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Gold rallies amid rising US unemployment and economic uncertainty

Gold rallies amid rising US unemployment and economic uncertainty
Aneena Alex

Gold (XAU/USD) rallied on July 5, continuing its upward trend as the U.S. unemployment rate unexpectedly rose to 4.1% from 4.0%, reaching its highest level since November 2021. 

This surprising data has increased optimism among investors that the Federal Reserve (Fed) might lower interest rates sooner than previously anticipated, thereby providing a significant boost to gold prices.

The U.S. Nonfarm Payrolls (NFP) report released on July 5 showed a rise in the unemployment rate to 4.1%, up from 4.0% previously. This was an unexpected development, as economists had not forecasted this increase, indicating a cooling labor market.

As a result of the rise in unemployment, expectations have heightened that the Fed will cut interest rates to stimulate hiring and economic growth. 

Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold, thereby making it more attractive to investors. Consequently, gold prices were trading around $2,360 on Friday, showing an increase of over a third of a percent for the day.

Furthermore, the NFP report also revealed that 206,000 new employees joined the workforce in June, surpassing the expected 190,000, though down from the previous month’s 272,000.

Average Hourly Earnings, a metric that can influence inflationary pressures and the Fed’s policy on interest rates, remained unchanged on a monthly basis, showing 0.3% growth as expected. On a year-over-year basis, wage inflation cooled to 3.9% from 4.1% previously, in line with expectations.

Central banks’ Gold buying and geopolitical tensions boost demand

In addition to the above factors, central banks in emerging markets are ramping up their gold purchases to reduce reliance on the dollar, driven by concerns over sanctions. 

Countries like China and Turkey are leading this trend. Notably, the People’s Bank of China aggressively bought gold for 18 months straight, pausing only when prices hit record highs in May. 

Consequently, retail and investment demand in China, the world’s top gold consumer, remains strong, with expectations that Chinese consumption will boost global jewelry demand by 1.5% this year.

Furthermore, geopolitical tensions, such as the conflicts in the Middle East and Ukraine and the potential return of Trump to the U.S. presidency, are making investors jittery, prompting them to invest in gold as a safe haven.

 Additionally, the BRICS move to reduce dependence on the dollar is further driving gold demand, as it becomes a preferred alternative for countries facing sanctions.

Meanwhile, in the U.S., inflation remains flat, increasing expectations of Federal Reserve rate cuts in September and December, which is bolstering gold’s appeal. The European Central Bank has already cut rates, adding to the positive outlook for gold.

Gold price analysis

Gold 6-month price chart. Source: TradingView / Finbold

As of July 5, 2024, Gold (XAU/USD) is hovering around $2,368. Short-term pullbacks continue to be buying opportunities, and the $2,300 level remains an important level to watch. 

Given these factors, gold is emerging as a strong investment opportunity. Therefore, investors should keep an eye on upcoming economic data and Fed announcements, which will likely influence gold prices in the near term.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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