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Gold will weather this storm as investors sell the rallies

The U.S. labor market has defied all expectations in 2024, but sentiment has started to shift as five months of consecutive outperformance come to an end.

Heading into the weekend, markets continue to digest the disappointing nonfarm payrolls numbers. The U.S. economy created 175,000 jobs last month, according to the Bureau of Labor Statistics. The monthly figure missed expectations as economists were looking for job gains of 238,000.

At the same time, the unemployment rate increased, and wages didn’t rise as much as expected.

This was initially good news for the gold market, and prices briefly popped; however, in a fatigued market, many traders used the rally to sell. The gold market has managed to hold support above $2,300 an ounce, but it is ending the week with a roughly 1% loss.

After its massive $400+ rally, the gold market continues to consolidate and trend lower as sentiment normalizes. The focus again turns to the Federal Reserve’s monetary policy and interest rates.

Ahead of Friday’s employment number, the Federal Reserve poured cold water on expectations that it would start its easing cycle this summer. The central bank left interest rates unchanged and noted a lack of progress in bringing inflation down to its 2% target.

The latest employment data will provide the Federal Reserve with a sense that the labor market is cooling, easing inflation pressures, but it won’t prompt them to act anytime soon. This will limit gold’s gains in the near term.

However, this consolidation period is not bad; a reset in the market will allow investors to establish tactical positions without having to chase the market.

While gold prices have room to fall lower as the Fed maintains its restrictive monetary policy, the market won’t completely collapse. The U.S. central bank may not be dovish, but it certainly isn’t hawkish.

After the decision, Powell made it very clear multiple times during his press conference that the Federal Reserve is not looking to raise interest rates.

“I think it’s unlikely that the next policy rate move will be a hike. I’d say it’s unlikely,” Powell said during his press conference.

Analysts note that this puts a cap on bond yields and a floor under gold.

At the same time, the factors that drove gold prices to record highs despite the Federal Reserve’s current stance still remain in play. In particular, central banks are expected to maintain their voracious appetite for gold.

The World Gold Council released its first-quarter Gold Demand Trends report and said the central bank bought 290 tonnes of gold in the first three months of the year, the strongest start on record.

“Gold has proven to be a very powerful diversifier, and that is one of the key reasons that central banks themselves cite us as the reason for holding it,” WGC Director of Global Research Juan Carlos Artigas told Kitco News in an interview.

Many major banks have dismissed gold’s current correction and continue to see higher prices this year. Goldman Sachs has dismissed a higher Fed funds rate as they see prices rallying to $2,700 by the end of the year.

“We’re seeing a surge in demand from emerging market central banks and from Asian retail investors,” said Nicholas Snowdon, Head of Metals Research at Goldman, in a commentary published ahead of the U.S. central bank’s decision. “We think these are long-term dynamics that will keep a firm bid under gold. So even if rates do stay high, we expect to see continued bullish momentum in the gold price.”

Source: Neils Christensen Kitco