Gold prices hold steady amid Fed uncertainty and US jobs data

Gold prices were little changed on Thursday, as investors awaited the release of the US nonfarm payrolls report for December, which could provide clues on the Federal Reserve’s policy outlook. The precious metal was also supported by a weaker dollar and lower Treasury yields, which reduced the opportunity cost of holding the non-yielding asset.

The US Labor Department will publish the monthly employment report on Friday, which is expected to show that the economy added 400,000 jobs in December, down from 546,000 in November, according to a Reuters poll of economists. The unemployment rate is forecast to drop to 4.1% from 4.2%, while the average hourly earnings are projected to rise by 0.4% month-on-month and 4.9% year-on-year.

Gold prices hold steady amid Fed uncertainty and US jobs data
Gold prices hold steady amid Fed uncertainty and US jobs data

The jobs data is closely watched by the Fed, which has signaled that it will start raising interest rates this year to combat rising inflation and prevent the economy from overheating. The Fed has also announced that it will accelerate the tapering of its bond-buying program, which has been a key source of liquidity for the financial markets.

The Fed’s hawkish stance has weighed on gold prices, which tend to benefit from lower interest rates and a weaker dollar. However, some analysts believe that the Fed may adopt a more cautious approach if the jobs data disappoints or if the Omicron variant of the coronavirus poses a threat to the economic recovery.

“We expect gold to remain range-bound ahead of the US jobs report, as the market is looking for clues on the Fed’s policy path,” said Edward Moya, senior market analyst at OANDA. “Gold could see some support if the jobs report misses expectations or if the Omicron variant leads to more lockdowns and restrictions.”

Dollar and yields retreat

Gold prices also found some support from a softer dollar and lower Treasury yields on Thursday, as investors took profits after a strong rally in the previous session. The dollar index, which measures the greenback against a basket of six major currencies, fell 0.2% to 95.96, after hitting a 16-month high of 96.40 on Wednesday. The 10-year Treasury yield, which moves inversely to bond prices, slipped 3 basis points to 1.66%, after touching a 10-month high of 1.70% on Wednesday.

The dollar and yields were boosted by the minutes of the Fed’s December meeting, which showed that most policymakers supported a faster tapering of asset purchases and were open to raising interest rates as soon as March. The minutes also revealed that some Fed officials discussed the possibility of reducing the size of the central bank’s balance sheet, which currently stands at a record $8.8 trillion.

The hawkish tone of the minutes surprised some market participants, who had expected the Fed to be more flexible and data-dependent in its policy decisions. However, some analysts cautioned that the minutes may not reflect the latest views of the Fed, given the fast-changing economic and health situation.

“The minutes are somewhat stale, as they predate the latest surge in Covid cases and the disappointing consumer confidence data,” said Fawad Razaqzada, market analyst at ThinkMarkets. “The Fed may have to revise its outlook and guidance if the Omicron variant proves to be more disruptive than anticipated.”

Gold outlook remains mixed

Gold prices have been trading in a narrow range of $1,770-$1,830 per ounce for most of the past two months, as conflicting factors have kept the market in a state of uncertainty. On the one hand, gold has been supported by safe-haven demand amid the Omicron outbreak, geopolitical tensions, and inflation worries. On the other hand, gold has faced headwinds from the Fed’s policy tightening, a stronger dollar, and a robust stock market.

Analysts have mixed views on the outlook for gold, as they weigh the potential impact of the Fed’s actions, the Omicron variant, and the global economic recovery. Some expect gold to remain under pressure, as the Fed raises interest rates and reduces its balance sheet, while others see gold as a hedge against inflation and a diversifier in a volatile market environment.

“We maintain a bearish view on gold for 2024, as we expect the Fed to hike rates three times and announce balance sheet reduction,” said Carsten Menke, head of next generation research at Julius Baer. “We see gold falling to $1,600 per ounce by the end of the year, as real interest rates rise and the dollar strengthens.”

“We remain bullish on gold for 2024, as we expect inflation to remain elevated and the Fed to lag behind the curve,” said Daniel Ghali, commodity strategist at TD Securities. “We see gold rising to $2,000 per ounce by the end of the year, as real interest rates remain negative and the dollar weakens.”

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