February has shown some light on gold with its value rising early in the month from $1,250 per ounce to $1,275 today. This streak is considerably better than the tail end of January, when prices had slumped to almost $1,240 per ounce. Here’s a look at some factors that may be contributing to gold’s February increase.
Gold and the NFP report
The Nonfarm Payrolls Report came out last week with much anticipation. The yellow metal saw an initial jump, with prices hitting above $1,270 per ounce as the data came back with less-than-expected numbers. The number of nonfarm payrolls rose only by 113,000 which was considerably below the forecast of 190,000.
This was favorable for gold because of how the Federal Reserve may respond. The aggressive economic stimulus program known as quantitative easing has been good for gold due to the massive amounts of money being printed to purchase bonds and mortgage-backed securities. As this practice continues, investors seek out safe haven investments like precious metals to protect the value of their wealth. Payroll numbers coming in below par is a good indication that the Fed will not be so anxious to taper the stimulus, therefore extending gold’s increase.
Investors are advised to watch for next month’s report. There is speculation that there may be a considerable increase in payrolls. “All in all, I don’t see the Fed paying much attention to this report. The February one is far more important as it won’t be distorted by poor weather,” said Craig Erlam, market analyst at Alpari in London. “I expect this to be a far better report, in terms of jobs added, with it probably picking up a lot of the slack from December and January. A number above 250,000 next month is probably not unrealistic.”
All things considered, even if next month’s numbers are higher and the Fed does decide to taper, there may just be a repeat of what happened in January. Emerging markets are used to a surplus of U.S. dollars and when this is threatened, gold demand soars from countries like Turkey and Argentina. To find out more about this reverse effect, look to last week’s post, Federal Reserve Tapering Bodes Well for Gold.
Chinese Demand on the Rise Again
The Chinese New Year sparked trading volumes over 22 tonnes – the highest in over a month. Premiums were up as well in China which has become the world’s largest gold consumer. Gold premiums soared to $11 per ounce; considerably more than the $4 per ounce before China went on holiday. It appears China has no intentions of slowing down its gold consumption even with inflated premiums. China recently overtook India as the world’s lead consumer of gold and may stay on this track if the situation India continues.
Gold Smuggling – India and Pakistan
It seems gold premiums in India are easing up somewhat, but a drop to $70 from $80 per ounce is still not ideal. The smuggling of gold into India has actually helped these rates drop as now there is a slightly more prevalent supply. This illegal inflow of gold is due to India’s large 10% import tax duty on the yellow metal. In an effort to help control the smuggling issue in India, neighboring Pakistan has imposed a ban on gold imports. This is good news for gold. When the demand from one country is so strong that consumers resort to smuggling and even cause a bordering country to change its policies and procedures, it’s clear to see that global demand for gold is not slowing down.
With demand on the rise from China, India’s ongoing thirst and the Federal Reserve tapering becoming progressively less of an issue for gold – it seems the yellow metal could well be off to a strong start in February.
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