(Kitco News) The gold market saw significant losses Friday as the precious metal dropped $50 on the day following a shockingly solid employment report out of the U.S.
The U.S. economy added a staggering 517,000 jobs in January as the unemployment rate dropped to 3.4% — the lowest level since 1969. This took many by surprise as market consensus calls were looking for just 185,000 new positions.
On top of that, the U.S. service sector beat expectations in January, rising to 55.2% after a contraction in December, according to the latest data from the Institute of Supply Management (ISM).
"Today's data irked the Federal Reserve, which was fairly confident about inflation trends. This service sector is still too strong. And it is going to keep wage pressures elevated," OANDA senior market analyst Edward Moya told Kitco News.
After raising rates at a slower pace of 25 basis points on Wednesday, Fed Chair Jerome Powell talked about disinflation progress. "It is gratifying to see the disinflationary process now getting underway," he said. "We can now say, for the first time, that the disinflationary process has started. And we see it really in goods prices so far."
However, Powell did acknowledge that the service sector is yet to feel a slowdown in inflation.
Before Friday's employment report, the markets were looking for the Fed to potentially end its hiking cycle in March, but that is now changing, and gold is reacting to that, noted Moya.
"This is very disruptive for the gold trade. The markets thought we were very close to the end of Fed tightening. And now, there is the question of when this economy will really weaken. This employment report was shockingly strong, and that suggests that wage pressures are not coming down any time soon," Moya added.
Gold plummeted Friday, with April Comex futures dropping to $1,875.70 an ounce, down $55 on the day and looking to close the week down 3.7%.
"There is a lot of data for markets to digest. And not just the employment report but the Fed's tone. The market wants to interpret Powell as dovish. But the Fed's reaction function will be difficult to predict. That's the main reason why gold has gone down," Gainesville Coins precious metals expert Everett Millman told Kitco News.
After the best start to the year since 2012, gold was due for some profit-taking, and with the latest developments, analysts said there might be more selling next week.
"The path of least resistance for gold is to move lower," said Millman. "Expect us to spend more time consolidating and trading sideways. Gold spent so little time trading between $1,800-$1,900 before this selloff. It quickly moved from $1,700 to $1,900. This is why gold will be testing a lot of these levels in $1,800s before the market has strong conviction again."
The immediate support for gold is $1,870 an ounce. If that doesn't hold, gold will test $1,850 and then $1,800, Millman pointed out.
However, the overall bullish outlook remains intact despite the short-term downtrend, noted Millman. "No matter what the Fed ends up doing, gold will perform well through the rest of the year. This is a short-term speed bump rather than a fundamental change in gold's outlook," he said.
One driver to watch in the first quarter will be central bank gold buying after the official sector purchased 1,136 tonnes — the most since 1967 in 2022, according to the World Gold Council's (WGC) data.
"This is a major theme supporting gold as an investment. We haven't seen that level of interest since the last financial crisis. That is an important thing to watch," Millman pointed out.
Next week's data
The event to watch next week is Fed Chair Powell's appearance at the Economic Club of Washington.
"If he fails to push back meaningfully against the market reaction, the implication would be that the Fed itself is relaxed with what the market is doing, which risks it pushing further in the direction of pricing future interest rate cuts," said ING chief international economist James Knightley.
Tuesday: Powell speaks
Thursday: U.S. jobless claims,
Friday: Michigan consumer sentiment
