Gold prices in the international market fell more than $50 per ounce following the market received better-than-expected US jobs data, reinforcing the possibility of the US Federal Reserve (Fed) continuing to raise interest rates. Analysts warn that profit-taking in the gold market will continue next week.
Investors massively took profits because they were afraid that the Fed would raise interest rates once more
Ending the trading session on February 3, the price of gold for April delivery on the Comex exchange in New York dropped 54.2 US dollars, or 2.8%, to 1,876.6 dollars per ounce, the lowest. for more than 3 weeks. Including the drop in the previous session, gold futures are down by nearly $100.
This is the first time since January 12 that gold’s $1,900 support has been breached. Spot gold also fell 2.5%, to $1,865.13 an ounce.
After a strong rally in prices to a 9-month high, the gold market was “dumped with cold water” when data from the US Department of Labor, released on February 3, showed that in January, the economy The US economy added 517,000 non-farm jobs, nearly three times higher than economists’ forecasts. Strong job growth pushed the US unemployment rate last month to 3.4%, the lowest in 54 years.
Investors rushed to take profits when they saw that the gold market might be at risk of a deeper correction as economists say the strong momentum in the US labor market might force the Fed to maintain its tightening policy stance. currency tightening longer than expected. High interest rates will help strengthen the dollar and US government bond yields, reducing the attractiveness of gold.
Fed officials have repeatedly said they need to see a marked cooling of the labor market before they feel confident they have inflation under control.
“Overall, this is clearly a tight labor market, suggesting the Fed has more work to do to cool down economic activity,” said Katherine Judge, senior economist at CIBC Bank (Canada). “.
Besides, the US service industry recovered strongly, exceeding economists’ expectations. Data from the Institute of Supply (ISM) showed that in January, the purchasing managers index of the US service industry reached 55.2 points, up sharply from 49.2 points in December.
“Today’s data will cause concern for the Fed following it starts to be confident regarding the direction of inflation,” said Edward Moya, senior market analyst at FX brokerage OANDA. The service sector is still too strong and it will increase wage pressure.”
After the Fed raised interest rates at a slower pace (0.25 percentage points) on February 1, Fed Chairman Jerome Powell noted that inflation began to enter a downward trend. “We can now say for the first time that the process of deflation has begun,” he said. And we’ve actually seen that in commodity prices so far.” However, he also acknowledged that inflation in the service sector has not really cooled down.
Before the jobs report, markets expected the Fed to end its rate hike cycle in March, Moya noted, but the outlook is changing and the gold market is reacting to that.
“This is causing great disruption to transactions in the gold market. Investors thought the Fed was regarding to end its tightening cycle. And now, the question is when will the US economy actually weaken. US jobs data is surprisingly strong. That shows that the pressure to increase wages will not subside anytime soon,” Moya added.
Gold price rose too fast, need to retest support levels
After having its best start to the new year since 2012, gold faces profit taking. With the latest developments in the labor market and the new services sector, analysts say the gold market will see more profit-taking sales next week.
Everett Millman. Gainesville Coins precious metals expert, said: “The path of least resistance for gold is a move lower. We expect gold prices to move sideways to consolidate for a while. Prior to this sell-off, gold had little accumulation in the $1,800 to $1,900 price range. The price of gold rose rapidly from $1,700 to $1,900 an ounce. This is why gold needs to retest support around $1,800 an ounce before the market regains confidence.”
The immediate support price threshold for gold is $1870/ounce. Millman thinks that if that level is broken, gold will retest $1,850 and then $1,800 an ounce.
Overall, however, the bullish outlook for gold remains intact despite the short-term downtrend, Millman said. “No matter what the Fed does, the gold market will do well for the rest of the year,” he said. This is just a short-term correction, not a fundamental change in the outlook for gold.”
Andrew Hunter, senior economist at Capital Economics, said that he does not believe the Fed will continue to raise interest rates in the second half of the year as wage inflation is cooling. The U.S. Department of Labor reported that average wages for non-farm workers rose just 0.3 percent last month to $33.03 an hour.
One market driver to watch out for in the first quarter of this year is central bank gold buying. According to World Gold Council (WGC) data, in 2022, central banks bought a total of 1,136 tonnes of gold, the highest since 1967.
Millman believes that central bank purchases of gold will support gold prices, so it needs to be closely watched.