The gold price started the new year at a 6-month high. However, the yellow metal sees the $1,900 target slipping away. Analysts blame a tight US labor market directly affecting the level of hawkishness the Federal Reserve will adopt in 2023.
Fed minutes block $1,900 for gold price
The gold price was just $29 away from $1,900 on Wednesday. The precious metal traded at its highest levels since June, driven by additional safe-haven demand from investors pricing during the recession. However, momentum wore off when the Federal Reserve December meeting minutes showed Fed officials were in line with Powell’s message that a more restrictive policy stance should be maintained ‘for a while’.
Fed officials reaffirmed their commitment to reducing inflation. Accordingly, they warned against ‘unnecessary’ relaxation of financial conditions. They also added that they are concerned about any ‘misperceptions’ regarding their actions in financial markets. None of the participants expected it would be appropriate to begin lowering the federal funds rate target in 2023, according to the minutes released Wednesday.
All eyes on NFP after ADP sees strong employment
As you follow on Kriptokoin.com, gold saw more losses on Thursday and fell to $1,829.90. This was largely a reaction to the special payroll data ADP, which showed a better-than-expected increase in employment in December. ADP showed that a total of 235,000 positions were added last month. Market consensus estimates were for an increase of only 150,000 after November data saw an increase of 127,000. “The economy is clearly weakening, but the labor market refuses to break,” said Edward Moya, senior market analyst at OANDA.
Strong ADP data could herald the highly anticipated December nonfarm payrolls figure on Friday. This will have important implications for gold. Brad McMillan, chief investment officer for the Commonwealth Financial Network, comments:
In the past few months, the official number has generally far exceeded the ADP data. Layoffs are very low overall, despite the headlines in the tech industry. Also, the voluntary turnover rate (a great indicator of the strength of the labor market) has risen again, even as vacancies remained well above pre-pandemic highs. According to all these signs, we can expect a significant hit tomorrow.
“If this happens, markets will react negatively”
Market consensus estimates that the US economy added 200,000 positions last month and the unemployment rate remained at 3.7%. Stronger-than-expected data will weigh on gold, raising the hawkish Fed rate hike expectations. However, any disappointment will help gold continue its rally above $1,850. Brad McMillan explains:
With 200,000 new jobs expected, we shouldn’t be surprised at anything above that, perhaps much more. In this case, wage growth will also remain at the last strong levels. If that happens, the Fed will likely continue to raise interest rates and markets will react negatively.
Analysts expect the labor market to finally start to cool in the new year, giving the Fed some room to be more flexible. According to analysts, the labor market will show signs of weakening going forward as corporate America seems to be constantly announcing layoffs and cost-saving measures. Edward Moya comments:
For now, the Fed needs to stick with the scenario and say rates will stay higher for longer. We’ll probably start to see unemployment claims climb much more from next week.
Wells Fargo is pricing in a slowdown in hiring, with its December report scheduled for release on Friday. In this context, the Bank makes the following assessment:
The vigor of nonfarm payroll growth seems to contradict other signs that the job market is starting to deteriorate. We expect nonfarm payroll growth to decline more markedly in the coming months, starting with the December jobs report showing hiring slowing to 205,000.
Wells Fargo adds that other employment metrics are already showing signs of weakness, including the household survey, the PMI employment indexes, and the latest Quarterly Employment and Wage Count.
What does this mean for the gold price?
Edward Moya says the $1,900 level will remain out of reach for the gold market until the labor market begins to show tangible signs of slowing down. He explains the reasons for this view as follows:
Gold is struggling as recent economic data shows the Fed will have a lot of pressure on them for further tightening. Labor market weakness is at hand. Until that happens, the gold price may remain stuck above the $1,800 level.
Bottom and top prediction for gold price: $1,600 and $2,100
MKS PAMP projects an average price of $1,880 for gold in 2023. Also, the MKS points to a slower Fed and increased stagflation and recession risks that will lead to a peak in US dollar and US yields. Nicky Shiels, metal strategist at MKS PAMP, explains:
The price of gold has plummeted under the influence of a hawkish Fed fighting inflation. However, it did not come out on an upward trajectory after that. The combination of slower global growth, chuckling (but not angry) inflation, and deglobalization is making gold return as a safe diversifier in times of heightened uncertainty. 2023 high-low range: $1,600 – $2,100.