Gold rebounds from Friday’s slump, gains remain capped on QE outlook

Gold rebounded on Monday after tumbling more than 2% on Friday as the U.S. Labor Department released data showing the worlds largest economy created more jobs in June than expected, which shot the dollar up. Gains were however limited as the positive economic news reinforced Feds view to scale back its monetary stimulus during the second half of the year.

On the Comex division of the New York Mercantile Exchange, gold for August delivery traded at $1 225.85 per troy ounce at 8:16 GMT, up 1.08% on the day. Prices ranged between days high and low of $1 228.65 and $1 214.55 respectively. The precious metal plunged more than 2% on Friday following the released U.S. labor data, erasing previous gains and settling the week almost 1% lower. During the preceding two weeks gold fell more than 11.5%.

The yellow metal drew support last week as renewed financial problems in the peripheral Euro zone members boosted its appeal as a safe haven for wealth preservation. However, Greece is likely to reach an agreement with its lenders for the next tranche of monetary aid and Portugals ruling coalition also settled its inner conflicts and remained stable.

On Friday, the U.S. Labor Department reported that the U.S. economy created more jobs than expected in June, which was followed by an upward revision of Mays reading, showing a stable recovery of the labor market. The Change in Non-Farm Payrolls indicator surpassed expectations for a 165 000 reading, surging to 195 000, aligning to May’s revised reading. The Unemployment Rate for June in the world’s biggest economy failed to meet expectations of a decline to 7.5% but remained unchanged at 7.6% compared to May.

Average Weekly Hours met projections and remained the same compared to June at 34.5 hours, whereas Average Hourly Earnings surged to 0.4%, surpassing projections of a 0.2% gain and above May’s 0.1% revised reading.

This shot the dollar index up to a 3-year high on Friday, after which a higher level of 84.83 was reached during the Asian session on Monday. The dollar index traded at 84.70 at 8:00 GMT, up 0.01% on the day. It surged almost 0.9% on Friday, closing the week 1.53% higher after settling the previous two weeks 0.98% and 2.21% on the upside, respectively.

The dollar and dollar-priced commodities tend to trade inversely. Strengthening of the greenback reduces a raw materials appeal as an alternative investment and makes it more expensive for foreign currency holders. And since the future of Feds monetary stimulus is one of the main factors that determine the currencys value, shifting expectations of an earlier deceleration of the bond purchasing program cause wide fluctuations in commodities pricing. The precious metal shed 27% of its value this year, 23% of which during the second quarter as Ben Bernanke announced after the latest FOMC meeting that the central bank will most likely scale back its bond purchasing program during the second half of the year, if the economy’s recovery keeps in line with Fed’s expectations. According to Bernanke, Fed’s moves are tied to what happens in the economy and the central bank has no fixed plan, but sentiment points at reducing bond purchases. Bernanke said that if the economy continues to improve in line with Fed’s projections, it would be “appropriate to moderate the monthly pace of purchases later this year”, and end the program as the unemployment rate drops to 7%, which Fed expects to happen around mid-2014.

As expected, the positive jobless readings further pressured gold since it is used mainly as a hedging strategy against inflationary effects, which arise amid loose monetary policies, such as Quantitative Easing. An earlier deceleration of Fed’s bond purchasing program will additionally cripple gold’s demand.

David Lennox, a resource analyst at Fat Prophets in Sydney said for Bloomberg: “We assume they’ll continue to follow on the same trajectory at looking at potentially limiting stimulus. I don’t think he’ll change his rhetoric,” he referred to Ben Bernanke.

According to data compiled by Bloomberg, assets in the SPDR Gold Trust, the largest bullion-backed ETP, dropped 0.3% to 961.99 tons on July 5, the lowest since February 2009.

Investors are now looking ahead into Wednesdays minutes of Feds June meeting and Ben Bernankes statement, which are expected to provide further information about the central banks future monetary policy.

Elsewhere on the precious metals market, silver, platinum and palladium are also tracking golds upward direction. Silver for September delivery traded at $18.908 per troy ounce at 8:13 GMT, up 0.92% on the day. Prices held range between days high and low of $19.080 and $18.675 respectively. Platinum October futures stood at $1 336.55 an ounce, marking a 0.77% daily gain. Prices varied between daily high and low of $1 341.25 and $1 324.15. Meanwhile, palladium for September delivery gained 0.73% on the day by 8:15 GMT. The precious metal traded at $682.50 an ounce, varying between $688.60 and $673.30.