A strong headline non-farm payroll report out of the US last Friday saw gold prices finally break below USD $1200oz. This weakness continued into the early part of this week, with the metal heading into the low USD $1180oz range, a key level that marked the bottom in both June and December of 2013.

Since then, there’s been an impressive rally in the precious metal complex, with gold currently trading some USD $40oz higher than where it was earlier in the week, sitting at USD $1223oz, with silver at USD $17.35oz

For AUD investors, a persistently soft AUD (currently sitting around 87 cents) sees AUD gold prices hovering just below AUD $1400, a reminder again that whilst it’s the USD price of gold the market focuses on, we’re getting a smoother ride down here.

So the big question now is

Was it a triple bottom?

After the price action of the last few days, it’s worth bringing out again the chart that shows gold prices since the end of 2010.

As you can see, after testing the USD $1900 range back in August and September of 2011, we saw three tests of the USD $1800 range, none of which were successful.

To the downside, as you can see, and as we have all had to endure, we’ve now had three tests of the USD $1180oz mark, all of which have held (so far).

Interestingly enough, the time period for gold topping out was roughly 1 year, whilst to the downside, the three tests of the $1180 mark have taken closer to 15 months.

The duration of this corrective period is no doubt why there’s so much apathy and a lack of confidence in the gold market now, with investors largely ‘over’ gold, not wanting to buy more, not wanting to sell – and waiting for the market to give a clear direction one way or the other.

As for whether or not this does mark the final bottom for gold, whilst we’d love to be certain that’s the case, and think the almost complete bearish sentiment towards to sector is a good thing, we must acknowledge

• That lack of confidence could mean it’s a while before the market properly gets moving again

• Weakness in the Euro and the YEN over the medium term are a strong possibility, which will bolster the USD and could pressure gold

• The USD was incredibly overbought after the last few weeks rally. A pause in that rally (and some short term relief in gold) were to be expected

• USD $1180oz is a critical support level for the gold market. Whilst the bounce has been impressive of there, it was unlikely to give up that mark without a fight. With that in mind, the rally we’ve seen was to be expected

It’s also worth pointing out that this latest gold bounce has coincided with a bit of a bloodbath on global equity markets, which were again roiled overnight, with the Dow Jones down over 300 points (or 2%), to 16,659.

Keep an eye on the ASX today, which could easily give up 60 points or so in a follow through move after the weak lead from Wall Street overnight.

Concerns over global growth levels are the major culprit, and all eyes will again be on central bankers, with the markets looking for yet more stimulus, or at least soothing words that interest rates won’t be moving up meaningfully any time soon.

All in all, we still see slow accumulation of metals as the most appropriate strategy for those of you looking to invest in the sector, as there’s a chance we see the USD $1180oz level tested again, and potentially breached.

Jobs Jobs Jobs

As many of you will be aware, last week we saw the release of the US non-farm payroll numbers, which saw 248,000 jobs created. Whilst many saw this as more ‘evidence’ of a US recovery, the data underlying the report was far less impressive, with no movement in average hourly earnings, and a high concentration of job creation in low paying work.

The Labor Force Participation Rate also shows no signs of moving off three decade lows, highlighting just how many people have given up on finding work.

The best chart that I’ve seen in a while which nearly captured the reality of the US jobs market is the one below, produced by the excellent Lance Roberts at Street Talk Live.

As you can see, the number of full time employees relative to the working age population has barely budged since the “end” of the GFC, is below 50%, and is at a level not seen since the 1980’s. Some recovery!

Lance’s article, which included this graph, can be viewed here.

Indeed, despite Wall Street originally cheering those numbers, softness in US employment markets is well known, and well acknowledged at the Fed, who’ve recently released a Labour Market Conditions Index (LMCI), which includes a range of factors when assessing the strength of the labour market.

These factors include the headline unemployment rate, labor force participation, average weekly hours worked, hiring rates, quit rates etc.

A full article on this index can be viewed at the Federal Reserve website here, however I’ve taken the liberty of showing the Chart 1 from the report, which shows the average monthly change in the LMCI backdated to the 1970s.

As you can see from the chart, the trend actually looks quite weak at present, and has been declining really since 2010.This, perhaps more than anything else is the major reason why the Fed is so reticent to increase interest rates, and whilst those who think we may even end up seeing additional QE before too long could well be right.

Onto the Australian job market, and yesterday we saw the ABS, who have admitted to having significant issues with their calculation of the unemployment rate of late, reporting a loss of 29,700 jobs for the month, much lower than forecasts which suggested a rise of about 20,000.

Concerns over the statistical accuracy of what’s coming out from the ABS have only intensified in the past few days, with many mainstream economists and market commentators openly questioning the veracity of the data.

Here’s the interesting part though. Despite widespread concern over the accuracy of arguably the most important economic data point in the nation, 23 out of 23 economists polled by Bloomberg a few days ago were sure that the RBA cash rate would be no lower than 2.50% between now and the end of next year.

That is captured in the image below, which was taken on October 7th, showing that mainstream economists see a median cash rate of 3% by the end of next year, with some seeing it as high as 3.50%.

To me this is an unbelievable level of confidence that our major forecasters and analysts are showing.

Australia is facing a number of headwinds, including

• A mining investment cliff that will see huge lay offs as major projects are completed, and expansion plans mothballed

• A slowdown in China and Japan, our two major export destinations

• Plunging iron ore prices which will wreak havoc on our terms of trade and budget deficits

• Negative real wage growth as wage increases are lower than CPI increases

• Rising unemployment and underemployment

Even the ‘wealth effect’ from rising asset values is all of a sudden not so certain, with evidence that parts of the property market are cooling, whilst the latest round of weakness on the ASX will be of concern to many investors, and a disappointment to all Australians next time they open their Superannuation statements.

With that in mind, the absolute certainty of all mainstream forecasters that we have reached the bottom of the RBA rate cutting cycle again reminds me of Bob Farrell’s rule of investing number 9, that “when all the expects and forecasters agree – then something else is going to be happen”

I lack the certainty of those forecasted by Bloomberg, but I’m quietly confident the next move in interest rates is down!

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.