Friday Sees Biggest One-Day Advance for Gold since August

Precious metals have certainly taken a bruising in the last few weeks…in May alone, gold slid approximately 6%.

But this past Friday, the 1^st of June, witnessed a dramatic rally for gold and precious metals in general. By closing time on Friday, gold broke the $1600 barrier, climbing 3.7% ($57.90) to $1622.10. Silver too had a good day – inching up 2.7% ($0.76) to end the day at $28.51.

Not only did the metals advance, the volume of trading was high, especially for a Friday.

What drove this latest rally? And is it a trend that will continue?

Well, everyone has their opinion we suppose but from our analysis, one of the contributing factors to Friday’s rally was the disappointing news on the jobs front. In May, only 69,000 non-farm jobs were created, well short of the 165,000 many economists were expecting.

This news, coupled with the fact more people entered the labor force, caused the nation’s unemployment rate to tick up to 8.2%.

“Two months of disappointing jobs numbers implies a trend,” comments Brien Lundin, editor of Gold Newsletter (…quoted on Marketwire.com). Lundin goes on to explain that bad employment numbers for two months indicates that a significant downturn is underway, which means another round of quantitative easing from the Fed may be in the offing.

“Gold has been the first [asset] to react to this prospect,” Lundin explains.

Other data regarding manufacturing also put doubts on the true strength of the economy. Another report released on Friday by the Institute for Supply Management (ISM) showed further weakness in the manufacturing sector. In May, the ISM index slipped from 54.8% to 53.5%.

A reading below 50% indicates contraction.

Also quoted at Marketwire, Austin Kiddle of the London-based Sharps Pixley bullion firm says all of this disappointing data “…could be the first sign of a shift in gold back to safe-haven territory.”

But while this news may indicate a long-awaited rally is underway, others say not so fast.

Another analysis over at Commodity Online explains that while gold’s bullish trend is still intact, a big rebound may not be sustainable. Slacking demand in China and India (…the big jewelry buying season in India just concluded) coupled with the possibility that the Fed will NOT pursue any further monetary easing will mean any gold rallies will occur because of profit-taking and be short lived.

For example, they cite the World Gold Council’s estimates that Indian gold demand will moderate in 2012.

While gold will remain strong, it will only average around $1720/oz in 2012 according to their analysis.

Of course, other events around the world will affect dollar-based gold too. As we’ve discussed before, Europe’s financial troubles grind on. Any reforms undertaken will certainly have some sort of impact on gold (…either up or down).

As of this writing (Monday 6/4), both gold and silver had given back approximately 1% and 2% respectively. Considering Friday’s record rally, this most certainly can be attributed to profit taking.

We’ll certainly keep an eye on the metals markets and see where they go from here. Will we see a sizzling summer like last year? It’s too early to tell – as we say a lot here at Provident, much of it depends on what central banks both here and in Europe due in response to a weakening economy.