Where now for the gold rush?

Spot gold enjoyed a monster rally on Friday with a high of $1178.

Gold
Source: Bloomberg

The US payrolls report alone didn’t cause such a strong reaction. If you look at the U6 unemployment rate - the broadest measure of unemployment - it fell 30 basis points to a six year low. There was a 683,000 jump in the household survey, which effectively saw the participation rate increase a touch.  Despite this, the headline unemployment rate ticked down to 5.8% and is now only 30 basis points from where the Federal Reserve classify as full employment.

The fact that hourly earnings grew a meagre 2% seems to have been the trigger; with US bond yields falling, which in turn has weakened the USD's appeal to fundamental traders.

USD/JPY collapsed and given the strong inverse correlation between this pair and gold we saw the metal rally sharply, with price actually printing a bullish outside day reversal. On the daily chart the bears would be enthused by the fact that gold couldn’t reclaim the $1180 level (key horizontal support seen since June 2013). The 38.2% retracement of the October to November sell-off (at $1179) has also acted as a ceiling.

It must be said that the 14-day RSI and stochastic indicator were at extreme lows, so there was always going to be a clear out of shorts on a slight miss and, as I detailed on Friday, the market was positioned for a strong payrolls report.

So with gold at $1173 (at the time of writing) this could be a level which the bears look to resell.  I would personally be watching USD/JPY intently, especially with the G20 meeting underway in Brisbane and the potential for Asian nations to express displeasure at the extreme JPY weakness. Given the trend traders will be looking to buy dips in USD/JPY, I would be cautious in being long USD/JPY above ¥115.00 at present.

On a fundamental note, it’s also worth keeping in mind the Swiss gold referendum scheduled for 30 November. Here, the Swiss public will go to the polls and vote on three issues. The Swiss National Bank (SNB) must hold at least 20% of its balance sheet in gold. The SNB can never sell its reserves and all gold reserves must be kept in Switzerland. This will need a majority for the actions to come into practice.

Given the SNB currently hold around 7.5% of its reserves in gold and its balance sheet is CHF522billion, it suggests they will have to buy just less than 1800 tonnes of gold. With the central bank holding 47% of its reserves in EUR, it seems logical that they’d have to sell EUR's to buy gold. This implies short EUR/USD would do well in this instance.

The central bank wouldn’t buy 1800 tonnes of gold in one hit and would work the buying through the market over a multi-year period; however we would clearly see a spike on the day. The polls are fairly close at the moment. That’s despite the price hardly suggesting a vote in favour of increasing the gold reserves. Still, this could be a huge event for gold and thus gold traders will need to keep this on their radar.

 

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