- Gold rebounded 0.69% despite significant job additions in the US, challenging the Fed’s interest rate cutting path.
- Gold is recovering from a post-labor report decline as investors weigh the Federal Reserve’s dovish stance on inflation.
- Upcoming US inflation and retail sales data are expected to influence the path of gold and Fed policy.
Gold prices rebounded from daily lows on Friday, extending their rise for the fourth straight day as traders ignored the strong US non-farm payrolls report. This eased the Fed’s concerns about the labor market, but not as much as some officials have acknowledged about inflation. The XAU/USD pair is trading at $2,687, up 0.69%.
Bullion fell sharply after the US Bureau of Labor Statistics (BLS) revealed that the economy added an impressive number of people to the workforce, exceeding 200,000. As a result, the unemployment rate fell, while investors priced in smaller interest rate cuts based on the fact that the economy continues to create enough jobs, while the process of slowing inflation has “stalled”, according to the latest Fed meeting minutes.
However, the XAU/USD pair recovered once market participants digested the data. The data reassured Fed officials that the labor market remains healthy while addressing inflation, which rose recently after the US central bank cut interest rates by 100 basis points in 2024.
The US dollar rose sharply to multi-month highs according to the US Dollar Index (DXY). The DXY index reached 109.96 before paring its gains and is at 109.68, up 0.49%. US Treasury yields have skyrocketed, but have stabilized, especially at the bottom of the curve.
Chicago Fed President Austin Goolsbee said they are not complaining because the economy has created more than 250,000 jobs. The jobs market appears stable “at full employment,” he said, adding that if conditions are stable and there is no rise in inflation, “prices should fall.”
Given this backdrop, investors’ focus will shift to next week’s data. The US table will contain inflation numbers on the producer and consumer side, along with retail sales and jobless claims for the week ending January 11.
Daily summary of market drivers: Gold prices rise accompanied by the US dollar
- The gold price ignores the rise in US real yields, which rose by 2 basis points to 2.30%. Meanwhile, the yield on the 10-year US Treasury note rose by seven and a half basis points to 4.767%.
- The US Bureau of Labor Statistics (BLS) revealed that the economy created 256,000 jobs last month, although November was revised downward from 227,000 to 212,000. The consensus expected 160,000 people to be added to the workforce, with private employment totaling 223,000.
- The unemployment rate fell to 4.1%, while average hourly earnings fell from 4% to 3.9%. Following the release of the data, traders expect the Fed to cut interest rates only once in 2025.
- Expectations for Fed easing continued to decline. December Fed funds futures are priced at 30 basis points of accommodation.
- US consumer confidence in January reported by the University of Michigan (UoM) surpassed estimates of 73.8 and fell to 73.2. Inflation expectations for one year rose by 3.3% from 2.8% and for five years from 3% to 3.3%.
- On Thursday, Fed Governor Michelle Bowman maintained a hawkish stance, saying the central bank should be cautious in adjusting interest rates, while Kansas City Fed Jeffrey Schmid added that interest rates would be neutral “soon.”
- Earlier, Philadelphia Fed’s Patrick Harker revealed that the US central bank may pause amid uncertainty, while Boston Fed’s Susan Collins said current expectations point to a gradual approach to cutting interest rates.
XAU/USD Technical Forecast: Gold price rises above $2,650 as bulls enter
Gold’s uptrend remains intact as the yellow metal recorded a succession of higher highs and higher lows, with traders eyeing the $2,700 level. Momentum is strongly tilted to the upside as seen on the Relative Strength Index (RSI), which shows that the bulls are in control.
If XAU/USD breaks above the $2,700 area, the next resistance will be the December 12 high of $2,726 and the all-time high (ATH) of $2,790.
Conversely, a drop below the $2,650 level would challenge the 50- and 100-day simple moving averages at $2,645 and $2,632, respectively. With further weakness, $2,600 rises next, ahead of the 200-day SMA at $2,503.
Frequently asked questions about gold
Gold has played a major role in human history as it has been widely used as a store of value and a medium of exchange. Currently, apart from its luster and use in jewellery, the precious metal is widely viewed as a safe haven asset, meaning it is a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency depreciation because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve assets and safe havens. When the value of the dollar declines, gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rise in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession could cause the price of gold to rise rapidly due to its safe-haven status. As a lower-yielding asset, gold tends to rise as interest rates fall, while a higher cost of money usually negatively impacts the yellow metal. However, most of the moves depend on how the US Dollar (USD) behaves as the asset is priced in Dollars (XAU/USD). A stronger dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.