Gold Price Spikes On Weak US Jobs Report

Today is proving to be a big day for gold investors…and for good reasons. Early this morning, the US jobs report was released, widely missing expectations and showing sharp contrast to the ADP employment report. Today, we'll talk about the news, what it has to do with gold, and whether or not today's gains in the price of gold are going to stick around for a while.

US Jobs Prove To Be Underwhelming At Best

Earlier in the week we saw the ADP Employment Report, which led to declines in gold as it signaled a strong month for jobs numbers. However, early this morning, the official US jobs report was released, widely missing expectations.

In the report we learned that in August the United States only added 151,000 jobs to its economy. This is an egregious hit. Not only did the figure miss the key 200,000 mark, it also missed the already dovish estimate of 170,000 jobs that economists were expecting to see. Understandably, the report was shockingly bad vis-a-vis the strong ADP report earlier in the week - and recent improvements seen in the United States economy.

What Does This Have To Do With The Price Of Gold?

At first glance, the US jobs report and the price of gold don't seem to be connected at all. However, that notion couldn't be further from reality. Generally, the two are very closely tied. This is because of the way gold is priced, as well as its safe haven properties. The precious metal is priced using the USD. So naturally, this creates a bit of an inverse relationship. Also, as a safe haven investment, poor economic news is generally good news for gold. Here's how today's report specifically was good for the precious metal.

• USD – Any time poor economic data is released out of the United States, we tend to see declines in the USD. After all, a currency is only as strong as the economy it represents. With that said, today's poor jobs report is leading to declines in the USD. Accordingly due to exchange rates, gold is becoming less expensive around the world. This leads to increasing demand and rising prices.
• Federal Funds Rate – Another major factor in the value of the USD is the Federal Funds Rate. In the fiat currency world, interest is ultimately the value. Currently, the Federal Reserve's interest rate is relatively low. However, they have planned on increasing it. Throughout the first half of the year, those plans were delayed as a result of poor economic conditions. However, more recently, the argument for a higher interest rate has been growing, putting pressure on the price of gold as the USD headed upward. Today's news is in sharp contrast to recent positive data and weakens the argument for a rate hike. Therefore, gold is also benefiting.
• Safe Haven Demand – Some of the most major shifts in safe haven demand tend to happen around the time of economic releases. To be sure negative releases lead to stronger safe haven demand. That's exactly what we're seeing at the moment. Thus helping to lift the price of gold.

What We Can Expect To See Moving Forward

Moving forward, I maintain my bullish opinion with regard to the price of gold. While economic conditions around the world seem to be improving, today's jobs report was a signal that the struggles are nowhere near over. This, in combination with the fact that the wedding season in India is just around the corner will likely help to continue to support price growth.

********

[Image Courtesy of Flickr]