(Newswire.net — August 22, 2016) — Gold currently boast 26.60% year-to-date price gains to erase the 11% losses that investors incurred in full year 2015. The best part is that the bullion has outperformed equities, bonds, real, estate and crude oil this year.
Many investors consider gold a smart investment to own because of its relative stability in times of socioeconomic and geopolitical uncertainties. However, you’ll find strong arguments on the other side of the debate from people who think that gold is nothing more than a shiny metal with fundamental flawed value proposition.
Irrespective your opinion on whether gold is a good investment or otherwise, you’ll agree that the price of the yellow metal often fluctuates in response to market news, laws of demand and supply, and the prevailing economic sentiment in the market.
Does economic data affect gold prices?
The 2016 rally in the gold started slowing down in July and the yellow metal crashed from a $1364.90 an ounce high on July 6 to touch a $1,318.80 an ounce low on July 20.
The reason behind the weakness in gold prices last month is the strong economic trend that was observed in the June jobs data. The U.S. Bureau of Labor Statistics reported that U.S. employers added 287,000 jobs in June to beat the consensus economists’ estimate of 175,000 jobs. The impressive jobs number in June also erases the fears that investors had about the labor market after the gut-wrenching May jobs number.
The strong employment data in June suggests that the weakness in the labor market in May was anomaly and that the recovery in the economy was proceeding at a steady pace. The implication of the improvement in the economy is that the U.S Federal Reserve would become more confident to raise interest rates if the economy is showing strong signs of recovery. Hence, it wasn’t surprising that gold lost its footing in July because investors started to take funds out of bullion holdings in anticipation of a rate hike from the government.
New economic data reignite the bullish prospects of gold
Gold has started August on an impressive note with strong gains and once again, the reason behind the new uptrend could be traced to economic data. On Monday, the yellow metal climbed as high at $1,353.40 an ounce in a sharp uptrend that suggests that the bullion will edge higher in August. On Tuesday, the yellow metal extended gains by ending the session with 1% gains at $1,367.33 an ounce. In fact, Tuesday’s closing price marks the highest closing price in the bullion since July 11.
In today’s session, the bullion is holding the gains steady as it maintains 0.1% gain at $1,364.00 an ounce. Analysts at SternOptions.com have observed that the “main reason behind the uptrend in gold prices this month is the content of the most recent set of economic data available in the market.”
Last Friday, the U.S. Commerce Department reported that the second quarter GDP grew at a rate of 1.2%, which is below the consensus economists’ estimate. The disappointing second quarter GDP growth suggests that the economy is now tracking a growth rate of 1% in 2016 to mark the weakest start in economic growth since 2011.
As expected, the weakness in the GDP growth will cause the U.S. Federal Reserve to think twice about raising interest rates. It is commonsensical to conclude that the Fed will not want to raise interest rates at a time of weak GDP growth because such a move could spook investors and trigger a panic attack in the market.
Ira Epstein, managing director at Linn Group observed that “There is a feeling that the Fed can’t do much, even if they want to, and that’s pushing people into gold.” She furthermore noted that “Gold is accepting the fact monetary policies aren’t working.”
All eyes on Employment Situation data
On Friday, the U.S. Bureau of Labor Statistics will release its July nonfarm payrolls data and an update on the labor market in the U.S. Economists have a consensus estimate of 185,000 job gains within a consensus range of 150,000 and 215, 000 jobs.
The consensus job range is still below the 287,000 jobs created in June; hence, the prevailing markets sentiment is that the employment numbers won’t disappoint. Nonetheless, the fact that the consensus number underperforms the prior month job gains suggests that the July jobs number won’t erase the sentiments that support the bullish sentiment for gold.