- On Monday, gold lost nearly 3% of its value as global markets sold off.
- The US unemployment rate hit a three-year high of 4.3%.
- Data on Monday revealed a bigger-than-expected increase in US service activity.
Gold prices extended declines on Tuesday, with the dollar and US Treasury yields recovering as recession fears eased. However, the yellow metal recovered by Wednesday as Fed rate-cut optimism overshadowed recent recession worries.
Gold (Source: Bloomberg)
On Monday, gold lost nearly 3% of its value as global markets sold off. The turmoil came from fears that the US economy would tip into a recession. Since last week, investors have been on edge due to downbeat US economic data. The first poor report was the ISM manufacturing PMI, which revealed a drop in activity to an eight-month low.
After the PMI report, the US released its nonfarm payroll report. Employment in the country missed forecasts, coming in low at 114,000. At the same time, the unemployment rate hit a three-year high of 4.3% compared to estimates of 4.1%.
Notably, the labor market drives a big part of the economy. Therefore, if fewer people are employed, demand drops, hurting the economy. The Fed closely watches this sector and will react appropriately to any unforeseen weakness. However, after the Friday report, markets panicked, leading to a global sell-off.
As a result, policymakers came out on Monday to calm the situation. Fed officials noted that a jump in the unemployment rate did not necessarily mean a recession. However, it will push the central bank to start lowering borrowing costs. Consequently, markets are fully pricing in a 50-bps rate cut at the September meeting.
Furthermore, data on Monday revealed a bigger-than-expected increase in US service activity. Therefore, fears of a recession eased slightly, allowing the dollar and Treasury yields to recover. A strong dollar reduces demand for gold, making it more expensive for overseas buyers.
Nevertheless, by Wednesday, focus returned to the looming Fed rate cut and geopolitical tensions, boosting gold. According to experts, fundamentals support more upside for prices in the future. Major central banks have started lowering borrowing costs, and tensions in the Middle East have escalated.
Lower borrowing costs are bullish for gold, which is a non-yielding asset. Meanwhile, geopolitical uncertainty provides safe-haven inflows as investors seek safety, increasing demand for gold. Traders will now wait for more US economic data to gain more clues on the state of the economy.
