It’s been a profitable start to the month for precious metal investors, for USD buyers at least.

After closing out Q3 2015 around USD $1114oz, gold rallied hard on October the 2nd, with a shocking US non-farm payroll report all but ruling out any chance of a Federal Reserve rate hike in 2015.

Silver also liked the news, and has put on approximately USD $1oz, or over 6.4% for the week.

In this market update, we’ll look at the latest economic data out of the United States in more detail, as well as look at the technical picture for the precious metal market.

We will also look at the Gold/Silver ratio, and finish with a look at central bank gold activity.

About that rate hike!

Consensus opinion leading into this 2015 was that the Federal Reserve would be in a position to hike interest rates by June of this year. The theory was that the US economy was approaching ‘escape velocity’, and that the era of excessive money creation, ultra-low interest rates and trillion dollar plus budget deficits was well and truly behind them.

And with that ‘knowledge’, it was expected that the United States would once again become the locomotive pulling along the global economy, with the strength of the US economy expected to offset any slowdown in China.

The wheels to this theory fell off almost as soon as 2015 started, with Q1 data from the US universally poor. Indeed the US economy shrank in Q1 this year, whilst the US Macro surprise index got off to one of its worst starts to a year ever in Q1.

And whilst the US economy did bounce back to a degree in Q2, it’s been soft ever since, with the Atlanta Fed GDPNow tracker suggesting that growth in Q3 2015 will be just 1.1%.

That’s not enough to stimulate real gains in wages, employment or business investment.

And that brings us to last Friday’s US non-farm payroll report. Market analysts were expecting the report to show new job creation of some 200,000 jobs for the month of September.

It was not to be though, with the report suggesting just 142,000 jobs were created. To make matters worse, prior month job creation figures were revised downward, from 245,000 to 223,000 for July, whilst August was revised down from 173,000 to 136,000.

Other ‘lowlights’ from the report included the fact that Average hourly earnings for all employees on private nonfarm payrolls, at $25.09, were unchanged month on month, and were up just 2.2% for the year

Perhaps the best illustration of how weak the US economic ‘recovery’ remains, and how things are trending in the wrong direction is the fact that average monthly job creation has;

? Averaged just 198,000 per month for 2015

? Averaged just 167,000 in the past 3 months

That 198,000 average number for 2015 is some 60,000 jobs per month LOWER than the figures for all of 2014. The final nail in the coffin for this report was the fact that the Labour Force Participation Rate fell 0.2% to 62.4%.

Those interested in reading the employment report in detail will find it here

All in all, it is no wonder that the market has almost fully priced out any chance of a rate hike in 2015, whilst those arguing for the return of QE grow ever louder.

And that call, or at least the suggestion that it will soon be back on the table as a policy option for the Fed featured as recently as today, with the following article in the Financial Review discussing the matter.

The article, which features the views of BT Fund Manager Vimal Gor, suggests that we are just at the start of the commodity and emerging market slowdown, and the USD strength over the last year or so would hamstring the Fed.

Gor suggested that the Fed is just as "likely that they do another QE package as they are to hike rates", and that the, “The world economy and global markets are not in a good place, and the pain would be compounded were the Fed to raise rates."

We couldn’t agree more, and is of course one of the reasons we continue to build our physical gold positions.

And whilst AUD gold and silver have been held back this week by a nice bounce in the AUD (after the RBA unsurprisingly kept rates on hold), we expect it to be short lived.

The bottom line is that the AUD is highly likely to resume its descent in the coming weeks and months, especially once the RBA inevitably folds and makes one or two more interest rate cuts.

Technical Update

with John Feeney

We have started October with some momentum developing for USD Gold and a sharp rally in Silver. With no US rate rise in September we have seen some funds flood in to precious metals, as investors are only now just starting to doubt the Federal Reserves ability to raise this year.

