Gold's Fed-induced short squeeze has disappeared
(Kitco News) - There is never a dull momentum in financial markets as the weekend ends with fireworks following a chartbuster U.S. employment report.
Market analysts started the week talking about the Federal Reserve potentially pivoting next month on its monetary policy. Those expectations were wiped off the board with just one data point. Data from the U.S. Labor Department showed that more than 500,000 jobs were created in July, significantly beating market expectations. Heading into the report, economists were looking for job gains of 250,000.
Unfortunately, there is not a lot of good news for gold investors in the stellar jobs report. Wages also rose more than expected, rising 0.5% last month. In the last 12 months, wages have risen 5.2%. In a typical economic environment, this should be positive for gold because it is considered inflationary.
However, this environment is anything but normal. The solid employment numbers mean that the Fed can continue to raise interest rates aggressively without having to worry about pushing the economy into a recession. The wage number will also reinforce the Fed's outlook that inflation is still a significant problem.
We are still nearly two months away from the Fed's next monetary policy decision, and markets now see an almost 70% chance of another 75-basis point move. The day before the employment report, markets only saw a 30% chance of a rate hike.
Last week's Fed-induced short-squeeze in the gold market quickly evaporated, at least for now.
Making it even more difficult for gold, the Federal Reserve is not the only central bank aggressively raising interest rates. This past week the Bank of England hiked its interest rates by 50 basis points, the first half-point move since its independence from the government in 1997.
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The Bank of England also said that the British economy faces a prolonged recession starting this year, as inflation has still not peaked.
But as many analysts have pointed out, there is still a lot more to gold than interest rates. Although gold has struggled through most of the summer, analysts noted a strong risk premium in the marketplace is providing solid support.
That premium is back in focus as relations between China and the U.S. continue to deteriorate. This week U.S. Speaker of the House of Representatives Nancy Pelosi visited Taiwan, raising the ire of China. In response to her visit, as part of a tour of Asia, China kicked off the biggest-ever military exercises in the Taiwan Strait.
These new tensions will not be going away anytime soon and add to the economic uncertainty, including the potential for a recession, a sovereign debt crisis, and an energy and food crisis.
"There are a lot of risks in the world today and they are all very real and at the forefront," said Chantelle Schieven, head of research at Murenbeeld & Co, in an interview with Kitco News.
That is it for this week. There will be no Kitco Newsletter on August 12 and 19. We hope everyone enjoys the rest of their summer.