Gold market reacted swiftly after the release of the recent US employment report US employment report . The precious metal prices retreated after posting two-year highs in the first week of August.
Gold futures in New York that is the most actively traded contract slid to $1,342.10 an ounce, a decrease of about 2% from previous week close when the shiny yellow metal prices had reached $1,380. This represented a 26% appreciation in gold prices or an increase of $300 an ounce.
Latest economic figures released by the Department of Labor revealed that around 255,000 new jobs were created in the month of July surpassing expectations of the experts that had predicted an increase of185,000.
The positive employee data has also increased the likelihood of the Feds’ rate hike expectations later this year, which will have a negative impact on the gold prices.
Probability of a rate hike in September meeting is 18%, while there is a 47% likelihood of an increase in rates during the mid-December meeting, according to a FedWatch report. Previously market pundits had predicted 32% probability of a rate hike.
A rate hike has inverse relationship to commodity prices including gold. Due to an increase in rates, investors flock to fixed rate investment instruments to hedge their positions. So, a probability of a rate hike will most certainly dampen the gold prices.
Apart from rate hike, increase in dollar value due to positive employment data also has a negative effect on gold prices. The dollar index has gone above 96 against major currencies after the release of the positive job data. Over the past year, the year-to-year greenback value has weakened 2.4%, and remained below 100 for most part of the year. That said, the dollar value is going strong at the moment putting a negative effect on gold prices.
Link between Employment Data and Gold Prices
Employment data and price of gold have a strong negative correlation – the two move in tandem in opposite direction. An increase in employment figures puts downward pressure on gold prices, while a decrease in employment figures positively impacts the price of gold.
The employment data represents economic status of a country. This figure is analyzed by policy makers when making important fiscal and monetary decisions. The figure influences Feds’ decision to increase or decrease the rates. Moreover, the employment data influence investors decision to put their stake on traditional stake and bond market.
When the employment data is positive, it represents a growing economy. The most recent employment data paints a positive picture about the US economy. The rate unemployment rate in July was at a six-year low at 4.9%, which is the lowest rate since June 2008 that had peaked to 10% during the financial crises.
Strong payrolls data puts the markets on a risk-on mode due to which they tend to gravitate towards riskier assets shunning safe investment instruments such as gold and silver.
Another crucial market indicator related to employment is the wage growth. In the US, average real hourly earnings had dropped by about 0.2% in June this year. Increase in 0.1% in average nominal earnings had been offset by a 0.2% increase in CPI-U.
Wage earnings report is also watched by investors when figuring out the status of the market. It’s important to watch this figure in addition to employment figures to make inferences about the status of the economy.
A strong employment and wage outlook paints a positive picture about the economy. This point to the likelihood of a decrease in gold prices, which are linked inversely to the economic growth prospects. It’s essential to taken into account this factor along with dollar value and bond rates when making decision about investing in gold currency.
Gold prices are the only financial instrument that is negatively affected by improvement in economic prospects. Financial instrument that are backed by gold such as gold-backed ETFs and shares are also negatively affected when the economy is in a good shape. Gold backed ETFs’ such as Agnico Eagle Mines (AEM), Barrick Gold (ABX), Goldcorp (GG), SPDR Gold Trust (GLD), Yamana Gold (AUY), and others move in tandem to the increase or decrease in gold prices
According to Edward Meir, analyst working for INTL FCStone, the impact of employment data cannot be dismissed, and we may well see a turning point for both gold and silver prices.1 This will prompt investors to expect for a rate hike during the second half of the year.
Among other precious metals that were negatively impacted by the positive employment data included Silver that decreased by 0.3% to 19.60 an ounce hitting a near two week low. Palladium remained flat at $693.55 while spot price of platinum ended $1,146, up nearly 0.4%.
Conclusion
Gold prices are strongly related to employment figures. The current employment data shows that the economy of the US is improving within thousands of jobs created during the past months. This decreases the opportunity cost of holding assets such as gold bullion and other related investment instruments.
Gold is highly sensitive to any market data that paints a positive picture for traditional investment instruments such as stocks, bonds, and others. Rising rates, increased employment and wages figure, and strengthening dollar tend to lower opportunity cost of holding precious metals.
The price of gold decreasing on the news of a positive employment outlook accurately reflects investor sentiments. If they believe that the economy is performing well, they tend to buy less gold, while if they believed that the economy is doing badly they tend to allocate a large portion of their resources to precious metals. That’s why it is important for savvy investors keep a look out at market statistics related to the US economy as it will weigh heavily on the price of gold.
Sources:
1. http://uk.reuters.com/article/global-precious-idUKL4N1AP183
