Weekly Fundamentals - Strong US Data Sent USD and Yields Higher, Gold Lower

New York (Nov 10)   US employment data surprised to the upside in October. Despite the 16-day partial government shutdown, non-farm payrolls increased +204Kwith the private sector adding +212K. The dysfunction eliminated 8K from government positions. September’s addition was revised up, by +15K, to 163K. The unemployment rate climbed up to 7.3% in October from 7.2% in the prior month. Meanwhile, the participation rate drifted -0.4% lower to 62.8% during the month. Earlier in the week, the government reported that jobless claims fell -9K to 336K in the week ended November 2 while the prior week data was revised up, by +5K, to 345K. The 4- week moving average dropped -9K to 348K. Meanwhile, continuing claims increased +4K to 2 868K in the week ended October 26 while the prior week was revised down -17K to 2 864K.

In addition to improvement in the job markets, US GDP growth accelerated to +2.8% in 3Q13, from +2.5% in the prior quarter. The result does not only beat market expectations but is the fastest pace of growth since 1Q12. This lifted speculations that Fed might delay tapering of the stimulus measures. Improvement in the US economy was broadly-based. Despite the partial shutdown, government spending rose + 0.2%. Consumer spending was up +1.5% while business inventories added +0.8% during the quarter. The only setback was business spending of equipment.

The upbeat economic data released last week raised speculations that the Fed might push forward the tapering schedule for its quantitative easing measures. These speculations inevitably affected commodity prices, in particular gold prices.

Gold‘s rebound in the second half of October turned out to be transient and appears unlikely to resume in November. In coming months, speculations of Fed’s tapering schedule would continue to affect the yellow metal’s movement in future. Therefore, upcoming US economic data, movements of the greenback and Treasury yields should be affecting gold’s movement. Indeed, recent price movements have suggested that the trend of US Treasury yields, rather than that of the US dollar, have move direct influence on gold price.

The stronger-than-expected US employment report for October, together with the upbeat GDP growth data released earlier in the week, again raised tapering speculation. This had the effect of sending yields and the US dollar higher. Janet Yellen’s confirmation hearing next week would be closely watched. Despite a dove, she is expected to reiterate the Fed’s ground that tapering would begin tapering as and when the economic data are sufficiently strong and stable.

Physical demand for gold has been sluggish. In India, the festive season failed to stimulate buying. The Times of India reported that gold sales declined 40% this Diwali from the same period last year while other sales that sale were down 20% from a year ago as customers preferred silver. A number of factors caused the lack of demand. Despite the price decline in international standard, gold price was high as the rupee slumped. Meanwhile, domestic economy has been weak while some of the purchases was brought forward into 2Q13 when gold price tumbled. India’s gold imports rose to 23.5 metric tons, well below imports in last October. While undeclared imports have increase to escape from the tariff, the volumes failed to offset those lost in official channels.