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Friday, July 08, 2016 Derek Macpherson

Why the Job’s Number Didn’t Matter for Gold


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Following weak U.S. non-Farm Payrolls number in May, the June result was much stronger and well ahead of expectations (287k vs 175k expected). The gold price had a sharp negative reaction and then quickly regained losses. While creating some short-term volatility, in our view this wasn’t the most interesting news of the day for gold. More important was as article reporting that funds continue to flow out of general equities and into gold stocks, supporting our view that we are in the early stages of a long-term bull market for gold.


U.S. Jobs number creates short-term volatility. The U.S. created of 287,000 jobs in June, which was ahead of expectations (175,000) and much stronger than May’s report. This follows a better than expected ADP jobs report on Thursday. When released this caused a sharp drop in the gold price. However, the gold price quickly retraced those losses (Figure 1). In our view this relates to two factors: 1) Gold had already been weak leading into the report, suggesting a strong number was priced in and 2) investors used the short-term pull back as a buying opportunity.



More importantly cash continues to flow into gold funds. Lipper reported that more than US$2 billion dollars has flowed into US gold funds since February while over that same period US$1.3 billion flowed out of financial sector funds, and US$1.4 billion out of stock funds (full article). This data is supported by the continued in-flow of funds into physical ETFs (Figure 2). It is important to note that while magnitude of outflows and inflows are roughly the same, because the gold market is significantly smaller, the impact is far more meaningful for gold and gold equities.


Fund flows support our view that a new bull market in gold has begun.
Like all commodities gold moves both up and down in long cycles. Figure 3 highlights these cycles relative to the S&P 500 (Gold:S&P 500 ratio), that ratio has started to turn, and suggests that gold is undervalued relative to the S&P 500 based on the historic ratio. Funds flowing out of general equities and into gold funds supports our view that the ratio is likely to expand causing precious metals and related equities to continue outperforming other asset classes.


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