Weak April Employment Catches Up - Will $1,300 Become Support in Gold?By Mike McGlone, Special Contributor to Kitco News
Friday May 06, 2016 09:25
The weaker than expected US April Employment data is benefitting gold prices and pressuring the US dollar, bond yields and stock prices - trends that have been in place essentially since the initial, and possibly only, Federal Reserve (Fed) rate hike in December. Gold has plenty of wood to chop to sustain above $1,300/oz. resistance, but if the 2016 market trends of lower bond yields, the declining US dollar and increasing volatility in the stock and currency markets are now supported by the notorious lagging indicator, US employment data, it should be a matter of time that $1,300/oz. in gold becomes support.
What Are the Markets Telling US? These Key Indicators Have Been Consistently Cautious
Declining Treasury Bond Yields Increase Gold Tailwinds - Adding to the improving tailwinds in the gold market, global bond yields have continued to decline this week, appearing quite unconcerned for the potential of economic growth and inflation. Prior to Friday’s US April Employment data, the 10yr benchmarks representing the three main continents; German bunds, Japanese JGB’s and US 10yr notes had declined 11bps, 3bps, and 10bps respectively (bps = basis points) since the end of April. Post the weaker than expected US April Employment data, the US 10yr is yielding near 1.71%; it ended 2015 at 2.27% and still has the most room to decline relative to most global benchmark sovereign bonds. Despite consensus expectations for higher yields in the US, notably since the Federal Reserve (the Fed) ended the QE3 bond buying program in 2014 and increased the Fed funds rate in December, US bond yields have persistently declined. Lower bond yields despite higher short-term rates, a flattening yield curve, is a negative indicator for the economy. Lower bond yields also reduce the opportunity cost of holding non-income producing assets like gold and silver.
The Elevated Gold/Silver Ratio has Been a Warning- Since the beginning of 1999, the gold/silver ratio has ended only 12-weeks above 80 - about 1% of the 906 weeks. Half of those weeks have occurred in 2016. On the most recent two occasions that the gold/silver index sustained above 80 prior to 2016, June 2003 and the end of 2008, the stock market was in the midst of a sharp downturn and/or near a significant bottom following a significant correction (featured chart). The inverse of the gold/silver ratio has had a tendency to track closely with global GDP and the stock market. Due to the catch-up in silver prices recently, the gold/silver ratio has declined to near 74, but the indication for global GDP and stock markets remains ominous as is the indication of the relative attractiveness of the price of silver relative to gold.