Weekly Gold Review: Gold prices give back gains, Non-farm payrolls increase instead of decrease, the FED has no way back

This week Spot gold remained almost unchanged, but hit a high of $1794.84 per ounce during the session, its highest since July 5, with a fluctuation of over $40. Although concerns about an economic recession are supportive of gold prices, the continued strength of the US labor market, with both total non-farm employment and the unemployment rate returning to February 2020 levels (before the outbreak of COVID-19), caused gold prices to give back most of this week's gains. The market has had to reassess the Federal Reserve's

As of press time, Spot gold not far from last week's closing price of $1765.63 per ounce; US Dollar Index (106.5860, 0.8260,  0.78% ) rose sharply by nearly 0.9% to 106.760.

The US labor market is heating up

The US added 528,000 non-farm jobs in July, the highest since February this year, far exceeding the expected 250,000, and the previous value was revised down to an increase of 372,000; the US unemployment rate fell by 0.1 percentage points to 3.50% compared to the previous value and the expected value, the lowest since February 2020.

The market has had to reassess the Federal Reserve's response to such a strong labor market. US interest rate futures prices show a 62% probability of a 75-basis-point rate hike by the Fed in September, up from 40.5% previously. The probability of a 75-basis-point rate hike exceeds that of a 50-basis-point rate hike. Fed Watch: After the release of the employment report, US federal funds rate futures prices show that the market believes that the Fed's interest rate will reach 3.5% by the end of the year (previously expected to be 3.4%).

Zero Hedge's commentary on the July non-farm payroll report: While we delve deeper into this data, this report will certainly raise expectations that the Fed will raise interest rates by 75 basis points at its September meeting, because "this is simply not what the Fed wants to see. The job market is not cooling down, but heating up. The only thing that could reverse this situation is whether next week's CPI data is significantly lower than expected.

Currently, the number of layoffs in the US remains low. A report released Thursday (August 4) by global placement firm Challenger, Gray & Christmas showed that the number of layoffs announced by US companies in July fell 20.6% to 25,810.

Prior to this, several Fed officials have made hawkish remarks, attempting to reverse market expectations that the Fed may slow the pace of interest rate hikes, thereby strengthening expectations of interest rate hikes. This means that the Fed's intention to continue raising interest rates until inflation falls is unquestionable, regardless of the impact on economic growth and employment.

Chicago Fed President Evans said in a public speech that the Fed may continue to raise interest rates significantly until it sees inflation fall. He said: "If you really think the situation hasn't improved... 50 basis points is a reasonable assessment, but 75 basis points is also possible, and I suspect more will be needed." San Francisco Fed President Daly also said that inflation remains a problem. She said the Fed still has "a long way to go" to reach its price stability goal. She said: "We remain steadfast and united."

St. Louis Fed President Brad said: "We still have some way to go before we implement restrictive monetary policy." In addition, Richmond Fed President Barkin acknowledged that the Fed is willing to pay the price to control inflation. He said: "There is a way to control inflation, but a recession may occur in the process. If this happens, we need to look at it correctly: no one has ever canceled the business cycle."

The ultra-low unemployment rate suggests that inflation will remain high and provides support for the Fed to continue raising interest rates significantly. The Fed raised interest rates by 75 basis points for the second consecutive time last week, and officials also pledged further rate hikes to try to control inflation, which is at a more than 40-year high. Since March, the Fed has raised interest rates by a cumulative 225 basis points.

Dante DeAntonio, an economist at Moody's Analytics in West Chester, Pennsylvania, said: "The Fed will continue to try to control inflation without tipping the economy into recession, because even with overall economic weakness, upward pressure on wages and prices clearly remains."

Concerns about an economic recession

Last week, Fed Chairman Powell said that the US economy has not fallen into recession, mainly because the US labor market remains strong, but at the same time gave the market a signal that it may slow the pace of interest rate hikes. Data released last week by the US Department of Commerce's Bureau of Economic Analysis showed that after a 1.6% year-on-year decline in GDP in the first quarter of this year, it continued to decline by 0.9% in the second quarter, lower than the expected 0.5% increase, weakening for two consecutive quarters. According to the standard definition of a recession, the US economy has fallen into a technical recession.

As the Fed's hawkish voices resounded again, these officials' series of speeches have exacerbated concerns about a US recession. In fact, in addition to the two possibilities of a recession and high inflation, there is a third possibility for the future of the US economy, namely stagflation, which is characterized by persistently high inflation and stagnant economic growth. There are more and more signs of stagflation.

High inflation is forcing Americans to concentrate more consumer spending on low-margin foods rather than clothing and other daily necessities, leading to overstocking at retailers such as Walmart, which have been forced to issue profit warnings.

