The last week saw gold and stocks rallying together and that positive correlation could have some room to run still. Stock investors are now seemingly cheering on bad economic news as any misses in key data points could bolster the case for lower rates.
On Friday, the U.S. Department of Labor reported that the country added just 75,000 jobs in May. That figure was far below consensus estimates for a gain of 185,000 jobs while the unemployment rate was steady at 3.6 percent. Revisions were also made to March and April jobs figures that brought the three-month moving average of gains from 245,000 in January to a current reading of 151,000.
The weaker-than-expected non-farm payrolls report followed an ADP jobs report earlier in the week that showed the smallest increase in private sector employment in nine years. According to ADP, the U.S. added just 27,000 private sector jobs for the month.
As the economic data has become increasingly murky, stock investors have turned their hopes to the Fed and the potential for a series of interest rate cuts. Despite the poor labor market data, the Dow Jones gained some 4.7 percent for the week while the S&P 500 added nearly 4.5 percent. The tech-heavy Nasdaq didn’t miss much either, adding nearly 4 percent for the week.
The market appears to have entered a phase in which bad news is good news, and investors feel confident that the Fed will ride to the rescue as markets and the economy sputter.
The ongoing U.S./China trade war and an aging business cycle could keep the U.S. economy under pressure. The longer the war on trade continues, the more that pressure will increase. The Fed seems to recognize the effects that the trade war is having, and it would not be a huge surprise to see the central bank cut rates as soon as this month. Although an initial rate cut of 25 basis points seems like a sure thing at this point, it remains unclear if the Fed will have to be more aggressive.
The combination of weaker stocks, a decelerating economy and lower rates could be a great recipe for higher gold. These issues could all have a significant impact on the dollar index, which has likely kept gold prices in check in recent months. In addition to a slowing economy and lower rates, the U.S. currency may also have to contend with fading tailwinds from tax cuts and government spending. That same fiscal spending has also caused the U.S. deficit to skyrocket, and at some point, the mounting U.S. debt will become an area of focus.
Strong fundamentals and an improving technical posture could see the gold market gather further momentum. Recent data from the CFTC showed that money managers tripled their long exposure to gold in the most recent reporting period, and ongoing concerns over global growth are likely to keep the metal on the offensive.