(Kitco News) The strong jobs report showed that the US economy is still expanding despite two consecutive negative quarterly GDP releases. And for gold, this means a price rally could be at risk, according to TD Securities.
Reacting to the US economy adding 528,000 jobs in July, gold lost 1% on Friday. The July report more than doubled economists’ expectations of an additional 250,000 jobs. On Monday, gold staged a rally, with December Comex gold futures rising again to $1,793.00, up 0.70% on the day.
Friday’s sell-off was led by a shift in sentiment that markets were premature to price in a Federal Reserve pivot of the aggressive tightening cycle, TD Securities chief commodity strategist Bart Melek said.
“The 528,000 rise in payrolls, unemployment falling to just 3.5% and a whopping 5.2% year-on-year rise in earnings growth suggest the US economy is expanding, despite the two consecutive negative quarterly GDP results,” Melek said on Friday. “This, coupled with the strength of the services sector and given that the US consumer has more than normal cash in checking accounts and money market funds, which are around three trillion dollars, everything suggests that there are many inflationary pressures in the system. .”
This week, the focus will be on the US July inflation report, with economists projecting the annual inflation pace to hit 8.7% after rising to 9.1% in June.
According to Melek, inflation will remain stubbornly high, and the metric to watch would be the core inflation number, which excludes the food and energy sectors. “Core CPI may continue to rise, even as lower energy prices drive down the headline level,” he said. “Next week’s US July CPI data, particularly the core, will be the ones to watch as any hint of stubborn inflationary pressures in the system should help debunk the pivot’s initial argument.”
Economists’ consensus calls expect the annual core inflation number to accelerate to 6.1% after hitting 5.9% in June.
For gold, this could mean a significant reversal of the move that took prices from below $1,700 to nearly $1,800, Melek noted, citing reduced exposure to the precious metal.
“There is a high probability that the recent rally, which took prices from a July low of $1,681/oz to a high near $1,795/oz, will be largely reversed as money managers reduce long exposure gained. recently,” he said. “The combination of aggressive statements from Fed officials and stronger-than-expected data are the likely catalysts that may trigger additional selling in the coming days and weeks.”
Hardline Fed speakers last week balked at the idea of the US central bank.
Chicago Fed President Charles Evans said the US central bank will likely continue to use large rate hikes until it sees inflation subside. “If you really thought things weren’t getting any better … 50 (basis points) is a reasonable assessment, but 75 might be fine as well. I doubt more is required,” he told reporters on Tuesday.
San Francisco Fed President Mary Daly said inflation remains a problem. The Fed has “a long way to go” before reaching its price stability goals, Daily said during an interview on LinkedIn. “We are still determined and completely united,” she said.
St. Louis Fed President James Bullard also noted that “we still have some way to go to get to a tight monetary policy.”
On top of that, Richmond Fed President Thomas Barkin admitted that the Fed is willing to pay the price of reining in inflation. “There is a way to control inflation. But a recession could happen in the process. If it does, we have to keep it in perspective: nobody canceled the business cycle,” he said.
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