The US labor market improved in August, although the headlines paint an overly optimistic picture. What does all of this mean for the gold market?

Good news for the US job market: according to BLS, the US economy has regained 1.4 million jobs, while the unemployment rate fell below 10% for the first time in the era of the pandemic! To be more precise, the unemployment rate fell from 10.2% in July to 8.4% in August, as shown in the graph below.

Importantly, the drop in the unemployment rate was larger than expected – and it was accompanied by an increase in the participation rate, from 61.4% to 61.7%, making the drop even better unemployment rate.

The figures are therefore negative for the gold market. They reflect the improvement in the labor market and the continued recovery of economic activity after the coronavirus crisis and the Great containment.

However, when we dig deeper, we would see a less rosy image. First, as can be seen in the graph below, the pace of employment growth in the United States has seriously slowed from gains of 2.7 million, 4.8 million and 1 , 8 million in May, June and July, respectively. This indicates that the non-farm payroll is clearly on the decline.

In addition, the 238,000 jobs were only created temporarily due to the 2020 census. And we cannot forget that the unemployment rate remains relatively high, especially compared to a rate of 3.5% before the outbreak of the ‘epidemic. So there is still a long way to go to get back to pre-COVID levels and trajectory.

Another example of how investors should always take the headlines with a pinch of salt are early jobless claims. They fell sharply from 130,000 to 881,000 seasonally adjusted during the last week of August (see graph below), but the drop was caused by a methodological change in the way the data is adjusted for seasonal fluctuations in employment.

Implications for gold

What does all this mean for the gold market? Well, the fall in the unemployment rate is negative for gold prices as it could restore confidence in the strong economic rebound. Indeed, the price of gold initially fell in response to the release of the employment situation report.

However, the fact that US job growth slowed further in August is worrying. The slowdown shows the fragility of the current economic recovery and calls into question its stability without the government’s new fiscal stimulus plan. The uncertainty surrounding the pandemic and the economic recovery is expected to maintain demand for gold as a safe haven asset and portfolio diversifier.

Therefore, short term, the gold market correction could continue. Gold’s inability to recover after the Fed announced its dovish change in the inflation targeting regime appears bearish and may indicate that gold has already built in the price of a more inflationary Fed. The improvement in the epidemiological situation and the economic recovery could also add some downward pressure on gold prices.

However, the fundamental outlook for gold remains bullish. the Monetary Policy remains easy, while real interest rates will remain ultra-low or even negative for years to come. Public deficits and public debts are exploding. In such a macroeconomic environment, gold should shine in the long run.

And don’t underestimate the power of the dovish side! After all, last week the Fed acknowledged that the Philips curve is dead, which will allow the economy to grow and inflation to rise to a higher level without the need to raise interest rates. In other words, the Fed promised to keep the fed funds rate close to zero for a few more years without worrying about inflation. As it has become even clearer that the Fed is more concerned with a weak economy than inflation, we are even more certain that real interest rates will stay at ultra-low levels for years to come, who will continue to push investors towards gold.

By Arkadiusz Sieron via Sun benefits

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