Gold prices broke lower this week, as a stronger than expected headline US jobs figure dented demand for the precious metal.

Last Friday night Australian time, the United States released their non-farm payroll report, which indicated that 257,000 Americans had found work, a much higher number than the market was expecting.

Alongside a strong rise in average hourly earnings, it was interpreted as a gangbuster report, which dented demand for precious metals as it heightened the chance of a US interest rate hike.

Gold wasn’t able to hold onto key support lines around USD $1250oz, and closed the week out on a much softer note, around USD $1240oz.

There’s been more easing this week, with the yellow metal currently trading at USD $1223 an ounce, though in AUD terms, it’s still close to the $1600 mark, with a weak local currency supporting the market. Silver is back below USD $17oz too.

Looking ahead, there are a few bullish and bearish factors interacting here. Starting with the bearish factors, futures positioning actually looks fairly aggressive, which is typically a bad sign.

The US Job Openings and Labour Turnover Survey (JOLTS), was also strong, indicating that there are 5 million openings. This report is rumoured to be a favourite of Janet Yellen’s, and her colleagues at the Fed have, if anything, seemed a little more hawkish of late.

Expectations of that rate rise will curtail gold demand for some time.

Rising bond yields (admittedly off an incredibly low base) are also denting demand.

On the bullish front, apart from the US right now, everywhere we look we see more and more monetary easing or policy accommodation. Gold may not pay a yield, but that’s better than earning a negative yield, which is what investors in short term debt all around the Eurozone are witnessing right now.

With a Greek exit from the Eurozone something markets will at least have one eye on between now and the end of February, we should see continued buying out of Europe.

World Gold Council

The World Gold Council released their full year 2014 Gold Demand Trends report yesterday. Whilst there are question marks over some of the numbers they put together, particularly regarding Chinese demand, their reports are still must reads for anyone interested in understanding the gold market.

According to their data, total gold demand for 2014 came in at 3,923.7 tonnes, a decrease of just 4% for the year. Jewellery demand, which typically makes up somewhere in the vicinity of 50% of the total, eased 10% from the record high levels of 2013, but was still comfortably above its 5 year average. The trend is still positive there.

Central bank demand was particularly robust in 2014, rising to 477 tonnes for the year, nearly 20% higher than the figure for 2013. The result for 2014 is the second largest for central bank demand in 50 years, with Russia the key player in 2014, adding 173 tonnes to their holdings.

Investment demand came in at 905 tonnes for the year, a slight increase on 2013 when it registered 885 tonnes.

The chart below breaks down the results

Breaking down that investment demand a little more, we can see that the net increase was driven much more by a huge decrease in gold ETF outflows, rather than a huge pick up in bar and coin demand.

In fact, bar and coin demand fell quite significantly in 2014, hardly surprising considering the explosion we saw the year earlier when gold prices collapsed in April and June of 2013.

The chart below, which plots bar and coin demand individually, highlights the decrease between 2013 and 2014. More importantly, it highlights the structurally higher gold demand that there is around the world in this post GFC environment, something that extends to central banks and jewellery buyers too.

The architecture of the gold market itself also developed considerably in 2014, with;

• The launch of the international board of the Shanghai Gold Exchange

• A new Hong Kong gold futures contract announced by the CME

• Introduction of the kilobar gold contract on the Singapore exchange

The WGC also commented that anecdotally, the proportion of over the counter transactions taking place in London is also on the decline, with more and more of this taking place in the East.

When we remember that Eastern gold demand is largely pro-cyclical, and linked to urbanisation, rising incomes and move into the middle class that hundreds of millions of Chinese and Indians will be making in the coming decade, we see huge potential for these numbers to increase in the coming years.

It is a major tailwind for the precious metal market.

Retail Sales Soft in the USA

With stronger than expected employment growth out of the USA these past few months, many have been expecting a healthy rise in consumer spending. Alas, they were disappointed overnight with the latest release of US sales figures, which registered a 0.8% decline.

This months fall, which was double what the market was expecting, alongside the decline witnessed in December marks the largest back to back fall in more than 5 years.

Zerohedge has an excellent article on the matter, and included an excerpt from Bank of America, who were clearly expecting a stronger result. The bank noted “All signs point to a robust consumer: job growth has accelerated,?with an average of 336,000 jobs created a month over the prior three?months, gasoline prices have plunged and interest rates have declined.?Consumers are taking notice with sentiment measures climbing higher. According to the University of Michigan survey, consumers have not been this upbeat since January 2004.”

Alas it was not to be, with the consumer still clearly sitting on the sidelines and hardly flush with cash.

The article, which can be read in full here, also contained a good graph illustrating why the average consumer isn’t likely to hit the shopping malls anytime soon.

‘Affordable’ health care is the answer

Australian Jobs Shocker

Last week, Australian news was dominated by the Reserve Banks interest rate cut to a record low of just 2.25%.

Chris Joye, writing in the Financial Review, had this to say; “The Reserve Bank of Australia has screwed savers by giving them negative "real" interest rates that do not cover their cost of living (after tax, they're miles behind). It has ruined retirees who cannot earn anything remotely like the 2 to 3 per cent real return above inflation they've become accustomed to since the RBA started targeting consumer prices back in 1993. With the cash rate set at depressionary levels, main street and conservative retirees are being forced to take complex risks (hybrids anyone?) they cannot fathom in a search for yield that will end in tears.”

I could not have put it better myself, and the whole article, which you can read here, is worth a look, with his breakdown of Commonwealth banks financials a real eye opener.

I could not have put it better myself, and the whole article is worth a read, with his breakdown of Commonwealth banks financials a real eye opener.

Whilst the latest political shenanigans in Canberra dominated news headlines earlier this week, the biggest development was undoubtedly yesterday’s unemployment results.

They were terrible, with the figures suggesting over 12,000 jobs were lost in January. Worse still, over 28,000 full time jobs were lost, partially offset by a rise in part time employment.

The ABS has been under a lot of pressure regarding the quality of there jobs numbers lately, but the trend is unmistakeable, with the unemployment rate, now 6.4%, the highest it has been in over a decade.

This chart, courtesy of the team at Macrobusiness, which shows aggregate hours worked, is also alarming, for the trend is down there too.

With CFO surveys from Deloitte indicating that businesses are still reluctant to invest, and with the unwind of the mining boom only just starting to work it’s way through the rest of the economy, expect this trend to worsen throughout 2015.

Odds of a March interest rate cut are now firming, though it may be delayed until April or May. Either way, the likelihood that Australian interest rates are below 2% by the time we get to Christmas this year is only strengthening.

Whilst it will take time, this will flow through to more demand, and higher gold prices for Australian dollar investors

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.