- The US jobs report last week raised hopes that the Fed might implement at least two rate cuts in 2024.
- There is an over 60% chance that policymakers will lower borrowing costs in September.
- Data revealed that China’s central bank added to its gold reserves for the 18th month in a row.
Gold prices pulled back on Tuesday as investors paused and took profits after the recent rally. However, the bullish bias remains as markets cheered the increased likelihood of a Fed cut in September. At the same time, central bank purchases kept demand high.
The pause in gold prices might be temporary, as most indicators point to higher prices. The recent rally started after last week’s US jobs report, which raised hopes that the Fed might implement at least two rate cuts in 2024. Notably, the jobs report revealed a bigger-than-expected decline in employment last month. Meanwhile, the unemployment rate increased, showing more jobless people.
As employment falls and joblessness increases, consumer spending declines. This, in turn, cools the overheated economy and lowers inflation. Lower inflation is bullish for gold prices because it allows the Fed to lower interest rates, which reduces the opportunity cost of holding the non-yielding yellow metal.
After the US jobs report, investors raised the chances of a cut in September to over 60%. However, policymakers still need more evidence that the downtrend in the labor market will continue. For several months, labor market data has surprised to the upside, showing resilience despite high interest rates. If the recent decline was a one-time thing, then policymakers would remain cautious about rate cuts. Moreover, markets might go back to pricing only one cut in 2024.
Turkey’s central bank gold reserves (Source: Bloomberg)
Meanwhile, gold prices were supported by central bank purchases. Turkey’s central bank gold reserves hit a record high last year, according to the World Gold Council on Tuesday. At the same time, households in Turkey rushed to buy gold as a hedge against inflation and geopolitical uncertainty.
Meanwhile, data revealed that China’s central bank added to its gold reserves for the 18th month in a row. The central bank bought gold despite the recent high prices, boosting demand. This demand has kept gold up despite the ever-changing outlook for US interest rates.
Moreover, if central banks continue buying gold, then prices will keep increasing. Additionally, if the US releases more downbeat data, the timing for the first rate cut will become clearer, allowing investors to anticipate increased demand for gold compared to the dollar.
