Gold price rallies to 7-week high

It’s a fine Friday

On Friday, gold bulls were off to the races, spurred by a turnaround in sentiment towards commodity markets and fresh indications that a rise in US interest rates may be further off than previously thought.

In heavy volumes in afternoon dealings on the Comex market in New York, gold futures with December delivery dates traded up as much as $15 or 1.3% at $1,159.30, the highest since August 21.

Gold is up 5% from where it was trading before the US Federal Reserve decided to hold rates steady at its September meeting. The last time rates were hiked was June 2006.

Gold jumped higher again after US Labor Department Statistics a week ago showed only 142,000 jobs were created in September, well below analyst estimates of 205,000.

Gold’s leg up on Friday came after Fed minutes released yesterday suggested that the US economy will grow well below historical averages for the rest of the decade. The central bank estimates growth of around 1.7% through 2020 versus average growth of 3.1% over the past 50 years.

The weak outlook provides further support to doves on the interest rate setting committee to keep rates near zero well into 2016.

Gold has an inverse relationship to US interest rates and  the gold price can be used as a predictor of interest rates, serving as an early warning system of both the direction and magnitude of the move in rates. The underlying reason for the relationship is that as US yields rise the opportunity costs of holding gold increases because the metal is not income producing.

The expectations of higher rates in the US has also been a major factor boosting the dollar, which as expected dropped in value against the US major trading partners following the weak outlook.

Gold is not alone in benefitting from a weaker dollar. Since last week’s weak job report crude oil prices have jumped 13%, platinum is up 8%, copper 4.8% and industrial metals 5.2% on average after double digit gains for zinc. Aluminum gained more than 5% over the week while benchmark iron ore price advanced by the same margin.

Including more modest advances for the agricultural sector (cocoa is the only commodity not in positive territory for the week) it’s the best week for commodities (as per the Bloomberg Commodity Index) since July 2012.

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