Gold Leaps as Recession Looms


"Gold rose on U.S. jobs data that showed no added jobs in August—the worst result since September 2010. Silver prices meanwhile smashed through $43/oz."

U.S. dollar gold prices rose more than 2% following the start of trade in London on Friday, breaching $1,878 per ounce following the publication of weak U.S. jobs data.

Non-farm payroll data published at 8.30AM New York time showed the U.S. economy added no jobs in August—the worst result since September 2010 showed a slight decline.

Silver prices meantime smashed through $43 per ounce—a near 4% weekly gain as we head towards the weekend.

European stock markets slid throughout the morning—with the falls accelerating following the nonfarms announcement. The FTSE 100 dropped 0.7% in less than five minutes, while the German DAX dropped 1.1% over the same five minutes.

"Investors are coming to grips with the magnitude of how severely the U.S. economy and global economy have and will slow," said Adam Cole, global head of foreign exchange at RBC Capital Markets, speaking before the jobs data were announced.

"Most of the problems in the U.S. have a root in the lack of sustainable employment growth."

"People are weighing whether we're facing a looming recession in 2012," adds Nick Nelson, head of European equity strategy at UBS.

"There's enough background noise in Europe, the U.S. and Asia to remind people of the many risks out there."

The manufacturing sectors of several major economies contracted in August, while others grew at very low rate, according to official purchasing manager index data released Thursday.

Manufacturing PMI in Germany, for example, dropped to 50.9—down from 52.0 the previous month (a figure below 50 indicates contraction).

"German PMI manufacturing has moved uncomfortably close to contraction...while Eurozone manufacturing has pushed deeper into negative growth," notes Marc Ground, commodities strategist at Standard Bank.

"This should only serve to heighten concern over a possible Eurozone recession to the benefit of gold and silver."

The European Central Bank should cut interest rates "as insurance to lower the risk of outright recession re-emerging," reckons Julian Callow, chief European economist at Barclays Capital in London.

"The economic deterioration has become sufficiently rapid and alarming."

"A weakening of global economic growth...should enable authorities to begin easing monetary conditions over the coming 3-6 months," adds a note from French investment bank Natixis.

Selling official reserves of gold bullion, meantime, "is not a solution" to the sovereign debt crisis, news agency Reuters quotes Philip Klapwijk, executive chairman of leading precious metals consultancy GFMS.

"The extent of the problem and the holes that need to be filled are so large that the gold doesn't really provide a solution."

Last year's Greek bailout, for example, was valued at €110 billion, while the most recent one agreed in July adds a further €109 billion to the rescue bill.

By contrast, WGC data suggest Greece officially holds just €4.7 billion of gold if valued at this morning's AM London Fix price.

Even the U.S.—holder of the world's largest stock of official gold reserves—could not clear its debt by selling gold. U.S. national debt is currently over $14.3 trillion—while its gold reserves are worth less than 4% of that at $484.8 billion.

Not only that, but "foreign exchange reserves are held and managed by central banks, not by governments," points out Natalie Dempster, director of government affairs at the World Gold Council.

"[They] are set aside for specific purposes—defense of currency, payment of external debt obligations and payment of imports."

In 2009, Bank of Italy governor Mario Draghi—who will take over from Jean-Claude Trichet in November as president of the European Central Bank—refused a request made from Italy's government to sell off some of the country's official gold reserves.

Over in Hong Kong meantime, the average daily traded volume of gold bullion last month was equivalent to 10 million ounces (311 tonnes)—double the daily volumes seen earlier in the year—according to the Chinese Gold & Silver Exchange Society, news agency Bloomberg reports.

Ben Traynor

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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