A string of weak economic data signaling potential weakness in the U.S. economy is making the case for higher gold prices. The precious metal is already up by more than 2% for the week and fast closing in on the elusive $2400 an ounce level. This week’s resurgence has come amid growing expectations that the U.S. Federal Reserve will be forced to start cutting interest to avert further weakness in the U.S. economy.
Weakening Labor Market
Gold prices hit all-time peaks in May, right after a helicopter accident in Iran caused the death of President Ebrahim Raisi. The result was heightened tensions in the market, forcing traders and investors to scamper for safety in the precious metal amid heightened worries about deteriorating political situations in the Middle East.
However, gold quickly dropped from these heights as the situation did not deteriorate as anticipated. This time, gold’s bounce back is driven by hopes for reduced interest rates, especially in the U.S., which offers more favorable conditions for investing in gold. Traders were observed raising their positions on a September interest rate decrease by the Federal Reserve following a series of poor economic indicators from the U.S. this week.
AN 8,000 increase in initial jobless claims to 229,000 for the week ended May 31 has once again triggered concerns about the U.S. labor market. It marks the first time jobless claims have risen above 220,000, signaling weakness in the labor market that has remained resilient for the better part of the year.
Interest Rate Cut Push
A weaker-than-expected nonfarm payroll report for May should heighten the case that the Fed will start cutting rates as early as September. Interest rate cuts often trigger weakness in the U.S. dollar, which works in favor of higher gold prices. For the longest time, the central bank has refrained from cutting rates, buoyed by the labor market’s strength that has hinted at a solid U.S. economy amid the high-interest rate environment.
Therefore, any weakness in the labor market should give U.S. policymakers a reason to consider their stance and avert a potential risk of the economy plunging into recession. The Fed is not the only central bank on course to start cutting interest rates. The Bank of Canada has also hinted at the possibility of loosening monetary conditions, which should favor higher gold prices. The European Central Bank has already carried out a cut offering support to higher gold prices.
Meanwhile, silver prices have been increasing steadily above the $30 level. This upward trend in silver prices is mainly due to growing expectations of a decrease in interest rates by the U.S. Federal Reserve (Fed) in September. This expectation comes after the European Central Bank (ECB) cut its interest rates by 25 basis points on Thursday.
Silver, which does not pay interest, could see a surge in demand as the U.S. labor data, which is not affected by inflation, suggests the possibility of two interest rate reductions by the Federal Reserve this year. During the North American trading session, investors are expected to look for more U.S. employment data, including Average Hourly Earnings and Nonfarm Payrolls.
In addition to the interest rate debate, gold and silver prices remain susceptible to geopolitical situations across the globe. Escalation of tensions in the Middle East could trigger renewed demand for the two precious metals often perceived as stores of value in times of uncertainty.
