Gold gains for a second day on QE outlook

Gold rose during early European trading on Monday as disappointing payroll data on Friday spurred speculation Fed will hold back from tapering its monetary easing program for some time as the labor market remains frail.

On the Comex division of the New York Mercantile Exchange, gold futures for December delivery traded at $1 313.85 per troy ounce at 7:48 GMT, up 0.26% on the day. Prices ranged between days high and low of $1 319.85 and $1 310.75 respectively. The precious metal settled 0.33% higher on Friday but still closed the week 1.66% lower after advancing 3.9% the preceding two.

Gold rallied for a second day on Monday as the U.S. Department of Labor reported on Friday the U.S. economy created far less jobs in July than economists expected. Non-Farm Payrolls climbed by 162 000, underperforming analysts’ expectations for a 185 000 figure. This was also below June’s reading of 188 000 jobs created, which was revised down by 7 000 from 195 000.

The negative payrolls reading offset other overall positive U.S. data that was released on Friday. The U.S. Department of Labor reported the Unemployment Rate fell to 7.4% from 7.6% in July, the lowest level since December 2008. Economists expected the indicator to drop by 0.1% to 7.5%.

Personal Income rose by 0.3%, mismatching forecasts for a 0.4% surge and May’s downward revised reading of 0.4%. On the other hand, Personal Spending exceeded the income increase of the average American and met expectations for a 0.5% surge, compared to June’s downward revised figure of 0.2%.

The controversial data sent the dollar falling, allowing commodities to advance. The greenback trades inversely to dollar-denominated raw materials. Weakening of the currency makes commodities cheaper for foreign currency holders and boosts their appeal as an alternative investment. The dollar index for September settlement swung between gains and losses last week amid controversial U.S. data and settled the week 0.3% higher after trimming previous weekly gains. On Monday, the U.S. currency gauge hit a new days low at 81.84 at 7:46 GMT, down 0.20% on the day. Days high stood at 82.00.

Mark To, head of research at Wing Fung Financial Group, a Hong Kong-based precious metals trader and refiner, said for Bloomberg: “Prices came back from intraday lows on Friday after July payrolls growth came in short of expectations, leading to speculation that the Fed’s plan to taper bond buying could be pushed further out. Buying interest in gold remains strong.”

This comes after the FOMC said in its after-meeting statement last week that Fed will keep its Quantitative Easing program intact as it sees risks of disinflation.

“The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said.

FOMC’s statement provided overall no new language since its latest meetings on the conditions for maintaining and decelerating the monetary stimulus. Bernanke and his colleagues said that further improvements of the labor market are required. Meanwhile, inflation remained stable and below the central bank’s 2% target, hinting risk of disinflation.

Gold’s price has largely been tracking shifting expectations of an earlier-than-expected deceleration of Fed’s monetary easing program. The metal is used mainly as a hedge against inflation, which accelerates when a central bank eases money supply. An exit from a program such as Quantitative Easing would deliver a heavy blow to gold’s price as its demand will crumble. According to a Bloomberg survey of analysts last month, fifty percent of the 54 economists expect Fed to taper its Quantitative Easing program in September.

Elsewhere on the precious metals market, silver and palladium advanced, while platinum marked a minor daily decline. Silver for September delivery traded at $19.932 an ounce at 7:50 GMT, up 0.13% on the day. The metal held in range between $19.985 and $19.815 per ounce. Platinum October futures fell to $1 450.25, down 0.09% on the day. Prices ranged between days high and low of $1 452.50 and $1 444.60 respectively. Meanwhile, palladium for September delivery traded at $732.50 per troy ounce, up 0.38% on the day. Futures varied between high and low of $732.50 and $729.00 an ounce respectively.