote than fall sharply on a “no” vote.

“I don’t expect it to pass, so it probably will be a non-event,” said Sean Lusk, director of commercial hedging with Walsh Trading.

Nabavi said he would anticipate some initial selling if the measure fails. However, UBS looks for “limited impact” from such an expected outcome, although the bank cautions that some shorts could feel emboldened to rebuild bearish positions once this event risk is removed.

“On the other hand, a surprise outcome supporting the initiative would have a much stronger impact – now more than ever,” UBS said in a research note. “The fact that the latest Swiss TV poll supports the commonly held view that the initiative is unlikely to pass suggests that investor conviction is probably stronger than it was a month ago. Given that the market seems unprepared for this outcome – psychologically and in terms of positioning – the knee-jerk upside reaction could be quite powerful.”

Yet another event traders will monitor is a Thursday meeting of the European Central Bank. Markets will watch to see if policy-makers increase monetary accommodation. If so, this tends to weigh on the euro and drag down gold with it due to the metal’s inverse relationship with the U.S. dollar. A report early Friday showed euro-area inflation rose only 0.3% year-on-year in November, and low inflation is thought to be pressuring the ECB to add to its existing measures aimed at reviving the economy.

“They are getting closer and closer – with their inflation numbers -- to really ramp up this ABS (asset-backed securities) program,” said Daniel Pavilonis, senior commodities broker with RJO Futures. “If that’s the case, it’s just going to put more pressure on gold. I think the dollar is going to become stronger.”

Traders will keep watching to see if U.S. equities back off from recent record highs, as analysts have said some investment money has rotated from commodities such as metals into stocks this year. Also, the market will keep casting an eye toward crude after oil hit a four-year low this week, dragging down other commodities on sympathy selling.

Several investment banks issued reports saying they look for still more weakness in energy prices after OPEC was not willing to cut output Thursday. However, Lusk sees potential for a bounce in the energy complex.

“This is real nice at the (gas) pump,” Lusk said of low energy costs. “But you’ve got to think there is going to be some spec buying to come in at some point, seizing the opportunity, or profit-taking (by traders unwinding short positions, or bets on lower oil prices).”

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Major U.S. economic reports next week include the Institute for Supply Management’s manufacturing Purchasing Managers Index on Monday, the ADP private-sector jobs report, ISM non-manufacturing index and Federal Beige Book report all on Wednesday, and weekly jobless claims Thursday.

Then comes what is normally the biggest report of the month – nonfarm payrolls Friday morning. Strong data tends to move ahead expectations for Fed rate hikes, boosting the dollar and pressuring gold, and vice-versa.

Based on other data released so far for November, economists at Nomura said they expect a 230,000 increase in private-sector payrolls plus a 5,000 rise in government jobs. This is right around consensus forecasts compiled so far by various news organizations.

“Note that reports suggest that some companies plan to hire more seasonal workers this year than in the past, which could provide a boost to payrolls,” Nomura said. “Therefore, there is some upside risk to our forecast.”

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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