Gold heads into today’s Fed decision on the defensive. While the FOMC is widely expected to hold pat, today’s ADP employment survey miss has heightened the downside risk for the April employment report on Friday.
Mounting worries that the U.S. economy is sputtering once again and the employment picture is dimming are pressuring stocks and commodities. The dollar, which fell to new three-month lows overseas has rebounded as investors rotate out of shares and into cash.
The ADP employment survey came in at +119,000 in Apr, well below expectations of 160,000, versus a negative revised 131,000 in Mar (from 158,000). Median expectations for April nonfarm payrolls were about +160,000, but the whispers of a possible downside miss are now rampant. TrimTabs Investment Research for example estimates that the U.S. economy added a mere 67,000 jobs in April.
Given the preponderance of recent data, those recently calling for a phased withdrawal of Fed accommodations appear to have been silenced. In fact, I wouldn’t be surprised to hear a more subdued characterization of both the economic outlook and labor market conditions from the FOMC today.
With deflationary pressures seemingly mounting as well, and the ECB perhaps poised to ease, I would argue that heightened accommodations are actually more likely than removal of accommodations. Many believe that the deteriorating economic conditions in the euro zone will prompt the ECB to ease by 25 bps, perhaps as soon as tomorrow.
With the ECB considering an ease, the BoJ already in hyper-accommodative mode, it strikes me as unlikely that the Fed is going to tighten any time soon. Fed chairman Bernanke has said as much on many occasions, but the market has seemed more inclined to fret over the musings of a couple of regional Fed presidents.
The bounce in the dollar is weighing on gold, but I think the market remains particularly concerned about the magnitude of the recent redemptions in various ETPs. Reuters reported this morning that a whopping 174 metric tonnes came out of the paper market in April. Some of that is attributable to reallocation to stocks, but some is clearly associated with getting out of paper and into the real thing.
While demand for physical ebbed this week as prices stabilized below $1500, U.S. Mint data for April is reflective of just how strong demand has been. Mint sales surged to 209,500 ounces in April, a startling 238% increase over the 62,000 ounces sold in March. It was the highest monthly sales total since December 2009.
The press is also replete with stories about gold sellers across Asia and the Middle East whose display cases have been denuded by absolutely voracious demand. My sense is that there is still quite an appetite for physical out there, likely to be reignited by lower prices.
There were a number of holiday closures across a number of Asian financial centers today, which likely impacted demand. Some European markets are closed for May Day/Labor Day holidays as well.
