Gold futures fell on Friday as a stronger-than-expected U.S. nonfarm payrolls report helped push the metal lower this week, its first weekly loss in a month.
Prices saw volatile trading during the session as investors continued to weigh clues about the Federal Reserve's interest rate plan. The release of monthly U.S. jobs data and an analysis of business conditions at service-oriented companies led to a wild ride on Friday.
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In the minutes after monthly U.S. jobs data was released, the numbers fell, showing a better-than-expected gain of 216,000 new jobs in December.
Data shows economic strength is not typically a catalyst for gold prices, said Adam Koos, president of Libertas Wealth Management Group.
Prices then rose temporarily after data from the Institute for Supply Management survey, a barometer of business conditions in service-oriented companies, showed a decline from 52.7% to 50.6% in December.
Gold has seen a “knee-jerk, short-term” price reaction, but in the longer term the precious metal will be “more sensitive to interest rates, the Fed, the dollar and of course the irrefutable law of supply and demand,” Koos said.
On Friday, December gold prices on the Comex were trading at $2,049.80 an ounce, down 20 cents, or less than 0.1%, during the session. Prices based on the most active contract lost nearly 1.1% this week after posting three straight weekly gains, according to Dow Jones Market Data.
Fed policy in focus
“The big swings in gold prices on Friday show that Fed policy is trumping geopolitics in the futures market, at least for now,” Adrian Ash, director of research at BullionVault, told MarketWatch.
In addition to ongoing attacks by the Iranian-backed Houthis on ships in the Red Sea, actions by the United States, Israel and the Islamic State this week in Iraq, Lebanon and Iran “significantly increase the risk of a regional conflict,” he said.
But after weakening earlier this week on euphoria over Fed rate cuts, gold was then hit by Friday's jobs data, only to rebound on the weak ISM report – moving around 40 in just under 90 minutes $, while futures traders rushed to reassess the chances of a revaluation cut in March, if not January,” he said.
Gold prices finished 2023 strong, up 11% in the fourth quarter, with prices moving closer to all-time highs hit in early December. The most active gold futures traded at an intraday record high of $2,152.30 on December 4th.
The Fed has indicated that the interest rate forecast still depends on data, said Jerry Braakman, president and chief investment officer of First American Trust, based in Santa Ana, California.
While the Fed has said the key interest rate will likely fall later this year, Friday's jobs report supports “the soft landing and higher for an extended period of time that many were hoping for,” he said.
“This is not a positive for gold,” as the metal typically responds best to lower interest rates, a weaker dollar and slower economic growth, Braakman told MarketWatch. “The Fed can continue its fight against inflation, which also has a negative impact on the price of gold.”
Still, he said people should be careful not to read too much into one month's jobs report. “We still expect the U.S. economy to weaken this year, leading to Fed rate cuts and a rise in gold prices.”
On Wednesday, minutes from the Fed's mid-December meeting showed central bank officials saying the economy may be evolving in a way that warrants further rate hikes.
Some investors are starting to “scoff at the idea of a rate cut by March,” said Koos of Libertas Wealth Management.
He believes the Fed “will take its time relaxing the reins it has tightened in recent years.”
Movements in the dollar
The U.S. dollar, meanwhile, depreciated again in the fourth quarter of 2023, falling to a 52-week low on Friday, Koos said.
The ICE US dollar index DXY hit a low of 101.91 before rising slightly in Friday trading, looking for a weekly gain. The index's 52-week intraday low was 99.58 on July 14.
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“If these lows are broken decisively, that would certainly provide a good tailwind for gold,” Koos said.
On the other hand, if the dollar “bounces off this support floor and continues to rise – above the October highs – the next stops would be the all-time highs already reached in September 2022,” he said. “In a currency environment that looks like this, the yellow metal would feel like it is running uphill with the wind in its face.”
Gold's record highs
However, global inflation is still weakening, and while we don't know how much the Fed will cut interest rates or when, “we know they will go down before they go back up,” Koos said. “So if you put all the pieces of the puzzle together, I think we will probably see a huge, large-based breakout and corresponding all-time highs in gold sometime in 2024,” he said.
First American Trust's Braakman, meanwhile, said a rise in gold prices to new highs would depend on further deterioration in the U.S. economy.
“That's not likely in the next few weeks, but it could happen later this quarter and is even more likely in the second quarter,” he said.
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