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Gold to Rise if US Jobs Report Boosts Growth, Inflation Outlook

Gold to Rise if US Jobs Report Boosts Growth, Inflation Outlook

2010-05-29 03:10:00
Ilya Spivak, Sr. Currency Strategist

The yellow metal’s anti-risk credentials seem to have been eroded, with prices conspicuously little changed in the last two trading sessions of last week even as equities soared on Thursday and retreated Friday. Indeed, 20-day correlation studies between the metal and the MSCI World Stock Index show virtually no link at present compared with a hefty -0.8 inverse relationship a mere two weeks ago. Meanwhile, the correlation of gold to US breakeven rates – spreads between yields on regular and inflation-indexed US Treasuries that serve as a gauge of the markets’ price growth expectations – has firmed significantly over the same period. This suggests that the yellow metal is once again trading as an inflation hedge, meaning it ought to decline if global economic growth expectations (and with them the spectrum of risky assets including stocks, commodities and carry trades) turn lower.

The coming week promises to be a decisive one for risk sentiment across financial markets. Friday’s downgrade of Spain’s credit rating by Fitch on the grounds that the country’s debt burden will bring higher borrowing costs and undermine growth underscores the global implications of the EU fiasco for the global recovery at large. Taken together, the European Union amounts to the world’s largest economy; if fiscally responsible EU members take it upon themselves to bail out the spendthrift ones (as is apparently the case), they too will accumulate a large amount of debt, the financing of which will indeed drive bond yields higher and weigh on growth across the region. With Europe thereby tethered and China actively pushing to slow its buoyant economy amid fears of asset bubbles and runaway inflation, this leaves the United States as the sole significant engine of growth left to drive the global recovery.

On balance, this puts the onus on the considerably busy US data docket, with natural emphasis on the Friday release of May’s labor market figures. Expectations call for nonfarm payrolls to rise 508,000 – the largest increase in nearly thirteen years – while the unemployment rate declines to 9.8 percent. If this proves to reassure the markets that a firming US economy can shoulder the burden of dragging the world along the path to recovery even as China and EU put on the brakes, gold prices stand to gain along with a rebound in risky assets.

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