Why Gold Rallied to Nearly $4,400 After NFP Data was Released

When U.S. nonfarm payrolls data was released indicating that the economy had unexpectedly shed 23,000 jobs, yet analysts had expected jobs to increase, gold immediately rallied to nearly $4,400. We discuss why the jobs data had such an effect on the price of precious metals and what investors need to keep in mind going forward.

For starters, gold and other precious metals have come under pressure in recent months due to a number of factors, but let’s focus on Fed policy expectations for now. The Fed has held interest rates steady for the past five months but the recent pair of FOMC meetings revealed growing interest in hiking lending rates in order to put a lid on persistent inflation.

As voices calling for a rate hike increased within the FOMC, gold lost some of its allure because it is non-yielding and investors usually prefer to put their money in assets that give them a real return on their investment.

So, when the nonfarm payrolls data came out showing that the economy hadn’t performed as expected in terms of creating new jobs, hawkish expectations took a major hit. You see, the Fed is responsible for taking steps to not only keep inflation from getting out of hand but also ensure that the economy keeps growing.

When NFP data shows such a large contraction in available jobs, the impetus to increase lending rates loses steam and focus shifts towards lowering rates so that the economy can get back onto a growth trajectory, at least in terms of creating new jobs.

This is the point at which gold’s rally comes in. As the probability of cutting interest rates grows, prospects of dwindling real yields on paper assets like Treasuries emerge. In such a situation, the opportunity cost of holding gold shrinks and more investors are willing to channel their money into gold.

This explains why there was a sharp rally in the price of precious metals when the NFP data was released. There is a real chance that the September sitting of the FOMC could lower interest rates, or at the very least see a number of votes cast calling for a cut rather than an increase.

As an investor, you need to keep close tabs on not only the next FOMC meeting but also another event that could give solid pointers about the probable Fed monetary policy direction at least till the end of this year. That event is the Jackson Hole symposium at the tail end of this month, when Fed Chair Warsh and other experts are expected to share their views on the economy more extensively than FOMC meeting minutes usually reveal.

Remember, the broader picture for gold remains the same: central banks are still buying about 1,000 tons of bullion annually, spiraling sovereign debt is watering down confidence in fiat currencies, de-dollarization is accelerating around the world, and inflation has persisted and could rise even more as a stalemate in the war with Iran keeps oil prices high and threatens to erode purchasing power even more. The picture is bullish, but news items can shift sentiment and influence prices temporarily. Watch this space closely in the way that entities like New Pacific Metals Corp. (NYSE American: NEWP) (TSX: NUAG) are probably doing.

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