(Kitco News) – Opinions are mixed as to whether or not Friday’s employment report can cool down what has been a red hot gold market in the first week of the new year.
Wednesday, gold prices hit a seven-week high at $1,094.90 an ounce despite the fact that ADP employment data showed considerable gains in the private sector labor market. According to the report, U.S. companies created 257,000 new jobs in December, well above consensus expectations of around 190,000.
Currently, economists are expecting the nonfarm payrolls report to show job gains of around 200,000. Although ADP was surprisingly strong, and some economists noted the potential for upside risk, most have not changed their expectations ahead of the official government report due for release Friday morning.
Analysts noted that that gold was able to shrug off the better-than-expected domestic data as the market is focused on international geopolitical concerns and global economic weakness — being led by China.
Colin Cieszynski, senior market strategist at CMC Markets, said that he doesn’t think the U.S. employment numbers will derail gold’s current rally as it won’t provide any new information for the market.
“Nobody is expecting the Fed to raise rates this month and I don’t think the employment report, no matter how strong, is going to change that,” he said.
With the Fed not expected to move until at least March, Cieszynski said that the U.S. dollar is looking a little expensive, providing an opportunity for gold.
“People are looking for defensive havens that are a little cheaper and that is why they are turning to gold,” he said.
KC Chang, senior economist at IHS, agreed that December’s employment numbers won’t change the current market outlook on U.S. interest rates, which is why the market is focused on geopolitical events.
He added that weakness in China is spooking equity markets, and investors are turning to gold for now. He added that he could see continued global uncertainty pushing gold prices above $1,100 an ounce in the near-term.
However, not all analysts are convinced that investors may be underestimating the potential impact of Friday’s employment data.
Bart Melek, head of commodity strategy at TD Securities, said that he thinks the U.S. dollar could see renewed momentum by the end of the week as the data confirms the Fed will hike rates in March.
He added that the recent rally in gold could mostly be attributed to short covering in what has been an extremely bearish market.
“The move we have seen in the last couple of days could easily be unwound by Friday,” he said. “Anything over 200,000 will be positive for the U.S. dollar and negative for gold.”
George Gero, vice president & precious metals strategist for RBC Capital Markets, agreed that gold’s rally will depend on what happens with the U.S. dollar. He noted that the U.S. dollar index has not been able to push back above 100, which is providing some support for gold.
“The U.S. economy remains the one beacon of strength out there and that means we will continue to see U.S. dollar strength,” he said.
Gero said that a stronger employment report could take some momentum away from gold on Friday but he would still expect the market to hold most of the gains made earlier in the week.
“Gold is an under-owned asset under current market conditions and I think some funds are starting to recognize that,” he said.