Rising living costs and concerns about a recession are forcing some retirees and others who have left the workforce to seek work again. This has increased the labor supply to some extent, keeping the unemployment rate stable near its pre-pandemic low.

Sal Guatieri, senior economist at BMO Capital Markets in Toronto, said: "High inflation, rising borrowing costs and depressing confidence are slowly winning the tug-of-war for consumers' wallets."

The Fed has raised interest rates four times since March this year, the last two times by 75 basis points, totaling 225 basis points. However, the CPI in June reached a scorching 9.1%, and the PCE released last Friday was still as high as 6.8%, higher than 6.3% in May, and the core PCE in June was 4.8%, higher than 4.7% in May, with no relief from inflation, and the effect of interest rate hikes is worrying. If the US economy heads towards stagflation, then there is no doubt that gold prices will continue to gain upward momentum.

Institutional views

The Perth Mint reported that it sold 79,305 ounces of gold in July, a 21% increase from June. At the same time, sales increased by 12% year-on-year. Philip Newman, managing director of Metals Focus, said that demand for gold and silver increased in July as significantly lower prices offered investors a buying opportunity. Although sales in the past two months were significantly lower than earlier this year, he said physical demand is expected to catch up to last year's strong demand. He stated, "We expect demand for gold bars and coins to remain strong in 2022."

Bart Kitner, president of Kitco Metals Inc., said that while demand rebounded in July, it's too early to tell if a new trend is emerging. However, he added that he expects physical demand to increase as concerns about a recession continue to intensify. He said, "Assuming a recession leads to a lack of confidence among individuals in the economy, the dollar, and the integrity of the financial system, physical precious metals will become more attractive." Some analysts expect physical demand to rise for the remainder of the year, stating that while interest rates have been rising, inflation at its highest level in 40 years remains a significant threat and will continue to support robust gold demand.

The World Gold Council's (WGC) latest report shows that July was the worst month for global gold ETF outflows since March 2021, with 81 tonnes of gold leaving the market. Adam Perlaky, senior analyst at the WGC, said in the report: "The significant outflow of funds from global gold ETFs, coupled with the reduction in gold futures positions (this is the fifth time since 2006 that there has been a net short position), weighed on gold's performance throughout July." However, the WGC also noted that with market sentiment significantly bearish at the end of July, the market may be on the verge of improvement. The WGC stated that demand remains strong after a strong first half of the year. Global total holdings have increased by 5% year-to-date. Demand may rebound in August as bearish sentiment appears to have peaked.

Mike McGlone, senior commodity strategist at Bloomberg Intelligence, said: "Gold seems more likely to resume its persistent upward trajectory, breaking through resistance around $2,000 an ounce, rather than holding support below $1,700. The Federal Reserve's most aggressive tightening policy since the 1980s in 2022 suppressed gold, and it's only a matter of time before rate hike fatigue allows gold to return to the path of least resistance upward."

Jim Cramer, a CNBC personality, also updated his outlook on gold this week, saying that after what he called a "bizarre period" for precious metals, now is the best time to enter the gold trade. He cited chart analysis from legendary market technician Larry Williams, explaining: "Williams found that when small speculators are overly optimistic, it's almost always a sign that we're near the top. But when they're overly pessimistic, it's almost always a sign that we've hit bottom. According to the latest Commitment of Traders report, small speculators have a net long position of 92,690 gold contracts, their smallest long position since May 2019, just before a significant rise in gold."

According to the latest forecast from Capital Economics, despite this week's price increase, gold could still fall to $1,650 an ounce by the end of the year before rebounding. Caroline Bain, chief commodities economist at Capital Economics, said: "After a significant decline in the second quarter, we believe gold is now approaching a cyclical low. Furthermore, as the market factors in the prospect of less aggressive monetary policy tightening in the US, gold prices should recover slightly in 2023."

Erik Norland, executive director and senior economist at CME, said in a report released Tuesday that declining gold and silver mine supply, given continued strong demand, should provide long-term support for prices. He noted that gold mining production fell 7% between 2016 and 2021. Meanwhile, silver mine supply fell 8.5%. Even with increased investment, considering the time it takes to begin mining from new mines, silver and gold production may not see a strong rebound for many years. Therefore, while there is no reason to expect a reduction in global mine output, there is also no reason to believe that today's high prices will quickly translate into increased production of the two metals.

Gold Price Prediction

Market concerns about a global recession and the latest geopolitical situation are supporting gold prices. However, it is worth noting that the options market is flashing mixed signals, posing a challenge for gold buyers. Speaking of sentiment in the options market, gold's one-month risk reversal (RR) broke a nearly three-week downtrend on a weekly basis, but if observed daily, it fell for the third consecutive day. The difference between call and put options, known as risk reversal (RR).

On the hourly chart, gold prices retested support around $1774-1768. If this support is ultimately broken, the market will further test support around $1754-1750.