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Now That Yellen Has Spoken, Gold Market Turns Focus To U.S. Payrolls

(Kitco News) - With Federal Reserve officials lately dropping hints that conditions are becoming more favorable for a U.S. interest-rate hike, all eyes will be on the monthly U.S. jobs report due out next Friday.

A strong number could heighten expectations for monetary tightening, and vice-versa.

Gold had a volatile session Friday after Fed Chair Janet Yellen suggested the case for a hike has strengthened. The metal briefly fell, but then spent most of the session in higher territory. Observers suggested gold held up since Yellen’s remarks were not seen as excessively hawkish and the market had perhaps already factored them into prices as gold fell in the run-up to her appearance at the annual Fed symposium at Jackson Hole, Wyoming.

Comex December gold was at $1,325 an ounce as of 1:45  p.m. EDT, which was a loss of $20.80 for the week.

Normally, higher interest rates hurt gold by boosting the U.S. dollar, making the metal more expensive in other currencies and increasing the so-called “opportunity cost” of holding gold, which refers to lost income from not having a yield-bearing asset instead.

“The Fed has been a bit more hawkish than we’ve been used to,” said Bart Melek, head of commodity strategy at TD Securities. However, “relative to the positioning (ahead of Yellen), it might not have been all that hawkish for many traders. There is still a significant amount of ambiguity….Since people were prepositioned, it didn’t have a huge impact.”

Bob Haberkorn, senior commodities broker with RJO Futures, commented that more traders might be looking for a December rate hike but are not necessarily sold on one for September yet.

“I think a Fed rate hike is on pause, even with that statement she made,” Haberkorn said. “So I think you’ll see more upside next week.”

Yellen said with “continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the Federal funds rate has strengthened in recent months.” However, the Fed chief added, policymakers’ action still hinges on future economic data.

“And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course,” Yellen said. “Our ability to predict how the Federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy.”

Sean Lusk, director of commercial hedging for Walsh Trading, said “even though the initial (Yellen) comments were hawkish, the trade doesn’t believe in this hawkish tone.”

Much of the activity next week may be traders deciding how to position themselves ahead of the August jobs report, he said. The July figure was a rise of 255,000 new jobs.

In the very near term, traders will continue to monitor any other comments from Fed officials at Jackson Hole, said James Steel, precious-metals analyst with HSBC. Then attention will turn to next week’s U.S. economic data.

“The big issue will be Friday’s unemployment report,” Steel said. “That will be very important. It always is.”

But in this case, the data will take on extra meaning in light of Yellen’s comments about potential for rate hikes, observers said. A strong report could prompt more bullish speculators to leave the market, while a weak number may well attract more buying, Lusk said.

“Anything around a 225,000 level would be considered a decent outcome suggesting the likelihood of a Fed hike might be in order here,” Melek said.

Other U.S. data on the calendar for next week include personal income and spending on Monday, consumer confidence on Tuesday, then weekly jobless claims and the Institute for Supply Management’s manufacturing survey on Thursday. Besides the payrolls report next Friday, the U.S. trade balance and factory orders are on the docket.

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

 

 

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