HardAssetsInvestor

Written by Cinthia Murphy  |

September 07, 2012

Precious Metals ETFs Jump On Weak Jobs Data

Details

A bad jobs report leads investors to prepare for QE3 from the Fed.

[This article first appeared on IndexUniverse.com and is republished here with permission.]

Prices of precious metals and Treasurys were jolted higher Friday after the U.S. government reported that the world’s biggest economy generated far fewer jobs in August than had been expected, encouraging views that the Federal Reserve was likely to launch new stimulus to keep the economy from slipping into recession.

The U.S. Labor Department said this morning that 96,000 new nonfarm jobs were created in August—a sharp decline from July numbers and a major upset for a market that had been looking for at least 125,000 new job posts for the month.

The prospect of Fed action in the form of bond buying has helped lift asset prices since the Fed enacted the first so-called quantitative easing program in the depths of the market meltdown in 2008. QE3, so named because it would be the third such policy action by the Fed, could come as early as next week.

Gold prices rose more than 1.5 percent, while yields on benchmark 10-year Treasury notes fell to 1.59 percent as investors bid up bond prices.

Government debt prices get pushed up by QE because market participants position themselves to take advantage of the Fed’s presence in the bond market. Precious metals also jump because QE weakens the dollar. A weaker dollar means materials such as gold that are priced in dollars automatically get more expensive. Moreover, dollar weakening often leads investors to look for enduring stores of value like gold.

The jobs report also contained a head-fake in the form of a drop in the unemployment rate to 8.1 percent from 8.3 percent previously. The decline reflects people dropping out of the labor market rather than actually finding new jobs.

Price Moves

Precious metals prices quickly jumped on the improving prospects for QE3.

Gold prices were up 1.6 percent in early trade at $1,735 an ounce, which buoyed gold ETFs such as the SPDR Gold Shares (NYSEArca: GLD) and the iShares Gold Trust (NYSEArca: IAU), both of which were up 1.6 percent in early trade.

Other markets such as silver and copper were also rallying early, with copper prices hitting their highest mark since May.

Silver funds such as iShares Silver Trust (NYSEArca: SLV) and the ETFS Physical Silver Shares (NYSEArca: SIVR) were tagging on gains of some 2 percent early on while the iPath DJ-UBS Copper Total Return ETN (NYSEArca: JJC) surged more than 3 percent.

On the bond front, yields on the 10-Year Treasury Note sank nearly 5 percent to 1.59 percent in morning trade, and were hovering around the 1.6 percent mark as investors rushed to own the bonds ahead of any Fed action. Bond yields move inversely to prices.

The $4.6 billion iShares Barclays 7-10 Year Treasury Bond Fund (NYSEArca: IEF) was up 0.6 percent shortly after the opening bell, while the longer-dated iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) was rallying nearly 1 percent.

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