Gold Increases as Market Anticipates Fed Decision; Strong Dollar Moderates Rise

Gold started the week off strong, with more joining the theory that the Fed will pause rates during September’s FOMC meeting. With the recent U.S. wage figures showing moderate improvements, most believe the cooling job market makes the Fed’s upcoming decision fairly obvious. As gold performs best with low borrowing costs, the precious metal has gained more traction due to the simple idea of interest rates getting a break this month.

At the beginning of the week, spot gold increased by 0.2% to $1,941.89 per ounce. The precious metal achieved excellent gains when closing last week at $1,952.79 per ounce. Gold futures also rose earlier this week by 0.1% to $1,952.79 per ounce.

Despite the expectation of a rate pause giving rise to gold, the U.S. dollar’s recent strength watered down the precious metal’s gains. The U.S. dollar nearly reached three-month highs ahead of the U.S. holiday. When the U.S. dollar rises, bullion becomes less attractive for investors overseas.

Data from last week showed that U.S. job growth figures increased in August, and wage figures showed moderate improvements despite the unemployment rate spiking by 3.8%. All things considered, most see the report as a sign of a cooling job market, responding appropriately to the Fed’s monetary policy.

“This is probably the final nail in the coffin for the chances of another rate hike by the Fed in September,” Christopher Rupkey, a chief economist at FWDBONDS, explained.

Last month, 736,000 people joined the labor market, helping increase the participation rate to the highest point it’s been in the last three and a half years. Nonfarm payrolls rose by 187,000 jobs in August compared to July’s 157,000 figure. The marketplace expected a figure of just around 170,000.

Clearly, the Fed’s efforts are beginning to ripple into the labor market. According to a former vice chairman of the Federal Reserve, we’ve yet to see the full impacts of the aggressive interest-rate hiking cycle, though.

“I think there’s a lot more to be seen,” Alan Blinder, the Fed vice chairman from 1994 to 1996, explained in an interview with Reuters. “We’re talking about historically average lags from monetary policy to inflation of two to three years. So against that, if it’s three months or four months faster, that’s not a big deal and suggests there’s still plenty to come.”

The interest-rate hiking cycle that began in March 2023 marked one of the fastest and most aggressive climbs we’ve seen from the Federal Reserve in decades. The last time interest rates were this high was in the 1980s. The Federal Reserve hasn’t enacted a hawkish policy like this in quite some time, so predicting how the economy will respond is a guessing game.

Right now, inflation sits well above the 2% target. The latest Personal Consumption Expenditures (PCE) price index came in at 3.3%, while data showed the core inflation rate at 4.2%. According to Blinder, core inflation typically takes a while to settle after monetary policy tightening.

Additional data showed that U.S. manufacturing activity contracted again for the tenth consecutive month. The silver lining here is a slightly slower pace for last month’s activity decline compared to previous months.

The same manufacturing activity downturn ease-up seems to be occurring overseas as well in the eurozone. Last month’s data suggests that the worst of the decline may be over now. At the same time, China experienced a shocking rebound in activity, offering some hope for nations relying on its exports.

In other news, SPDR Gold Trust is finally on the rise again. After a record fund decline when spot gold dipped in price, the trust is finally gaining attention from investors again. The world’s largest gold-backed exchange-traded fund saw a 0.10% increase in holdings last Friday as spot gold spiked in response to the new data supporting a rate pause.

In overseas news, Nigeria announced its plan to create a state-backed solid minerals corporation with the purpose of attracting mining sector investments. Nigerian Solid Minerals Corporation will focus on extracting gold, coal, iron, and more.

“The proposed corporation will seek and secure partnership investment agreements with big multinational companies worldwide to leverage on the attractive investment-friendly regime operating in the country to secure massive foreign direct investment for the mining sector,” Dele Alake, Nigeria’s Solid Minerals Minister, explained in a report.

With interest rates easing, manufacturing activity improving, and nations around the globe looking toward gold, the precious metal may have a bright future ahead. As always, investors should consult their financial advisors before making any portfolio decisions.

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