The gold market wrapped up the trading week with a “thud” as prices got hit hard, declining by over $25 per ounce or nearly two percent. The catalyst for Friday’s selling was the release of the Employment Situation Report for July.
According to the U.S. Department of Labor, the country added 255,000 jobs last month while the unemployment rate ticked a hair higher to 4.9 percent. To put this jobs number into context, consensus estimates were looking for an increase of 180,000 jobs.
Of particular note, the report showed an uptick in the labor participation rate, which could be indicative of improved overall sentiment among those who are out of work. The report also showed an increase in hourly wages, which rose by $.8 or a 2.6 percent annualized rate.
As if that was not enough, revisions for both May and June showed more robust job creation than previously thought. Stock investors clearly felt very encouraged today by the news and bought up equities driving some indices to fresh all-time highs. Interest rates rose as investors sold treasuries, apparently feeling better about the economic outlook and hungrier for risk.
Gold and silver, on the other hand, saw some steep declines as risk aversion faded today in light of the jobs data. The question many investors may now be asking themselves is:
Will this be another buyable dip in gold or the beginning of a larger move lower?
For now, the overall trend in gold still points higher. The next few days may tell us if that trend is set to continue.
As has been the case for some time now, positive economic data like what was seen today will likely fuel further speculation of another interest rate hike in September or possibly December. Is it enough to sway the Fed to take action? Probably not. The central bank may want to see additional improvement elsewhere before becoming more aggressive on rates.
One could also make the argument that the Fed will avoid being too eager to tighten given the ongoing low rates and QE in other parts of the world. The era of low rates and easing is far from over, in fact, the Bank of England just this week introduced fresh stimulus measures in an attempt to counter the expected negative economic effects of Brexit.
For the time being, gold may find support from the idea of rates remaining at current levels throughout the rest of the year. A good string of more upbeat economic data, however, could potentially drive a shift in sentiment and rate expectations.
The week ahead is light from a data standpoint, and markets may simply drift on low summer trading volumes. If stocks continue moving higher, gold may find itself on the defensive, and further downside may be seen.
In addition to stronger equity markets, gold may have to contend with a rising dollar. The greenback saw a nice bounce Friday after the jobs data was released, and has recovered much of the losses seen following last week’s disappointing GDP data.
More positive economic signs may keep the dollar on the offensive, as interest rate expectations may boost demand for the currency.
The recent rally in gold is likely in for a good test in the coming days and weeks, and near-term price action may provide some solid clues as to the underlying strength of the market. For now, we continue to look for dip-buying unless proven otherwise.