Gold prices surged again this week, reaching a new all-time high of $2,500 an ounce on Wednesday before retreating to around $2,470 an ounce to close out the week.
Friday’s labor market report from the Bureau of Labor Statistics revealed a stark slowdown, with only 114,000 jobs added in July, significantly below the forecasted 176,000. Unemployment rose unexpectedly to 4.3%, its highest level since October 2021. Additionally, average hourly earnings grew by just 0.2%, falling short of expectations.
Calling the data from the Bureau of Labor Statistics “shocking,” Samer Hasn, Senior Market Analyst at XS.com noted that it “significantly” altered market expectations about the Federal Reserve's next steps.
“Markets are increasingly optimistic about multiple rate cuts this year,” Hasn noted.
Previously, there was a 90% chance that the Fed would implement a 25-basis-point rate cut in September. However, the market is now split between anticipating a 25- or 50-basis-point cut, with the potential for an additional cut or two later in the year. This could result in a full percentage point reduction in interest rates by year-end, according to the CME FedWatch Tool.
“Gold’s gains today come as the US labor market is showing its weakest performance in nearly two and a half years, prompting Treasury yields to give up all of their gains this year, while geopolitical tensions in the Middle East are at their highest,” Hasn said.
Gold's rally is further supported by heightened geopolitical tensions. Investors flock to gold during times of uncertainty and geopolitical instability because it is considered a reliable store of value. Geopolitical tensions can lead to economic instability and potential inflation, especially if they disrupt trade or supply chains.
As Hasn noted, tensions are high this summer. Recent assassinations of Hamas political chief Ismail Haniyeh and Hezbollah leader Fouad Shukr have intensified fears of a multi-front response against Israel. US administration officials are deeply concerned about potential escalations, leading to intensified diplomatic efforts to prevent a full-scale regional war and revive ceasefire negotiations in Gaza, according to The Wall Street Journal.
Hezbollah's Secretary-General Hassan Nasrallah recently declared that the conflict has entered a new phase, criticizing Israel for crossing a significant red line. The ongoing tensions might complicate negotiations on the Iranian nuclear file, potentially prompting Iran to accelerate its nuclear program, as reported by The New York Times.
Despite US efforts to de-escalate the situation, it has reiterated its military support for Israel. This support likely emboldens Israeli Prime Minister Benjamin Netanyahu to continue his aggressive stance, driven partly by pressures from his far-right coalition, according to Politico.
The market is also keenly awaiting Monday's ISM Services PMI report, which is expected to rise to 51 points for June, up from 48.8 points in July. A stronger PMI could ease some investor concerns about the economy, potentially slowing gold's rally. However, the ongoing geopolitical instability is expected to sustain gold's appeal as a safe-haven asset.