The May jobs report was an exception. The U.S. economy added significantly more jobs than forecast in the month of June. The key question is what will the Federal Reserve do next. Whether the Fed holds or hikes, there is a strong case to exit the SPDR Gold Trust (ETF) (NYSEARCA:GLD) now.
June Jobs Report Throws A Positive Surprise
Back in May, the Fed had indicated that a rate hike was likely in the summer. Those plans though were derailed after the May jobs report disappointed. In its June meeting, which happened a week before the UK referendum, the Fed kept benchmark interest rates unchanged. More important, the Fed scaled back its rate forecasts for 2017 and 2018.
On Friday though, data released by the Labor Department showed that the U.S. economy added 287,000 in the month of June. The report suggests that the huge miss in the month of May was an exception and the U.S. economic recovery remains on track.
What will the Fed do next? I have noted before that the central bank has never raised rates close to a Presidential election. So a rate hike at the next meeting is unlikely. Having said that the Fed might change its tone a little. We might get a more hawkish statement from the central bank. Also, a December rate hike is back on the table.
Driven by Data or Market Sentiment
The key question is whether the Fed will act on data or sentiment. In the past, the Fed has acted more on market sentiment. Remember that the Fed delayed a rate hike last year after China's decision to devalue its currency against the dollar led to turmoil in the markets. Even before that the Fed has acted more on sentiment than data. If the decision to hike rates is purely based on data then a rate hike is merited this year. The Fed's next meeting will be closely watched. If there are hints of a rate hike in 2016 itself it will be negative for GLD.
What About Brexit?
Fed is not the only factor driving gold though. Gold hit multi-year highs recently after the UK voted to exit the European Union (EU). Concerns over Brexit have eased somewhat over the weekend as there is more political certainty in the UK. However, Britain's terms of exit from the EU are still not known. In fact, it is still not clear when Article 50, which will begin the exit negotiations, will be invoked. With Brexit issue still lurking, GLD cannot be written off completely. But taking profit now will be a prudent strategy.
GLD finished higher on Friday despite the strong jobs report. It saw a pullback on Monday though. I believe that in the near-term we could see further pullback. After Friday's strong jobs report, two more positive developments have happened that have boosted market sentiment. The first was the landslide victory for Japan's ruling coalition in elections for the upper house. The verdict suggests that Japanese voters have approved the so called Abenomics, measures implemented by the Shinzo Abe government to boost economic growth and fight deflation. The second is some political certainty in the UK. Following the referendum results, the British Prime Minister David Cameron had announced his resignation. After almost three weeks of uncertainty, Theresa May has emerged as Cameron's successor.
These two factors, combined with the June jobs report have turned the market into risk on mode. On Monday, the S&P 500 closed at record high levels. To add to this, the upcoming earnings season is expected to be better than the first quarter. All these factors are also coinciding with weak technicals for gold. As the chart below shows, GLD is hovering around a stiff resistance level.
The right strategy with GLD would be to take profit and remain on the sidelines at least until the next Fed meeting.
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