Metal Prices And Debt Yields

Friday’s U.S. jobs report was a game changer as far as the gold market is concerned. Jobs growth in May was just 69,000, well below economists’ expectations of 150,000 gains, while April’s payroll number was revised down from 115,000 to just 77,000. The unemployment rate also increased from 8.1% to 8.2% -- troubling news for President Obama as his presidential-election campaign shifts up a gear.

Gold and silver both shot up on the news, which seemed to indicate the Federal Reserve will resort to more quantitative easing. June Comex gold settled $57.90 higher, an impressive 3.7% intraday move, while silver for delivery in the same month gained 2.7% to close at $28.50. Platinum recorded a more modest 1.1% gain, while palladium recorded barely any gains on the day as the more industrially orientated precious metals lagged gold on account of the bearish news swamping the global economy at the moment.

The Dow lost 2.2%, while the yield on 10-Year Treasuries fell another 10 basis points to 1.46%. Yields are even lower on equivalent German debt (1.16%) and Japanese (0.81%), while lending money to the Swiss government for 10 years currently yields a whopping 0.48%.

Governments Steer Credit
Investors’ quest for “safety” is undoubtedly part of the reason why yields on government debt are so low. Aggressive buying by central banks (whether in the form of quantitative easing or the Fed’s current “Operation Twist” scheme) is also a factor. However, analysis from Citigroup shows that U.S. and European regulators are essentially forcing banks to buy government debt. While obviously a good way for governments to keep funding themselves, what happens in the event of sovereign defaults? Moreover, channelling money to the government comes at the expense of loans to the private sector. How is healthy economic growth to return if credit is being steered away from private enterprise?

$1,625 is the next important resistance point for gold -- this marking the metal’s 50-day moving average, and the point at which it ran into resistance on Friday. Beyond that, $1,650 and $1,680 are the next two resistance points worth noting.