Gold Reverses Sharp Drop on Strong US Jobs Report, Short-Covering "Now in the Air"

London Gold Market Report

WHOLESALE gold in London reversed a sharp drop Friday lunchtime, recovering a $20 plunge on the release of US jobs data to trade back above $1230 per ounce, heading for a 1.7% drop on the week.

Versus analyst forecasts of 180,000 net hiring last month, the US economy added 203,000 jobs according to the official Non-Farm Payrolls report.

The unemployment rate felling to 7.0% in November.

Commodities had earlier ticked higher with European stock markets, which were heading for near-3% weekly losses. 

Priced in Dollars, gold started afternoon dealing in London 1.7% below last Friday's finish.

The Euro currency meantime fell hard from 5-week highs to the Dollar, helping gold for Eurozone investors move back above €900 per ounce, a 3-year low when hit earlier this week.

Silver also whipped with gold, rallying back above $19.40 to head for a 2.5% weekly fall.

"Short-covering is now in the air," one Asian trading desk said earlier, after Wednesday had seen bearish speculators being forced to close their bets by a$25 spike on the private-sector ADP jobs report.

Economists' language "has now turned to suggest Fed tapering will hit US bonds most directly," the note added.

The US central bank, said Dallas Fed president Richard Fisher on Thursday, should now"define a very clear path...once we start tapering...as to when we reach zero" from the current monthly QE of $85 billion.

But noting the volatility in UK gilt prices and yields after new Bank of England governor Mark Carney discussed a timeline for raising interest rates here, "It is questionable," says French investment and bullion bank Natixis, "how successful the Fed could be in calming fixed-income markets through its own forward guidance.

"Indications of stronger US growth therefore have scope to undermine gold further if the US bond market continues to push yields higher." 

"Rising opportunity costs depress gold," agrees Germany's Commerzbank in a new 2014 outlook, also pointing to higher real US interest rates (after inflation) in 2013 as well as the surging US stock market.

Even so, "Gold is likely to recover from its historic slump this year," Commerzbank's commodity team concludes. Gold investment demand "should gradually revive...in conjunction with robust demand from Asia."

"China is absorbing the gold which is becoming available as a result of ETF outflows," the report adds.

"Essentially," agreed James Steel at London bullion market-making bank HSBC to the FT this week, "physical gold stocks are migrating from Western investment hands to eastern consumers." 

"If China," adds mining fund manager Evy Hambro, at Blackrock "starts to move towards similar per-capita gold consumption levels as India, that will be very supportive for the market."

Slipping 0.7% this week for Chinese traders, prices on the Shanghai Gold Exchange ended Friday equal to $1242 per ounce, almost $10 above London quotes at the time.

That premium to benchmark wholesale prices compares with $7 at the start of the week.

Indian premiums meantime hit new all-time records Friday, as the world's former No.1 importer faced ever-tighter domestic supplies following the government's anti-gold rules.

"Only ScotiaBank, State Bank of India and some trading agencies like MMTC are importing," Reuters quotes one wholesale gold dealer in Kolkata.

"There is no other option for domestic jewellers but to pay high premiums," the dealer, Harshad Ajmera of J.J.Gold House goes on, citing the new record high above international prices of $150 per ounce on Friday.