Gold: Don’t Get Comfortable! GLD NUGT JNUG GDX

What’s bad for the employment picture may be good for the stock market. But it’s bad for the U.S. dollar, which is good for gold and gold ETFs like the SPDR Gold Trust ETF (NYSEARCA:GLD).

Gold: Don't Get Comfortable! GLD NUGT JNUG GDX

Clear as mud? Actually, the chain reaction isn’t nearly as complicated to follow as it may seem.

Jobs Report: Bad News Is Good News

On Friday, the much-anticipated jobs report for August could only be categorized as disappointing. Economists were expecting the addition 180,000 new payrolls, which would in turn move the unemployment rate down from 4.9% to 4.8%. Instead, the nation only created 151,000 new jobs in August, leaving the unemployment rate at 4.9%.

In a twisted sort of way, the jobs report was good for stocks.

Although tapering job growth (we added 255,000 new jobs on July) is an indication of economic malaise, the prospect of rising interest rates has been far more terrifying to investors than the drag a tepid economy could be on the stock market. Had August’s jobs report shown strength for what would have been a third straight month of major progress, the odds of a rate hike at the next possible moment for the Federal Reserve would have soared.

Investors got the reprieve they wanted, though. Until the numbers were posted, the market’s index futures were mostly flat. After the jobs report was unveiled, those same futures jumped, with traders breathing a sigh of relief that the next rate hike had likely been at least delayed a bit.

That’s not the only impact the news had, however.

Ripple Effect on Gold

As much as stock investors have been eyeing the recent employment reports, bond traders as well as those who trade commodities like gold or oil have also been on edge, with the prospect of rising rates looming. A country’s interest rates also impact the value of that country’s currency. Specifically, rising interest rates make a nation’s currency worth more, and falling interest rates makes that nation’s currency lose value.

In that oil and gold are priced in U.S. dollars, what works against the dollar works in favor of gold.

Clearly the Federal Funds Rate didn’t change, nor is it apt to in the immediate future now that Fed Chairwoman Janet Yellen has room and reason to hold off on such a measure. The economy clearly  isn’t overheating just yet.

The end result? The value of the U.S. dollar was sent into the red on Friday. That marked the third straight day the dollar had lost value. (Some were already speculating that a moderate jobs report would give the Fed some breathing room.)

The result of the dollar’s weakness: Gold staged a respectable effort to reverse a downtrend that’s taken away nearly 4% of its value since Aug. 2. The aforementioned SPDR Gold Trust ETF was up 0.8% as of the latest look on Friday.

SPDR Gold Trust (GLD vs. U.S. Dollar Index

The impact was even greater on gold mining stocks and the Market Vectors Gold Miners ETF (NYSEARCA:GDX), and greater still for leveraged gold mining exchange-traded funds like the Direxion Daily Gold Miners Bull 3X ETF (NYSEARCA:NUGT) and the Direxion Daily Jr. Gold Miners Bull 3X ETF (NYSEARCA:JNUG). GDX was higher by 3.1% following the employment report, while and NUGT and JNUG were trading up 9.5% and 11.7%, respectively, early in Friday’s action.

That was courtesy of the greenback’s value dipping on diminishing odds for a near-term rate hike.

Don’t Get Comfortable

While today’s weak dollar may well cement a bullish reversal in place for gold and gold-related trading instruments, traders still will want to tread lightly. The market has been fickle on the matter of late, not entirely sure if a rate hike will be a crushing impasse for economic growth, or a necessary measure to keep unstoppable economic growth from racing out of control. The consensus today was that not raising interest rates is a good thing. That’s not the way traders have collectively every single time they’ve voted of late, though.

At the same time, while all the connections are usually made on any given day, interest rates on bonds are actually up today despite the likelihood that the Fed isn’t in a hurry to ratchet them up. The U.S. Dollar Index is down roughly 0.2% all the same, however, making it clear the two can and will disconnect from time to time.

To that end, it should be noted that as much as the dollar and interest rates can be synced up, they’re not linked up as much as many would like to believe. In late 2015 and early 2016 as the U.S. Dollar Index was racing to multiyear highs, interest rates were still en route to record lows.

U.S. Dollar Index vs. Bond vs. Yields

Gold bugs presuming the dollar would follow the lead of interest rates — at the time, and ever since — have been sorely frustrated by the mostly inconsistent and often nonexistent relationship between the two.

Either way, even if rates should start to edge higher, the dollar’s undertow is turning bearish. The world is just realizing the rise of the dollar’s value in 2015 was neither necessary nor sustainable. That broadly bodes well for gold prices.

If and when the jobs reports do turn consistently strong and the Fed has no choice but to raise interest rates, it’s not necessarily a death sentence for gold.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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