Gold Reacts to Slight Dip in Dollar and Yields Following Release of Jobs Data

With poor U.S. jobs data pushing Treasury yields and the U.S. dollar lower, gold gained some much-needed momentum last week. The Labor Department’s employment report revealed that nonfarm payrolls rose by 187,000 last month. Marketplace forecasts estimated figures closer to the 200,000 level.

Following the job data release, spot gold increased by 0.4% to $1,940.86 per ounce on August 3, while gold futures also rose by 0.4% to $1,9760.10 per ounce.

“The jobs report has allowed the market to propose that the Federal Reserve is not as likely to raise interest rates. As a result, we’ve seen bond yields drop along with the dollar, and that is certainly supporting the price of gold,” David Meger, the director of metals trading at High Ridge Futures, explained.

Lower interest rates mean lower opportunity costs for investing in non-yielding assets, like gold. As more data comes through supporting the end of the interest rate hiking cycle, gold can gain more attention from investors shifting around their portfolios. The estimates for a hike in September have already dropped significantly following the latest data.

Based on the CME’s FedWatch Tool, the odds of the Federal Reserve leaving the current interest rate as is during the September meeting has now risen to 85% from the previous probability of 78% just before the job data came out. The meeting will take place from September 19 to 20. The latest statements we’ve received from committee members were relatively mixed, so all traders can do now is assess the incoming data and await the next meeting.

After the U.S. jobs data came through, the dollar fell sharply by 0.5% against competing currencies. The dollar’s fall also makes gold cheaper and more appealing to investors, adding further to the precious metal’s rise. At the same time, benchmark U.S. ten-year Treasury yields fell from a nine-month high, following suit with the dollar.

“The data was a bit weaker-than-expected, but not dramatically so, which is why a small slight rise in prices this morning … Any dips (in gold) over the course of the next couple weeks is likely going to be a buying opportunity,” Meger explained.

As of August 11, gold has maintained a slight downtrend (aside from its rise on August 3) since its spike at the end of the month after the latest Fed meeting. If the September gathering concludes with a rate pause or mentions of the end of the cycle, gold will likely gain momentum again as it did in July. Because of these expectations, many are seeing this current lull as the perfect opportunity to strike while prices are low.

While gold may show volatility in response to interest rate decisions, analysts predict its long-term performance trends to display positive stability following the end of the hiking cycle. As the economy continues depicting tightening figures, the concept of a “soft landing” seems further out of reach. If a hard landing or recession occurs following the end of the hiking cycle, gold should gain excellent levels of safe-haven demand from investors protecting their wealth from the crumbling economy.

“The Fed’s refusal to pause rates through the first five months of 2023 sets up an unwanted scenario: a hard landing,” Harvey, the director of research at Research Affiliates, explained. “Regulatory oversight and stress tests failed to identify or properly assess the duration risk that upended some of the banks.”

“By aggressively raising short rates, the Fed has upended the normal model and created risk,” Harvey continued, noting the banking crisis fiasco, which occurred as an immediate response to the Fed’s hawkish actions.

The hard- versus soft-landing debate is still highly up in the air as the rate-hiking cycle hasn’t officially concluded. “There are many signs that we’re on the path to a ‘soft landing,’ but that path can also lead us to a sustained downturn if we miss the exit to a sustainable and strong labor market,” Nick Bunker, the head of economic research at Indeed Hiring Lab, explained.

Moving forward, traders can continue analyzing incoming data and market predictions to estimate how the Fed will respond to the economy, how the economy will respond to Fed actions, and how all of this will affect gold prices. Gold often flourishes in poor economic periods, which we seem to be approaching. With gold prices currently low, many investors are choosing to strike now.

As always, investors should consult their financial advisors before making any portfolio decisions.

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