Turmoil in Ukraine Helps Underpin Gold

10/02/2014 7:00 am EST

Focus: COMMODITIES

In this article, James Hyerczyk at FXEmpire.com addresses how recent geopolitical events in Ukraine and concern over global growth had an effect on the global markets and suggests a plan of action as traders await Friday’s US Non-Farm Payrolls report.

Turmoil in Ukraine and concern that global growth is slowing helped drive investors into US government securities, driving down Treasury yields. This helped diminish demand for the US dollar.

Also out of the US, private jobs data from ADP Research Institute showed the US economy added 213,000 new jobs. This was above the 205,000 job estimate. On Friday, the US is scheduled to release the September US Non-Farm Payrolls report. This report is expected to show a 218,000 job increase versus a 142,000 gain in August.

Another report showed US manufacturing softened a little in September. The Institute for Supply Management’s Index dropped to 56.6 from 59 in August. Traders had priced in a figure of 58.6. PMI data for German and the UK showed a steeper-than-expected decline in manufacturing in both countries in September, with German joining France in contraction. The UK posted a reading of 51.6, below economist estimates of 52.7. Finally, US Construction Spending posted a 0.8% decline versus pre-report guesses of a gain of 0.5%.

The reports didn’t have the expected effect on the currencies and commodity markets. GBP/USD, EUR/USD, and gold traders produced a two-sided trade as they continued to pare positions ahead of Friday’s US Non-Farm Payrolls reports.

Wednesday’s reports were bearish for the UK and the EuroZone, but this data seems to have been baked into the market based on Wednesday’s reaction. Technically oversold conditions also helped trigger countertrend moves. Despite Wednesday’s rebound rallies in the British pound and euro, expectations are for these markets to continue lower if the US reports better-than-expected jobs data on Friday.

December Comex Gold (IAU) is also likely to fall on bullish jobs news if it triggers a rally in the dollar. However, geopolitical events in Ukraine and the Middle East could underpin the market. The lack of follow-through to the downside recently in gold could be a sign that countertrend investors are coming in to defend the psychological $1200.00 level.

If these buyers force the hedge and commodity funds to cover aggressively, technical factors indicate gold has the potential to spike higher by at least $50.00 over the near-term.

November Crude Oil futures rallied on Wednesday after a government report showed oil stocks unexpectedly fell last week. According to the US Energy Information Administration, crude inventories fell by 1.4 million barrels in the week-ended September 26.

Continue to look for light profit-taking and position squaring in the British pound, euro, and gold ahead of Friday’s US Non-Farm Payrolls report, but be prepared for volatility due to geopolitical developments in Ukraine.

By James Hyerczyk, Analyst, FXEmpire.com

Related Articles on COMMODITIES