A Stronger U.S. Dollar Puts Pressure On Gold Prices
Over the last few days we have seen some important news releases, which have pushed up the price of the US dollar against its major counterparts. This in turn normally puts additional pressure on the gold prices.That’s because there is an inverse correlation between these two assets: gold is considered a safe haven asset, while the USD is preferred by risk takers when the economy is in a stronger position.
The US labor market and gold prices
The main driver of the USD’s ascending price movement was August 15th's long awaited Nonfarm Payroll report, which surprised the market.
In July, the number of people employed in the US non-farm payroll rose 255 000 compared with June’s 259 000, the latter being revised downwards from 287 000. This is way more than the expected increase by 180000. The unemployment rate remained unchanged at 4.9%, while analysts expected a slight drop to 4.8%. The average hourly wages rose in monthly terms by 0.3%, which is more than the previous rise by 0.1%, and is above the expected growth by 0.2%.
Gold prices reacted promptly to the labor market improvement. During the Friday session, gold lost 1.65%, closing at $1336.40 per troy ounce. It slightly recovered on Monday, and at the time of writing, 4:06 GMT, August 8, is priced at $1341.65.
The Fed interest rate prospects
Referring to the Nonfarm Payrolls report, Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York said: “If the July number is relatively normal, I think the conclusion that people will draw is that whatever July prints is more or less the new trend”. Accordingly, the continuation of this trend will support the chances of a rate hike by the Fed in December or even in September, the second option being less probable. Currently, the futures on the federal funds assess the probability of a rate hike in September at 15%. The chance of an increase in December is estimated at 44% compared to 33% prior to the labor market report.
Charles Evans, the president of the Federal Reserve Bank of Chicago said in an interview that a rate hike is almost guaranteed as the economy found support, yet he finds the low inflation still worrying: “I do think that perhaps one rate increase could be appropriate this year. At some point, you always make your judgment as to, well, this is close enough in line with what I think the appropriate policy is,” he referred to an eventual FOMC decision to raise rates this year. “Given the data improving and my outlook, we could see one rate increase this year, even if I would prefer none until we saw inflation much more strongly” added he.
On the other hand, there are some pessimistic voices in the Fed that find the rate of inflation problematic. Jerome Powell, a leading member of the Federal Reserve Board of Governors, said he would not accelerate the growthrate, making reference to a “very gradual” process for any rises. He also was worried that there may still be a pullback in the US economy because of global risks. “With inflation below target, I think we can be patient,” he told the Financial Times.
A higher interest rate by Fed supports the US dollar and puts much pressure on the safe haven assets, and gold in the first instance.
What should gold traders do?
Over the coming weeks, the pressure on gold prices will persist, particularly if the US data, such as the applications for unemployment benefits, retail sales, producer price, and consumer sentiment, will show greater than expected results.
The market participants, particularly those interested in commodity trading, can already recognize that the prospect of an early rate hike will lead to a new increase of the US dollar, which will make the precious metal even more expensive for foreign investors. This provoked a massive profit-taking and closing of long positions on gold, which started on Friday.
Even if there was a slight correction on Monday, in the medium and long term the traders should be ready for a considerable drop in gold prices.
Luis is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis's areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.