Gold Prices Driven By Fed Rate Speculation

Gold ended the week virtually flat at 1328 after a lackluster US jobs report and volume remained light on Monday morning with little price action. Gold had fallen as low as $1300 ahead of the monthly jobs report but reversed course within minutes of the release. Although the numbers on the surface were disappointing, when combined with revisions to the previous month and averaging out the quarter, the data was pretty solid.

Speculators were hoping that the report would give more precise guidance to the Federal Reserve thinking ahead of the September meeting. The dollar reversed losses Friday, as investors bet that a soft August employment report is unlikely to dissuade the Federal Reserve from raising interest rates later this year.

Nonfarm payrolls rose by a seasonally adjusted 151,000 last months, while the unemployment rate held steady at 4.9%, the Labor Department said Friday. Economists surveyed by The Wall Street Journal had expected employers would add 180,000 jobs in August and forecast an unemployment rate of 4.8%.

Still, some investors believe the data show an economy that is strong enough to support an interest-rate increase before the end of the year, if not at the Fed’s next meeting, which is scheduled for Sept. 20-21.

“September may be a long shot, but this does not reduce the odds of a December increase at all,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

Expectations of higher rates tend to boost the dollar, as they make the currency more attractive to yield-seeking investors.

“Monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth,” U.S. Federal Reserve Vice Chair Stanley Fischer said on Sunday, calling on Washington to invest more in infrastructure and education to juice up the slowly recovering U.S. economy.

An upbeat payrolls report would have reinforced the view that a US rate rise is on the cards, with Fed officials having sounded a hawkish note at a meeting last weekend, pressuring gold further.

Gold is highly sensitive to rising US interest rates, which increase opportunity cost of holding non-yielding bullion while boosting the dollar in which it is priced.

Gold prices edged higher in the international market a day before on a disappointing ISM Manufacturing survey weighed against Fed rate hike bets, pushing the US dollar lower alongside bond yields and boosting the relative appeal of anti-fiat and non-interest-bearing assets. The data showed factory-sector activity unexpectedly contracted for the first time in seven months in August. Silver climbed nearly 3% to 19.39 an ounce.

Gold continues to be moved by Fed hopes and the if and when of the rate increases. But this mood is very much data driven. Some positive figures last week, coupled with what were taken as some potentially hawkish statements by the Fed Chair and Vice Chair, had led to some sharpish falls in the gold price on the expectation that this had put the possibility of an interest rate increase announcement following the FOMC meeting to be held on September 20th and 21st back on the cards.