U.S Labor report and its effect on crude oil price & spot gold price

Last week the Bureau of Labor Statistics published the U.S. employment situation report for the month of December 2010.

The report shows an improvement in the labor stats in the U.S. as the unemployment rate fell by 0.4 percent point during December, from 9.8% to 9.4%. The number of unemployed has dropped by 556 thousand people to 14.5 million. Further, the non-farm payroll employment has risen by 103,000.

Let’s breakdown how this recent news could affect the commodities markets in particular the demand for crude oil and gold.

I will also review how this news could affect crude oil price and spot gold price:

Gold market

The demand for gold was driven primarily by the decline in trust of many investors in US dollar related investments such as Government Treasury Bonds (the low interest rates obviously didn’t make these investments any more appealing).

As a result gold spot price doubled in the last two and half years.

This news on the decrease in unemployment rate is a good sign, for the U.S. economy. It shows that the U.S. economy is improving as there are more jobs and thus more business transactions.

The improvement in the U.S. economy and its slow movement towards coming out of the recession, of past few years, could have a positive effect on the U.S. dollar: people might start to regain their trust in the U.S. economy and consequently return to invest in it, e.g. in the U.S. stock market.

Therefore, as the U.S. will continue to show improvement, this could adversely affect spot gold price and decrease the demand for gold as an investment opportunity.

Crude oil market

As for crude oil, there could be some different effects:

On the one hand, much like gold, crude oil is considered an investment for dire times and many investors also consider it a safe heaven as the U.S. economy slowed down. Thus, as the U.S. economy will improve, the demand for crude oil as an investment will decline, along with the upward price pressures. This effect, however, will be marginal as most investors considered gold a more reliable investment than crude oil. Consider that despite the slow down in the U.S. economy crude oil price returned to a similar price level as it was back in the beginning of 2008.

On the other hand, there should be a stronger effect from the demand side: as the U.S. economy continues to progress, the demand for energy – e.g. crude oil and natural gas should rise and consequentially there should be pressures for crude oil price to rise.

Nonetheless, the biggest demand for crude oil will probably come from the manufacturing sector, and this sector, in this Labor report showed just a slight rise of 10,000 employees.

As the U.S. economy will progress, commodities investors will have to keep close tabs on its improvement and consider when, and if, it will be safe and worthy to get back and invest their funds in the U.S. economy.

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