Jobs Reports and Gold Explained
Every month, the U.S. Bureau of Labor Statistics releases an employment situation report (commonly referred to as a jobs report) that tends to cause violent moves either up or down in equity markets around the world. Although this cluster of data mainly provides insight into the labor market, the implications are wide-ranging.
To break it down in a simple and logical manner, the monthly jobs reports gives market participants a vague idea of how the U.S. economy is performing and, obviously, provides insight into labor and wage trends. Investors, however, are not the only ones keeping a close eye on this employment data the Federal Reserve monitors it as well. Because savvy market participants know this, jobs reports lead directly to speculation in the marketplace about when/if the Federal Reserve will raise or lower interest rates in an attempt to control earning inflation and other economic staples.
To even the above-average and well-versed investor, all of this talk about wage inflation trends and interest rates can be understandably bewildering. Nevertheless, when its broken down into a few manageable pieces, the effects jobs reports have on virtually every market in the world, especially the gold market, become much easier to comprehend.
Specifically regarding the gold market with no superfluous analysis, the correlation between jobs reports and the price of gold is as follows:
Strong jobs report = possible higher interest rates = gold goes down.
Weak jobs report = possible lower or unchanged interest rates = gold goes up.
The reasoning behind gold going up or down is a tad more complex than it appears in the equation above, in part because the price movement depends on what a strong or weak jobs report really means. If the U.S. economy adds fewer jobs than expected, which would constitute a weak jobs report, then the Federal Reserve would theoretically be less likely to aggressively hike interest rates, because, according to the jobs report data, the economy is fragile and would not do well with higher fed. fund rates.
Conversely, if the U.S. economy adds more jobs than expected, it would indicate economic robustness. An interest rate hike would not be of detriment to the economy and, in fact, might be necessary to reach/control Federal Reserve inflation targets.
This is where the jobs report and gold discussion really starts to get interesting. Conventionally, high interest rates are not favorable to the price of gold, whereas low interest rates are seen as very favorable. The reasoning behind this is relatively simple. When it gets more expensive to borrow money because the Federal Reserve raises its benchmark borrowing rate, its nonsensical to pay more in interest to buy gold, which inherently pays nothing compared to interest-bearing instruments.
There is, however, a massive caveat to all of this analysis about gold and jobs reports. Over the short term and especially intra-day, jobs reports and interest rates do indeed affect the price of gold; but over the long term, the price of gold is influenced more by supply and demand, and other economic/world events, than by employment data.
Additionally, it is worth noting that gold could theoretically rally on a strong jobs report and sell off on a weak one (the opposite of what is expected), because the aforementioned conventional wisdom regarding jobs reports and gold is by no means a certainty. With that said, a negative correlation between jobs reports and gold certainly exists over the short term, but on a longer time horizon, the correlation seems spurious, and the future effect remains unknown, much like in any market.
In spite of this, it is still important to be informed about what a strong or weak jobs report will likely mean for a gold investment. By knowing this, investors, or anyone looking to purchase gold, can have a leg up on the rest of the market, and capitalize on the entry opportunities that arise from a strong jobs report.