Gold prices strengthened last week as the U.S. dollar and yields declined ahead of the highly anticipated yet disappointing U.S. economic data. The figures provided additional support for a pause in interest rate hikes in September. Stagnant inflation rates, increased consumer spending, and a tight labor market in August all point toward the Fed keeping rates unchanged during September’s FMOC gathering.
With this data, the U.S. dollar dropped against currency rivals, making non-yielding bullion more attractive for traders using other currencies. Benchmark 10-year Treasury yields also fell from the recent peak, giving gold an edge.
By the end of the week, the U.S. personal consumption expenditures price index report revealed August’s increase of 0.2%, on par with market expectations and June’s rate. Consumer spending increased by 0.8% in July, showing that consumers continued to buy at increased rates despite the inflation levels.
“For the [Fed], the best news from this release was the relatively large decline in the price index for goods even as goods consumption remained strong,” Eugenio Alemán, the chief economist for Raymond James, explained. “On the flip side, consumption of services and the price paid for services will remain the biggest concern for Fed policymakers.”
The nonfarm payrolls data also came out at the end of last week, offering additional clarity on how inflation is impacting the greater economy.
“Strong employment, strong jobs numbers, and wage numbers imply continued stress on wages and potential inflation, meaning the Federal Reserve is more likely to keep rates at high levels for a prolonged period,” Bart Melek, the head of commodity strategies at TD Securities, predicted before the data came out.
“Gold could fall back towards the $1,900 if data remains very robust; I think it’s not outside of the realm of possibilities that gold could go to $1,840,” Melek continued.
Despite Melek’s view, the data said otherwise. The U.S. job figures came in weaker than expected, showing a job market that may be responding to cooling inflation rates. Weekly initial jobless claims fell by 4,000, bringing the total number to 228,000, compared to the four-week average of 237,500.
“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 ADP National Employment Report stated.
During the Jackson Hole Symposium on August 24-26, Fed Chair Jerome Powell stated the possibility of another rate hike. Despite this, most do not believe the potential rate hike will come in September. If necessary, it could come later this year or in early 2024.
According to CME’s FedWatch Tool, the probability of a rate pause during September’s meeting spiked from 88.5% to 93% following the release of last week’s U.S. economic data. Now, analysts are only predicting a 7% likelihood of a rate hike this month.
Investors are currently estimating a 64.8% chance of a rate pause in November as well as a 63.7% chance of a pause in December. Just over 2% of investors believe the Fed may cut rates by December’s meeting.
September’s FOMC gathering will take place on September 19 and 20. Until then, investors can look to several important figures that will likely impact the Fed’s decision.
“Bad news for the economy will be good news for gold,” Ricardo Evangelista, a senior analyst for ActivTrades explained.
If September’s meeting concludes with a rate pause, gold may gain excellent traction. Gold typically faces headwinds with high interest rates, as high rates increase the opportunity costs of holding non-yielding assets. With rates exceeding the highest level they’ve been in 40 years, a pause would give gold a much-needed break.
Gold is not the only precious metal on the rise in anticipation of the Fed’s meeting. Platinum increased by 2.2% to $964.99 per ounce, palladium spiked by 2.5% to $1,254.89 per ounce, and silver held firm at $24.23 per ounce, just below critical $25-per-ounce lines.
Moving forward, traders should continue assessing the incoming data to predict how the Federal Reserve may respond during September’s meeting. Gold may strengthen if further figures come out that show declining yields of other currencies and investments.
“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, a New York-based metals trader, explained.
As always, investors should consult their financial advisors before making any portfolio decisions.