It’s been another quiet week for the precious metal complex, with gold oscillating around the USD $1200oz mark, and silver sitting just above USD $16.30. This is down a touch on last Friday’s London PM fixes, which saw gold at USD $1214 oz.

We’re not surprised to see this calm before a potential storm, with the market focused on the non-farm payroll report, which will be released tonight Sydney time.

As it stands, the market is expecting that the United States about 240,000 jobs, with the unemployment rate tipped to hit 5.6%.

Whilst predicting this number is a complete lottery, and it is subject to revisions all the time, we wouldn’t be surprised to see the number underwhelm this time around, with nearly all US macro data released this month underwhelming market expectations, suggestive of a broad based slow-down in the US economy.

Even this week, we’ve seen

• Personal income growth of just 0.3% for the month, lower than expected

• Personal spending declining 0.2%, worse than expected

• Construction spending fall by 1.1%. The market thought it would rise

• ISM manufacturing decline to 52.9 points, suggesting slow expansion only

• Declining factory orders, when again the market thought it would rise

• ADP employment growth of just 212,000 jobs, below expectations

That ADP figure had fallen by 70,000 jobs since November last year, with a noticeable down trend since it peaked then. That’s a worrying sign.

Maybe the most alarming of all reports out this week though was the 50,000 job cuts announced in the latest Challenger, Gray and Christmas report. Whilst this was a decline in job cuts compared to January 2015, the number was 20% higher than job cuts from a year ago. It marked the third month in a row that the current lay off plans exceeded those from the same month in the previous year.

Oil is to blame, with nearly 40% of all job cuts due to the declining oil price. As many people are aware, it has been the stunning of growth of US shale oil that has been behind much of whatever growth the United States has generated in the last couple of years.

This trend is now sharply reversing, as much of this oil is uneconomic at today’s prices.

All the big players in the North American energy space are paring investment plans in the sector, which will devastate overall capital expenditure plans in the United States this year, negatively impacting employment, and government tax revenue.

The effect will be felt all around the globe. To give a sense of scale to this, consider that US oil now comprises about 4% of total supply. That’s up from about 0.5% when the GFC hit. To achieve that growth, over 20% of total investment in the global oil space was concentrated in North America these past few years.

That is a huge positive on the way up, but no so much today.

Short term for gold, it all hinges on the non-farm payroll number tonight. Were we to see a sub 200,000 job reading, expect to see prices firm, though a reading above 250,000 will see gold close the week out below USD $1200oz almost certainly.

As it sands right now, the implementation of European QE, which is due to start next week, is further boosting the US Dollar. This, and the lack of official inflation in the developed world are the primary hurdles to any gold price strength right now, with hedge funds and short-term speculators seeing no macro-reason to invest in precious metals yet.

That’s OK for long-term investors, as the current calm allows us to dollar cost average effectively.

Indeed despite the US dollar strength, there seems to be a growing feeling in the market that all this talk of Fed rate hikes, and interest rate normalisation will be yet another pipedream, with some Fed officials now openly stating there should be no interest rate increases til 2016 at the earliest. At the start of 2015, it was expected the Fed would hike rates by June at the latest.

Some are now saying the Fed might make one token interest rate hike (being seen to be doing something) and then leave things for a long time. They are clearly scared of sparking off any turmoil in financial markets, for the only cheerleaders they have reside in the two Big W’s, Wall Street and Washington.

Bullish support for gold could also come from the futures market, with positioning now far more neutral than it was a few weeks into 2015, when speculators had taken on a much more aggressive postured.

On the downside, apart from the USD strength and the lack of inflation, Asian demand has been a touch lacklustre since the end of the lunar new year festivals, whilst the NASDAQ hitting 5,000 points, and broader equity market strength are still limiting safe haven bids for the precious metal.

The bottom line to all of this is that the most appropriate strategy for long-term investors is to continue dollar cost averaging, as I briefly mentioned above. Gold is still looking lukewarm in USD at best, and that final wash out could still be ahead of us. Keeping some powder dry to capitalise on that potential opportunity makes sense.

A sharp move in the metal, either higher or lower, which will no doubt flow through to silver, could come as soon as tonight. But that depends on where that payroll number ends up landing, and how the market reacts to it.

Of some interest to market participants will also be what happens to average hourly earnings, which are used as a barometer of any potential inflationary pressure. They only tend to rise strongly when the market is picking up and employees have a bit more bargaining power.

Of lesser concern to markets, though equally important, will be industrial production figures in Germany, with anything that happens in the one country holding Europe together having broader implications. Euro wide GDP numbers, which are also set to be released tonight, are also worth noting, especially with Draghi’s QE programme about to get underway.

With bond yields already negative out to 7, or even 10 years in some parts of Europe, and with equity markets at or near all time highs, we are not quite sure what he is trying to stimulate. The financial markets seem plenty exuberant already.

Either way, when it comes to the GDP print itself, the market seems to be expecting an anaemic 0.3% growth rate for the final quarter of 2015. If that number surprises to the upside, and the non-farm payroll numbers surprised to the downside, then expect to see gold rally somewhat, though a print of 0.1% in Europe, and a stronger payroll figure will have the opposite effect.

For a more technical outlook on gold as the payroll number approaches, please read on below. This section was mostly put together by my colleague John Feeney, who is pretty hand with the charts, these days.

It’s worth a read to get a feel for where the market is sitting.

Technical Outlook

Over the past week or two there hasn’t been anything too exciting from a technical perspective. Gold has found support around $1,200 US and seems stuck there for now. The next breakout will signal short-term direction for the US gold price and I’m thinking it may be to the south.

If there is any price-sensitive news it will always overrule the technical traders, but on no news, technical analysis can be used to provide an indication of where prices are headed.

One of the most valuable and accurate indicators in the past 18 months for US Gold has been the Williams % oscillator on the weekly chart. This indicator measures overbought and oversold levels, but the key is to use this indicator when prices are tracking sideways, as it can largely be ignored in a strong uptrend or downtrend.

If we take a look at the chart below, the indicator down the very bottom is the Williams %. I’ve drawn a blue line from the July 2013 low, as US gold has largely been tracking sideways from then on.

When the Williams % indicator is green and above the -20 level, it is signalling that the market is over-bought. When the indicator is red (or brown) and below the -80 mark it is signalling over-sold.

As you can see, if you were to buy during the oversold periods, and sell during the overbought periods, you would have done very well over the past 18 months.

To the very right of the chart is where we are now, and the next signal will be a buy signal. It’s not here yet, but it is approaching, and I’m looking forward to it.

It is my opinion that once gold has finally made a bottom (possibly this year) that an overall uptrend will resume. I believe this due to economic factors and not technical factors.

If this indeed happens and we see gold up past $1400 US and continuing higher, the Williams % indicator on the weekly charts will then be used to time entry points only.

Just as important as the US gold price is the Australian dollar. The AUD has been the defining factor driving our gold price higher since late last year. With iron ore prices plummeting and China experiencing slowing growth, this trend is likely to continue.

So although I see lower US gold prices short-term, timing a bottom in AUD gold and silver prices is a lot harder. So the case for dollar-cost-averaging seems very relevant for 2015.

Here's a chart of the AUD, going back a couple of years. It could be due a short-term bounce, with some expecting it to reclaim the 0.80 mark against the USD temporarily, but this strength would likely prove temporary.

More rate cuts, which are a certainty in Australia, despite them keeping the cash rate unchanged earlier this week, should also support Australian investor demand for gold, as the painful reality of zero interest rate policy inexorably finds it way down under.

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. This report was produced in conjunction with ABC Bullion NSW.