For Gold to Rise, Physical Buyers Must Return

Since its 2012 peak at the end of February at $1,786.1, gold has lost over $140/oz. Much of this fall is on the back of an increasingly firm belief that another bout of quantitative easing in the U.S. is unlikely.

So, when the U.S. government released its latest set of non-farm payrolls data, which came in weaker than expected, it was not surprising that gold prices rose.

As UBS's Edel Tully points out, "Friday's NFP should be giving gold the opportunity to gather support again."

The big question on the minds of potential buyers, in Tully's view is, "does this latest data challenge the increasingly accepted view that some form of QE is unlikely to come from the Fed?"

While the increased uncertainty could boost gold in the short term, for Tully and the economists at UBS, do not expect this to be the catalyst that gets gold back on its feet.

"Although more on the disappointing end, Friday's data hardly comes as a game-changer. Our economists think that the softer-than-expected March payrolls are likely due to weather effects rather than fundamental weakening. They estimate that the earlier weather-related boost to employment figures has now more or less been fully reversed, given the weak numbers in March," she writes.

Morgan Stanley, is a little more on the bullish side.

In a note out earlier yesterday titled, "We still like gold" the bank writes, " We believe that the recent weakness in gold is a good entry point as some elements of the recent selling pressure appear to be at odds with the FOMC's still dovish position. As the Fed continues believing that long-run inflation will likely remain subdued, it has reaffirmed a commitment to accommodative monetary policy, as expressed by zero nominal rates, negative real rates, and Operation Twist. These developments will likely support gold prices. Moreover, we believe that the weak March payroll report out last week likely underlines the Fed's cautious outlook."

And, it points out, "After peaking in mid-1Q12, gold prices fell amid renewed volatility. We note such corrective price movements have been evident throughout the 2001–12 bull market, especially since the acceleration in the uptrend from 2009. Notably, this latest correction, while painful, has not retested the late December 2011 lows and has so far been notably less severe than the retracement in 2H11."

Where to next?

For Tully, the yellow metal needs a boost from the physical side of the market if it is to really turn a corner and build momentum.

"The end of the jewellers strike in India provides a good foundation, especially with the Akshaya Tritiya festival on Apr. 24. But prices need to be appropriate."

She points out that Indian demand only really started to kick in last week when gold traded below $1,620/oz.

But, she adds, "The relatively 'clean' state of spec positioning could enable a move higher, if interest returns. The latest COTR to Apr. 3 shows the gold net longs contracted by 1.07 Moz to 18.7 Moz. But this factor is just an enabler; investors need to want to buy gold first." – Geoff Candy, Mineweb