Gold experienced a dramatic sell-off today, as two significant economic events converged, causing the precious metal's prices to tumble. The single-day drop of over $80 was the largest since January 8, 2021, reflecting the market's response to the changing economic landscape and announcement by PBC.
First, the People's Bank of China (PBC) announced a temporary pause in its massive gold bullion purchases. This decision came after the Chinese central bank had been aggressively accumulating gold reserves for the past 18 months, contributing to the metal's strong demand.
Compounding the impact was the release of the U.S. Labor Department's jobs report for May. The report revealed that the U.S. economy added 272,000 new jobs to payrolls, significantly exceeding economists' forecasts of 180,000 to 200,000 new jobs. This robust employment data added to the market's concerns about persistent inflationary pressures.
The Federal Reserve has been engaged in a battle against inflation through a series of interest rate hikes since March 2022. By raising rates, the central bank aimed to slow economic growth and reduce inflationary pressures, with a target of bringing inflation down to 2%. Recent inflation reports indicate that the current rate stands at 2.7%.
Since March 2022, the Federal Reserve has raised its benchmark interest rate from near zero to between 5.25% and 5.5%, with 11 consecutive rate hikes. However, the central bank paused its rate hike policy in September 2023 and has maintained the current level since then.
As of 5:45 PM ET, gold futures for the most active August contract were fixed at $2,325, reflecting a substantial decline of $84.10 or 3.51%. Spot gold traded at $2,293.59, down $82.01 for the day. While dollar strength played a role, gaining 0.78% in the dollar index now at 104.949, it was not the primary driver of gold's decline.
Market participants are now turning their attention to next week's Federal Open Market Committee Meeting (FOMC), scheduled for June 11-12. The FOMC's release of the Summary of Economic Projections (SEP) containing a new revised dot plot will provide insight into the Federal Reserve's plans and timeline for potential rate cuts this year through 2026. Additionally, the Bureau of Economic Analysis will release the Consumer Price Index for May on June 12, further shaping market sentiment and the outlook for gold prices.
The robust jobs report and inflationary data throughout 2024 may make it less likely for the Federal Reserve to initiate three 0.25% rate cuts this year as initially anticipated. Regardless of the number of cuts, they are now expected to occur later in the year than previously projected, given the recent economic reports.
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