The yellow metal fell below $900 on Wednesday with a better than expected ADP employment survey. Gold recaptured all of those losses yesterday on a surprise surge in initial jobless claims. Gold initially went back on the defensive after Jul nonfarm payrolls came in at only -51k. The market was looking for a number closer to the -62k that was seen in both Jun and May. However, the yellow metal has subsequently rebounded.

The ADP survey for Jul showed an uptick of 9k jobs in July, suggesting there was indeed slight upside risk in this morning's payrolls number. However, sentiment indicators remain weak. Recent divergence between Michigan consumer sentiment and payrolls suggests that the bias for labor should remain negative. The uptick in the unemployment rate from 5.5% to 5.7% offsets the better than expected headline number to some degree.

Given the volatility in gold earlier in the week I think a lot of the short-term players have been cleared out. Cycle analysis shows that gold tends to establish seasonal lows in Jun/Jul. In many instances over the previous seven years, there tends to be one final test of the downside toward the end of July. Perhaps that's what we saw on Wednesday.

Over those same seven years, purchases made during the months of Jun and Jul have always proven to be below what is ultimately proven to be the average annual price. I don't think it's too late to make such a purchase with gold still hovering around the 50 and 100-day moving average. In fact, over the past 35 years, more than two-thirds of average annual gains occur between 01-Aug and year-end.

Certainly the midweek low at 893.75 now provides a good intervening barrier ahead of both the Jun low at 857.45 and the range low at 845.50 (02-May low). The 200-day moving average offers additional support around 890.20 today. Dips below $900 have attracted good physical interest.

A definitive close above the 50 and 100-day moving averages, at 914.20 and 911.20 respectively, could set the stage for the first leg higher within an Aug/Dec rally. Such a move would target the 930/950 zone initially, but potential would be back toward the high from 15-Jul at 988.00. The latter is seen as the trigger for renewed tests above $1,000.

Regardless of the short-term market swings, gold continues to serve in its role as a means of preserving wealth. It is the classic hedge against a weak dollar and the resulting inflation. Given the ongoing turmoil in the banking system and the need for liquidity, the Fed is hamstrung to do anything substantive to support the ailing greenback.

The US and other major economies continue to slow and stocks still look rather vulnerable. We've now seen seven consecutive months of job losses. The credit/liquidity crisis is seemingly entering another new worrisome phase. Housing is the root cause of the various crises and there has been nothing to suggest a bottom is in sight for home prices. Gold is also an excellent hedge against general economic uncertainty.

For all of these reasons, we strongly believe gold has become a permanent component of the contemporary portfolio. Consequently, we anticipate that less and less gold held by investors is going to be finding its way back into the market. This is going to further tighten supplies in a market that already has very favorable supply and demand dynamics.

Gold Market Movers:

US ISM manufacturing index for Jul 50.0, above market expectations.

US construction spending for Jun -0.4%, below expectations, versus upwardly revised unch in May.

US nonfarm payrolls for Jul fell 51k, above market expectations. However, the jobless rate jumped to 5.7%.

UK manufacturing PMI fell to 44.3, a ten-year low.

Eurozone manufacturing PMI for Jul revised down to 47.4.

Swedish Q2 GDP +0.7% y/y.

German retail sales for Jun -1.4%.

Stressed banks borrow record amount from Fed

GM swings to massive second-quarter loss

Greenspan says housing prices not yet near bottom