Global stock indexes are still experiencing big daily moves as the S&P 500 recovered the 2000 mark last night. We expect some more volatility in stocks to come, so don’t think sell-offs are over just yet. The Aussie dollar has seen a short-term bounce to 0.725 US cents. As we mentioned in last weeks market update, these bounces have generally provided good entry points for Aussie gold investors in the past 6 months, and this one has seen AUD gold drop to $1,570.

Moving onto the USD gold and silver charts, we can see some momentum building in the metals below. We have had a series of higher lows from the August low this year. The technical set up would look better if this was coupled with a series of higher highs, but not the case. So what we have instead is a tightening trading range around the USD $1,130oz mark.

There are some positives with the 20 day moving average moving upward and above the 50 day moving average, but there seems to be some resistance around the USD $1,150 mark.

It wouldn’t be surprising to see gold trade in this USD $1,115oz to USD $1,150oz range for a few weeks, but a close above USD $1,160oz could signal a break out, which would be a positive step and could restore some confidence in the sector.

It is interesting to note the very strong performance of Gold miners so far this month, as an indication that sentiment is definitely improving.

Silver has seen a better start to the month of October. We at ABC Bullion have experienced exceptional demand for physical silver since June, with September being particularly strong. This echoes global silver demand trends with most refineries reporting extremely strong sales and demand for product.

And with good reason too, as the Gold/Silver ratio was in the high 70’s during this time and even got as high as 80 in August. Smart investors have taken advantage of a long overdue silver rally, and we can see the sharp rise below.

We’ve hit some resistance at USD $16oz, but a very strong start to the month so far.

Touching further on the Gold/Silver ratio, and as per the following chart, which goes back ten years, you can see just how cheap Silver has become relative to gold.

With the broader sell off in the commodity complex, the precious metal (gold) collapse of 2013, global disinflation, and a huge rally in risk assets, silver has become one of the most unloved and unfashionable investments on the planet.

Sitting at over 80:1 just a few short weeks ago, which is basically back to where it was at the height of the GFC, silver was at one of its cheapest points relative to gold in the better part of 100 years.

It’s typically a good idea to look at assets when they’re that cheap, especially when gold itself is so unloved, and cheap compared to financial assets.

Currently sitting just below 73:1, we expect to see this ratio fall further in the next few years, offering substantial upside to investors who can stomach the greater volatility silver inevitably comes with.

Central Bank Gold Activity

It seems like every week there is more news coming out regarding central banks and gold activity in this space. The Bundesbank made news, releasing an inventory of its gold reserves, presumably to alleviate ongoing concerns regarding the security of their gold holdings, and how much yellow metal they actually hold.

You can find the link to gold bar list here

We are all for greater transparency in the gold, financial, and indeed central bank space so this is a step in the right direction, though the team at GATA are still sceptical, as you can see from this note here.

We also thought it was worth sharing the following report, written by Koos Jansen from Bullion Star. Koos is best known for the amazing work he has done covering gold acquisition by China, tracking flows in and out (mostly in) from the Middle Kingdom, as well as depletion of gold held in London, and refining through Switzerland.

In the attached report, he looks at Belgian gold sales, as well as those from the Netherlands, and the ‘co-ordinated’ approach to bullion sales central banks clearly take.

It’s an interesting read.

Finally, as per this report from Sharps Pixley, we’ve also seen yet another update on Chinese gold holdings. Since making their first announcement in years regarding their gold reserves back in June, we’ve seen regular reporting from China, who have announced

? Purchase of 19 tonnes in July

? Purchase of 16 tonnes in August

? Purchase of 15 tonnes in September

We have no doubt gold bears, and certain sections of the financial community will focus on the technical fact that China’s pace of gold acquisition has fallen by 20% (from 19 to 15 tonnes per month), showing a ‘waning appetite’ for the yellow metal.

We think balanced observers would see what we see - a country that is on track to officially add 200 tonnes of gold a year to their reserves, with the real number no doubt higher.

Add in the rest of the worlds central banks and collectively they’ll be buying 600-700 tonnes of gold a year. In a market that struggles to produce more than 3,000 tonnes a year in ‘new supply’, its profound support, and a tailwind every precious metal investor can benefit from.

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.