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Precious Metals Could Benefit From Lingering Economic Worries cold

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A lower-than-expected U.S. jobs report and eurozone bond purchases by the European Central Bank should give precious metals prices a boost going into next week, with gold likely to benefit most of all.

Gold prices could retest its recent high as the market pushed above $1,400 an ounce on Friday following a bearish surprise in the November U.S. unemployment data. According to the U.S. Labor Department, non-farm payrolls rose only 39,000 in November, when expectations were for a gain of around 150,000. That sent down the dollar and lifted gold prices swiftly through $1,400.

February gold prices on the Comex division of the New York Mercantile Exchange settled at $1,406.20 an ounce, up 3% on the week. March silver gained 9.3% on the week to settle at $29.271 an ounce.

The lower figure was especially a surprise because the previous day another jobs indicator from payroll services firm ADP was deemed positive on the jobs front. The low jobs number came at odds versus other U.S. economic data that showed generally good news. As gold rallied, other markets like crude oil and equities fell.

“It’s really not good news,” said Bart Melek, Global commodity strategist with BMO Capital Markets in Toronto. “It’s certainly positive for gold, though.”

Melek said the lower-than-expected jobs data might silence some of the critics of the Federal Reserve’s second quantitative easing program and the Fed might approach its purchases of U.S. Treasury notes with more vigor to help bring down unemployment. He added the Fed can act more aggressively because inflation is not a problem at the moment.

Because of that, the dollar might come under a little more downside pressure, he said, which will also assist gold’s rise. The dollar has come under pressure this week because the European Central Bank has been buying up bonds to quell concerns in the market about solvency of certain member states after Ireland received a bailout of its banks recently.

In an economy that is coming out of a recession, unemployment data can sometimes be a lagging indicator as companies are fearful to hire until they feel more confident of economic growth. And it’s possible Friday’s numbers are an aberration, but that won’t be known until next month. In the meantime, Melek said, the Fed is likely to make err on the side of liquidity to stimulate growth.

Zach Pandl, economist at Nomura, said the jobs data was “quite disappointing relative to high expectations, but is in line with our view that real GDP is currently growing 2.0‐2.5%.”

He added that the rise in the unemployment rate, which has gained three tenths of a percent in four months, certainly raises questions the potential for more quantitative easing from the Fed. However, he also pointed out that data following the jobs report, the ISM non-manufacturing index, was positive.

“The employment index stands out: this measure reached 52.7, its highest level since October 2007. The high level contrasts with only lukewarm service sector employment growth in today's jobs report, and suggest payroll growth could accelerate a bit next month,” he said.
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\ The worries about U.S. employment are likely to linger into next week and that could let gold retest its recent high of $1,426, Melek said.

He said gold could have the upper hand early next week because of these worries, but that silver and the platinum metals group will also benefit as gold is expected to rise. Silver and PGMs have fundamental support from structural deficits and strong investor demand which will keep them supported into 2011, he said.
Next week’s economic calendar is fairly light, with the trade balance and consumer confidence out on Friday. Consumer confidence could be given more credence, in a way to compare some of the early views toward holiday spending.

Peter Thomas, director of business development at PFG Precious Metals, which sells sovereign coins and bullion, said now that the gold market has reached $1,400 there’s a bit of “now what” view. “A year ago we thought prices would hit $1,400 and they have. Now people don’t know what to think,” Thomas said.

He said investors are going to likely take some time to consider what to do next, which could lead to some sideways trade at these levels.

On the physical side, demand for coins and bullion is “rock solid” with few year-end sales to offset purchases. Normally at this time of year he would see customers look to book profits on metal bought earlier, but there’s hardly any of that happening, he said.

Because of the strong physical demand he doesn’t see prices dipping into year end. “We could go into 2011 at these levels,” Thomas said.

It’s not just gold that has spurred investor interest, but also silver bullion, so much that the initial supply he expected to last until year end has been depleted. “It’s hard to find product,” he said.

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