Last Wednesday, gold hit its highest price point in nearly a month after August’s economic data came in, firming the viewpoint that the Federal Reserve would hold interest rates steady this month. With soft economic data and poor job figures, the Fed does not have much wiggle room for raising rates. The committee already announced during July’s meeting that it would not raise rates in a way that would compromise the job market, so most feel confident that this month’s meeting will result in a rate pause.
Gold prices have an inverse relationship with interest rates because high interest rates increase the opportunity cost of investing in non-yielding assets like gold. With interest rates higher than they’ve been in the last 40 years, gold investors are desperately awaiting an interest rate pause. Given the latest data, September may be the long-awaited end of the interest rate hiking cycle, allowing the precious metal to finally rise.
Gold gained 0.4% to reach $1,943.92 per ounce last Tuesday, the highest point since August 2. U.S. gold futures also rose 0.4% to $1,973.00 per ounce.
The ADP National Employment Report showed that “Job growth slowed notably last month, driven heavily by leisure and hospitality. Job creation by hotels, restaurants and other employers in the sector fell to 30,000 in August after months of strong hiring.”
The weak report gave rise to gold prices, as it supported a rate pause during September’s Federal Open Market Committee (FOMC) meeting. At the same time, the real gross domestic product (GDP) second-quarter preliminary increased at an annual 2.1%, whereas the first quarter of 2023 came to 2%.
“The increase in real GDP reflected increases in consumer spending, nonresidential fixed investment, state and local government spending, and federal government spending that were partly offset by decreases in exports, residential fixed investment, and private inventory investment,” the Bureau of Economic Analysis GDP report revealed.
The GDP revision as well as the ADP report show soft economic data during 2023’s second quarter. The Federal Reserve will use these indicators when making its rate-hike decision.
“Gold is trading at highs for the month as the weaker-than-expected ADP report and GDP revision continue a trend of softer economic indicators that will likely keep the Fed on hold in September,” Tai Wong, an independent metals trader, explained.
After this data came out, 10-year yields fell from a nearly one-month high and the U.S. dollar hit a two-week low. Poor U.S. jobs data only added to this decline.
Gold typically rises when these commodities fall as the opportunity cost of investing in non-yielding assets drops. Bullion, which is priced in dollars, often finds support when yields fall.
According to CME’s FedWatch Tool, the bets of an interest rate pause in September rose from 88.5% to just under 91% after this new data came out. The odds of a pause in November also rose to 59% from the previous 52%.
As of September 4, the odds rose yet again favoring a pause. Now, the likelihood of a pause in September sits at 93%. The market is favoring a pause in November by 62.5% as well.
The closer we get to the meeting, the more analysts expect to see rates stay the same, especially with all the incoming data. With this rise in sentiment over a pause, gold gained more investor demand, adding to its recent price gains.
“The smart rally in the past week suggests traders were a little short. The market will consolidate ahead of key inflation and payrolls data; a move back above 1980 is needed to awaken bulls’ animal spirits,” Wong continued.
As a few more key pieces of data are expected to come in before the meeting, we can expect to see some more major shifts occur in gold prices and market expectations regarding Fed actions.
“Bad news for the economy will be good news for gold,” Ricardo Evangelista, a senior analyst at ActivTrades, explained.
In other news, silver has managed to maintain its one-month high at $24.63 per ounce, just below critical $25-per-ounce lines. At the same time, platinum continues to hold its $976-per-ounce high that it has maintained since mid-July.
Moving forward, traders can continue analyzing the incoming data to predict how the Fed may respond. We have a few more weeks before September’s meeting, so a lot can still change. At the moment, the odds of a rate pause are high, which means good news for gold.
As always, investors should consult their financial advisors before making any portfolio moves.