Is Gold Making A Comeback?

Includes: GLD, IAU
by: Lior Cohen

The price of gold rallied in during last week. Moreover, on a monthly scale gold is up by 3.7%. The recent disappointing non-farm payroll report may have lowered the odds of the FOMC tapering further its asset purchase program in the near future. Will gold continue to rally in the near future? Let's analyze the recent news that may affect gold (NYSEARCA:GLD).

Despite the recent rise in gold price, the demand for leading precious metals' ETF including iShares Gold Trust (NYSEARCA:IAU) and SPDR Gold continued to diminish. During January, SPDR Gold's holdings declined by 1%. The minutes of the December FOMC meeting revealed the reservations of FOMC members in further tapering QE3. Let's take a closer look at this subject.

The FOMC and gold

Back in December, the FOMC reduced its asset purchase program by $10 billion. This mini-taper seems to have had an immediate effect on the markets including gold price and long term securities - two assets that are considered safe haven investments. The chart below shows the movement of gold price and U.S 10 year treasury yields.

As you can see, the news of the mini-taper seems to have dragged down gold price and pull up long term yields. This may also imply the demand for safe haven investments have declined as investors are turning towards riskier investments such as equities. But the reaction didn't last long; since then, long term yields have declined and gold price has rallied. This could imply that even if the FOMC continues to taper QE3 in the near future, it won't have a long term adverse effect on gold price.

The minutes of the FOMC meeting also showed that FOMC members are still concerned about the progress of the U.S economy including the labor market. The recent non-farm payroll report was disappointing: only 74,000 jobs were added. This only further reinforces several FOMC members' reservations about the recovery of the U.S labor market.

The table bellow shows the changes in the non-farm employment, the reaction of gold price and USD/yen currency pair and the correlations among them.

The table shows that when the non-farm employment rise by more than 150,000 and is higher than expected, the price of gold tends to fall and the US dollar tends to strengthen against the Japanese yen. These correlations are mid-strong but don't always hold up. Nonetheless, this means, all things equal, if the upcoming non-farm payroll continues to show fewer than 120,000-150,000 added jobs, this could reduce the odds of another announcement by the FOMC of cutting down its asset purchase program and pressure up gold price.

Final note

The recent developments reduced the chances of the FOMC to taper QE3 in the near future including in the upcoming FOMC meeting at the end of the month. Moreover, such mini-tapers are likely to have little short term effect on the price of gold. Therefore, I think gold could continue to slowly rally in the near future.

For further reading see: What is These Gold Companies' Silver Lining?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.