The New York Federal Reserve recently released survey results revealing the region’s manufacturing sector conditions for October. According to the index, general business conditions suffered a sharp decline, offering positive news to gold as investors gained yet another reason to increase their safe-haven allocations. The data came out on October 16, allowing gold to increase to $1,935 per ounce immediately the day after.
According to the New York Federal Reserve Empire State manufacturing survey, the general business condition index dropped to -4.6 in October. For reference, September yielded a shockingly positive reading of 1.9.
While the data came a bit above the general market consensus, it still showed severely dropping conditions compared to the month prior. The market expected figures around -7, so -4.6 actually showed better promise than expected. Still, October marks only the second negative reading since May, with the other being August, which rang in at -19.
Spot gold increased in anticipation of the release. At 8 a.m. EDT, before the data came out, spot gold was trading at $1,915.12 per ounce, then quickly rose to $1,923.53 per ounce just minutes before the New York Federal Reserve released the survey. By the end of the trading session, the precious metal retreated, though it quickly regained its footing and shot up near the $2,000-per-ounce territory over the next two weeks as safe-haven demand continued surging.
The report highlighted numerous declines across the sector. To start, the New Orders index decreased by nine points compared to September’s figure. In October, the New Orders index came to -4.2.
The Shipments index also decreased by a whopping 11 points from September, bringing October’s total down to 1.4. Its level in September was a relatively high 12.4.
One positive balancing out the numerous drops on the survey was the labor market. The New York Federal Reserve survey showed a bit of labor market strength. The Number of Employees index increased to 3.1, compared to September’s -2.7 reading.
In general, the Empire State Manufacturing Survey displayed persistent inflation pressures, which can mean bad news for gold. In October’s case, though, numerous Fed committee members released statements around the same time as when this data came out, offering dovish opinions regarding November’s meeting. These statements reduced rate hike fears, allowing gold to maintain its current pricing despite what the data said, as most felt confident that the Fed would not raise rates.
Another figure on the report, the Prices Paid index, remained virtually unchanged between September and October at 25.5, showing just a 0.3 drop compared to the month prior.
The Future Business Conditions index decreased just slightly from 26.3 to 23.1. The level it hit in September was the highest seen in over a year, showing that many firms are feeling optimistic about future business conditions. While the figure may have dropped slightly, the committee still expresses optimism regarding upcoming conditions.
That being said, many survey respondents do not think conditions will improve any time soon. Most forecast troubled waters in the next few months as the Federal Reserve still attempts its soft landing from the recent rate-hiking cycle.
“However, less than half of respondents expect conditions to improve over the next six months,” the report stated. “New orders and shipments are expected to increase, though less so than last month, and employment is expected to grow.”
How these conditions will affect gold is still highly unclear, but what we do know is the Federal Reserve will look at this data when making its upcoming rate decisions. The committee chose to pause rates in November, though it provided more hawkish statements regarding future actions, which could mean short-term headwinds for gold.
High interest rates increase the opportunity costs of investing in non-yielding assets, like gold, so any indications of the Fed keeping rates high for longer can reduce gold demand. Gold enjoyed excellent performance ahead of the November meeting, as most of the market expected a rate pause, which is exactly what occurred.
The next Fed decision will come in mid-December. According to CME’s FedWatch Tool, the current odds of a rate pause are 95.4%.
Assuming the 95.4% likelihood stays the same, gold shouldn’t face too much volatility regarding rate decisions, but much can change between now and then. Any hints of a rate cut coming soon could offer excellent performance boosts for the precious metal.
As always, investors should consult their financial advisors before making any portfolio decisions.