6/1/2012
By David Urani, Research Analyst

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The action in gold today is very compelling, coming off of support and turning upward to the tune of more than 3% today. Obviously the idea that the US employment picture is deteriorating is sparking a run to safety; I will spare you the bull case of gold as a safety investment, everyone knows that.

But what gives gold extra support is the idea of central banking intervention. If there's one thing that will turn the markets back around in the near term it's money printing, and now that we are facing global recession it's becoming likely that we see some sort of intervention by world central banks. Of course money printing means weaker currencies and reduced faith in money in general. Actually, gold does face a risk in the event that the ECB decides to turn on the presses and the Fed doesn't, as it's likely to raise the relative value of the dollar; seeing as gold is priced in dollars it may become vulnerable.

That's where the employment report comes in. Not only was the 69k nonfarm job gain disappointing, but after revisions the BLS shows that job growth was also anemic in April at 77k, and has been slowing for four months in a row. Of course, we all know that the Federal Reserve follows the Dual Mandate, which includes targeting maximum employment. That means the possibility of more QE just got that much better. Dollar printing could serve to be a big boost to gold, as it has in the past due to the weaker dollar implications.

Given the dismal world economic data this week, it makes sense to look for defensive names and short selling. But short sellers are vulnerable to a government intervention rebound. With gold, investors may win in both a bear market and a government-induced bull market. The one scenario where gold may be pressured is in that middle ground in which the ECB swings into action and the US Fed does not. But in the case that the ECB acts before the Fed, do not rule out the possibility that the Fed follows suit down the road.

David Urani
Wall Street Strategies