Economic Outlook and Rate-Cut Prospects Impact Gold

The recent addition of 206,000 jobs in June initially suggests a positive outlook for the economy. However, downward revisions to the job numbers for April and May have raised optimism about an early rate cut from the Federal Reserve. This expectation has significantly impacted long-term Treasury yields, causing them to plunge, which in turn has driven up the prices of stocks, bonds, and precious metals, including gold. Lower yields reduce the opportunity cost of holding non-yielding assets and make it more attractive to investors. Consequently, gold prices are likely to benefit from the anticipation of a rate cut, as lower interest rates generally weaken the dollar and support higher gold prices. This economic outlook and rate-cut expectations impact gold prices.

A Slowdown in Economic Activity

The contraction in temporary jobs by 1.8% in June signals a potential slowdown in economic activity, even as cyclical sectors continue to add jobs, as shown in the chart below. Historically, sectors like manufacturing, construction, and transport & warehousing tend to shed jobs early in a recession, acting as a leading indicator. The fact that these sectors are still adding jobs suggests that the economy is not yet in a recession, but the decline in temporary jobs could be an early warning sign. This mixed economic signal adds to the uncertainty in the market, often leading investors to seek safe-haven assets like gold. As economic activity shows signs of slowing, the demand for gold as a protective measure against economic downturns is likely to increase.

Moreover, the dollar’s break below the support level of 105, driven by plunging Treasury yields, further influences gold prices. A weaker dollar typically makes gold cheaper for holders of other currencies, boosting its demand. The sustainability of this dollar weakness will largely depend on upcoming inflation data. If inflation remains subdued, it could reinforce the case for a rate cut, keeping the dollar under pressure and supporting higher gold prices. Additionally, with the unemployment rate edging up to 4.1% but remaining historically low, and aggregate weekly hours worked growing at a modest rate, the overall economic outlook remains uncertain. This uncertainty, combined with the potential for lower interest rates and a weaker dollar, creates a favourable environment for gold, reinforcing its long-term bullish trend.

Gold Price Consolidation

Despite a strong price surge on Friday after the NFP release, prices corrected lower on Monday, indicating that further consolidation is likely before a real breakout occurs. The seasonal correction of May and June typically involves a lot of fluctuations before it is complete. Therefore, these consolidations are considered a wide range within the $2,285 to $2,450 region. A break above $2,450 is required to initiate the next move higher. However, the price behaviour indicates a bullish formation.

To receive in-depth technical analysis, including short-term and medium-term trading signals, please subscribe using the link below.