Gold's Downward Direction Supported, Upside Catalysts Dormant

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Includes: GDX, GG, GLD, NUGT, SLV, UUP
by: Markos Kaminis

Summary

Friday's Employment Situation Report rebutted last month's data, which was also revised higher, and answered an important question about the strength of the U.S. economy.

As a result, the key driver of gold's recent trend lower, dollar strengthening, was reinvigorated and the SPDR Gold Trust shed 1.25% of its value on the day.

Upside risks remain which could alter the path for gold, but they remain dormant for now as this prevailing key driver is strengthened.

The gold short is no longer a low hanging fruit among investment options, but it appears to have near-term viability.

Over the course of the last several months, I have time and again written about the importance of the dollar to gold prices. More recently, I indicated that the dollar's great drive higher had come up against a new question being posed about the American economy. I have said that the economic question would need to be answered for dollar appreciation to continue and for gold's downward follow through as well. Friday's jobs report answered that question in an important manner, and gave the dollar renewed vigor and in turn restarted gold's decline. The Dollar Index Spot Exchange Rate was up 0.7% Friday and the SPDR Gold Trust (NYSE: GLD) closed down 1.25% in turn as it pushed through strong support. There are many factors at play and scenarios that could alter the gold's direction now at almost any moment, so it is no longer a low hanging fruit for short investment, but for now gold has downside directional support.

Precious Metals Relative Security

Friday 12-05-14

YTD

TTM

SPDR Gold Trust

-1.25%

-1.5%

-3.5%

iShares Silver Trust (NYSE: SLV)

-1.01%

-16.6%

-16.5%

Market Vectors Gold Miners (NYSE: GDX)

-2.34%

-11.3%

-9.3%

Direxion Daily Gold Miners Bull (NYSE: NUGT)

-7.01%

-54.9%

-51.8%

Goldcorp (NYSE: GG)

-2.45%

-9.9%

-7.3%

The Employment Situation Report for the month of November showed nonfarm payrolls increased by 321K, surpassing economists' expectations for 230K. The data also offered a revision of the prior month disappointment, with October's payrolls being pushed upward to 243K from the initially reported 214K. It was fantastic news, and it was driven by private sector strength. Private nonfarm payrolls increased 314K, and September data was revised up to 236K from 209K. On Thursday, I anticipated that this kind of employment news would be necessary to check off Santa's Checklist in order for a year-end stock market rally to gain steam.

Since I pinpointed the stall in gold's decline and the dollar's rise to last month's employment report, this much different result should allow that old dollar and gold trend to see renewed vigor. It is my view that up until last month's employment report disappointment, the market was relatively sure of American economic strength. It was a given, despite overseas issues, and the focus was on the easing measures being pursued by the Bank of Japan and the European Central Bank (ECB). ECB talk still indicates forward extraordinary measures are probable, which still lends support to the dollar euro relationship, the most important in the dollar index and the driver of gold decline.

So now that we have this economic reassurance, the dollar's appreciation against major foreign currencies seems primed to continue. The jobs data also coincides with a recently upward revised GDP data point for the third quarter. Thus, the U.S. Federal Reserve's plans to raise interest rates in 2015 would remain on track as well.

In the past I indicated that gold should continue to trek lower until some threat were posed against the dollar, and those risks remain. By risks, I mean they hold the potential to turn the dollar trend and start gold higher again. So these are not risks in the traditional sense, but potential upside catalysts for gold.

In my opinion, the most important of these upside catalysts remains Russia. Recent reports indicate that Russia is growing increasingly testy about intensifying western sanctions against it. From the Russian perspective, the lengths to which the west has gone in response to its efforts in Ukraine go far beyond the regional conflict. Based on this report which refers to a German article, it appears that currently being discussed Russian exclusion from the SWIFT banking system would be considered an act of war by Russia, and would completely severe ties between Russia and the United States and Europe.

I've often portended that Russia would likely cut energy flow to Europe this winter to strike back at it for its costly sanctions. I continue to believe that will happen. However, such an action should only further deteriorate the euro relationship to the dollar and further weaken gold, if that were all that happened. Obviously, if Europe is seriously threatened, the U.S. is threatened and the dollar gives way along with other currencies to man's default currency, which I strongly believe is gold. There remains the possibility that Russia will not want to give the U.S. dollar any further support and could act in some manner, perhaps unexpected, to harm the U.S. and give reason to question dollar safe haven status. Also tied to Russia's isolation and the west's plans, Russia is buying gold fast and furiously, and this supports gold as well.

Finally, there remains the risk posed by the Islamic State and competing terrorist organizations. While Europe remains an easier terror target for these organizations, the U.S. is in their crosshairs. In 2009, on Christmas Day, a plot failed to destroy a U.S. bound aircraft. Like the so-called underwear bomber, today a new Christmas terror plot is among the chatter intelligence agencies are picking up. An attack against America would do damage to the dollar and support gold, and so is a risk to the gold downside argument and bet. I would not be short gold the week before Christmas and through New Year's Day. I recently fielded criticism for hedging through Thanksgiving, but I would much rather be criticized than be right about this. Remember, we actually want to lose money with hedges on their cost, because we only reduce our primary investment loss exposure using them.

Risks aside, the underlying catalyst today for gold, and the one investors can most count on is its discounting in dollar terms as the greenback appreciates against major currencies. This key catalyst has just received major confirmation and support in the strong employment figure. So, for now, the SPDR Gold Trust has directional downside support. While investors should be aware that gold is no longer a low hanging fruit, in terms of its predictable depreciation in value, it should drift lower near-term for as long as risks stay dormant. For regular updates on gold and the factors affecting it investors may find my column a value resource.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.