Gold defies booming jobs report as Bank of America lifts forecast

Golds startling resilience was the buzzword afterFridayshighly scrutinized U.S. employment report and another reason why a major banks new bullish forecast should carry weight with bullion investors.

In anticipation of the June nonfarm-payrolls number from the Labor Department, the gold price initially dippedFridayafter hitting two-year highs earlier in the week as traders took profits.

The jobs report is viewed as a gauge of the U.S. economy as well as an indicator of the Federal Reserves future interest-rate policies. Along with Brexit uncertainties, the disastrous Mayjobs report issued in June ensured that the central bank would not raise rates at its meeting that same month.

Payrolls rose by 287,000:However, the June payrolls number publishedFriday(July 8) surprised to the upside,with 287,000 jobsreportedly created. Gold then fell near $1,336 but then remarkably rebounded back into positive territory. By early afternoon the metal was just below break-even status, trading near $1,360. (Silverrose, again topping the $20 level, and stocks gained as well.)

Conventional wisdom holds that if the jobs number was poor, the gold price would rise because of cooling expectations of a Fed rate hike. Conversely, a strong jobs report would be expected to slam bullion lower by raising the likelihood of Fed action. (Rising interest rates are often, though not always, associated with lower gold prices.)

Brexit likely ties Feds hands:But gold has held relatively firm. Why? Because 1) the true U.S. jobs picture isnt nearly as strong as the payrolls report suggest. The unemployment rate rose to 4.9%; a closer look at the employment categories shows that most of the newjobs areminimum-wage positions; and the labor-participation rate remains near record lows, with more than 94.5 million Americans out of the work force.

And 2) even though a good headline jobs number would ordinarily pressure the Fed to raise rates, too many negativesexist in the global economy for the central bank to start tightening now. Uncertainties from the pro-Brexit referendum are only just starting to unfold, with cracks surfacing in the UK property market and across the European banking system (especially in Italy as well as in Germanys Deutsche Bank).

U.S. elections also a factor:Moreover, with the U.S. presidential election just months away, the Fed might be reluctant to change the status quo by raising rates now. A rate hike could derail thestock market and the overall U.S. economy, and with Fed chief Janet Yellen leaning left politically, any resulting shocks could hurt the chances of her presumably preferred candidate, Democrat Hillary Clinton, against Republican Donald Trump.

Sure, The Wall Street Journals Fed insider, Jon Hilsenrath, as well as Goldman Sachs both see the chances of a Fed ratehike rising after this positive jobs report, butothers disagree largely because of the ongoing Brexit overhang.

One jobs number isnt going to change the outlook for the Fed right now, said Bob Haberkorn of RJO Futures. It hasnt changed the fundamental outlook for the global economy, because we still have Brexit and low rates.

BOAML sees $1,475 ahead:That overhang is one reason why gold was standing tough after the jobs report and why investors should consider taking Bank of America Merrill Lynchs new bullion forecast seriously.

A BOAML research team led by Michael Widmer has joined the likes of Credit Suisse and Morgan Stanley in predicting gold prices rising near $1,500 in the coming months.

The world has been walking from crisis to crisis and we see risks that this may not change, the banks analystswrote. We called a bottom in gold in February and Brexit reinforces our view. As such we are upgrading next years gold price forecast from $1,325 per ounce to $1,475 per ounce.

The burgeoning chorus of gold bulls also includesBarry Dawesof Paradigm Securities ($1,400-$1,500, this year, with longer-term potential of $1,900);Georgette Boeleof ABN Amro Bank ($1,425 this quarter, $1,450 in 2017); andJoni Tevesof UBS ($1,400).

Call for personal acquisition assistance: 1.800.880.4653

Subscribe to our eNewsletter

Get the latest tangible assets news, insights and buying recommendations delivered to your inbox every month.