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Summary

  • Jobs data supports Fed's underlying rate outlook.
  • Positives and negatives exist, but caution remains warranted with GLD at elevated levels.
  • Watch the Dollar as a precursor to trend changes in the metals ETFs.

There are plenty of reasons to explain why investors move money into the SPDR Gold Trust ETF (NYSEARCA:GLD). Geopolitical uncertainties or the potential for rising inflationary pressures offer some of the more commonly cited examples. And, to be sure, it was only a few years ago that we saw regular headlines in the financial news media that were calling for the next Great Depression, total economic collapse, and the destruction of the investment markets as we knew them.

The Reality and the Fed

Fortunately, these negative projections have not been matched by the actual data releases in areas like jobs creation and GDP growth. Steady improvements have been seen over the last few years in both emerging and developed markets, reinforcing investor confidence in the assurance that the economic worst is behind us.

This gives central banks the flexibility they need to start normalizing rate policy - a scenario for which the broader market is still woefully under-prepared. "In the current reality, policy normalization means rising interest rates," said Fan Yang, markets analyst at FXPips. "Last week in the US Non Farm Payrolls, we saw the latest round of evidence that the Federal Reserve will have the breathing room it needs to move ahead with those plans."

(click to enlarge)

(Chart Source: Google Finance)

But while events like the monthly payrolls release will have a clear influence on GLD, the higher interest rates that are ultimately expected as a result shouldn't increase downside pressure in the iShares Silver Trust ETF (NYSEARCA:SLV) to the same degree. Comparative differences in the two metals ETFs will likely be seen, given the fact that silver is still associated with some industrial applications. But since these two ETFs do share a strongly positive correlation over history, any changes in central bank policy that are bearish for GLD will likely carry over into SLV as well. This can be seen above in the relatively similar trajectory each ETF has shown over long-term intervals.

Jobs Data

(click to enlarge)

(Chart Source: Trading Economics)

Monthly jobs numbers in the US came in at 288,000 for May, while the unemployment rate fell to 6.1%. These numbers are even better than the Fed's own projections, and there is a variety of reasons to view these developments as strong and sustainable. The US economy has added more than 200,000 jobs in each of the last five payrolls reports, an event which has not occurred since the 1990s tech boom. The unemployment rate itself (the Fed's preferred gauge) has fallen to its lowest levels in six years. All of this supports the argument for the Fed to start tightening next year - an environment which would make it difficult for both GLD and SLV to move much higher.

Potential Positives

Of course, the picture can't be entirely negative all the time, and there are some factors to consider that could start to create a more bullish effect in GLD. ETF outflows have continued into the mid-point of 2014, but the close-out rate has started to slow. Additionally, the US Dollar has had some difficulty gaining traction against some of its most commonly traded counterparts (the British Pound and Japanese Yen would be primary examples here). The value of the US Dollar holds a strongly inverse relationship with GLD. And if the finalized QE stories are not enough to bring buyers to initiate bullish exposure to the greenback, we could be in store for a prolonged downtrend in the currency (a supportive factor for GLD). For those reasons, it will be equally important to watch activity in the PowerShares DB US Dollar Index Bullish ETF (NYSEARCA:UUP) and the Dollar-denominated forex pairs.

Chart Perspective: GBP/USD

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(Chart Source: Orbex)

Of particular interest in this area is the GBP/USD, which has recently gained a foothold above 1.70. The GBP/USD is not generally given the attention that is offered for the EUR/USD or USD/JPY. But this diminished interest will often lead to more volatile price activity in its less liquid market. Is the rally above 1.70 the early indication of more broadly based Dollar weakness? As of now, it is too early to tell - but with the Dollar unable to gain traction (even as the Fed closes out on QE), there is still scope for additional weakness in the Dollar. If this occurs, we could see gold bulls re-enter the market. Without it, caution is warranted as GLD still trades within striking distance of its yearly highs.

Source: SPDR Gold Trust ETF: Bulls Still Cautious At The Highs