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Encouraging Dovish Economic Data in the US Supports Gold Investors

Encouraging Dovish Economic Data in the US Supports Gold Investors

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Incoming data on the US economy this week has been quite promising for gold investors. Several indicators have pointed to emergence of a negative momentum in the world’s largest economy, and the key report of the week, the Non-Farm Payrolls, which could have justified the Federal Reserve’s vague and wavering stance, fell short of expectations. The market broke through the key medium-term resistance, the upper boundary of the bearish channel, seemingly bracing for a move towards recent historical highs:It all started with the JOLTS data on job openings, which indicated a sharp decline in July, dropping from 9.5 million to 8.8 million. Recently, this indicator played a significant role as the main indicator of labor market imbalances (towards demand for labor) caused by pandemic restrictions. The reduction in the number of job openings is now interpreted by the market as a decrease in labor market overheating, which should, in turn, slow down wage growth rates and subsequently inflation rate. Following this, the ADP report on Wednesday provided a rather modest assessment of job growth in the US. Consumer sentiment data and the revised GDP for the second quarter (both significantly below expectations) reinforced market expectations that the July rate hike by the Federal Reserve was likely the last, prompting investors to turn their attention back to noticeably cheaper Treasury bonds. Buying or holding gold became more profitable due to diminishing opportunity costs in the form of real interest rate offered by US inflation-protected Treasury bonds after weak economic data:It’s worth noting that the real interest rate in the US reached a round 2% and then went into a correction. This is the highest level since 2010, and a reversal in its trend may now offer a good risk-return opportunity. Considering the correlation with the price of gold, betting on its decline would mean taking a long position in gold.The NFP report for August, as mentioned earlier, turned out to be rather unremarkable. Job growth slightly exceeded expectations at 187,000, while the previous figure was revised downward to 153,000. Interestingly, for the first time in several months, wage growth slowed down and fell below expectations, registering only 0.2% compared to a forecast of 0.3%:The decrease in this indicator could indicate both that companies are losing the ability to sustain high wage growth rates due to declining revenue and that competition is increasing – the supply of labor is growing, and companies have to compete less for workers by raising wages. In both cases, this has negative consequences for consumer inflation, meaning there is a greater risk that prices in the coming months will rise at a slower pace. Therefore, the market’s reaction to the report essentially represents a bet that the Federal Reserve will no longer tighten its policy – bond yields are declining, risk assets are rising, and the dollar is giving way to its peers.In my view, the market will continue to adopt the scenario that the Federal Reserve will more confidently communicate at the upcoming meeting that there is no need for further policy tightening. Of course, the market has not fully priced in this scenario yet, so the aforementioned trends in major asset classes will likely continue for some time. Once again, taking a long position in gold is an interesting opportunity in such a scenario. Recent breakthrough of the bearish channel can serve as a technical confirmation for this idea.
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