Fed Rate Cuts Fuel Gold Demand
The primary driver of Thursday’s rally is the growing belief that the Federal Reserve will initiate a more substantial rate-cutting cycle due to signs of a slowing U.S. economy. Recent data, including Wednesday’s Job Openings and Labor Turnover Survey (JOLTS), showed job openings fell to a three-and-a-half-year low, raising concerns about the labor market’s strength. As a result, traders are now pricing in a 57% chance of a 25-basis-point rate cut and a 43% probability of a 50-basis-point cut for September, according to the CME FedWatch tool.
Ole Hansen, head of commodity strategy at Saxo Bank, noted that the global economic slowdown has increased downside risks across growth-dependent commodities, adding further support for gold. As rate cuts lower bond yields, gold, which offers no yield, becomes more attractive to investors.
ETF Buying Resumes as Treasury Yields Fall
The anticipation of a rate cut has also spurred renewed interest in physically-backed gold exchange-traded funds (ETFs). These funds had seen outflows in recent years as investors favored U.S. Treasury bonds, which offered higher yields. Now, with yields expected to drop, ETFs are once again increasing their gold holdings.
Carsten Menke, an analyst at Julius Baer, highlighted that while the Fed’s potential rate cuts will keep interest rates in restrictive territory, above the neutral rate, this could limit a major wave of buying by Western gold investors. However, gold has still gained 22% year-to-date, marking its strongest performance since 2020.
ADP Employment Data to Influence Fed’s Next Move
The next significant market mover will be the ADP Employment Change report, scheduled for release today. Economists expect private-sector job growth of 144,000 in August, which would surpass July’s figure of 122,000. The ADP report, along with Friday’s nonfarm payroll data, will provide further clarity on the labor market’s health. Any surprises could shift the Fed’s approach at its upcoming September 17-18 policy meeting.
A stronger-than-expected ADP report might dampen expectations for a larger rate cut, while weaker data would likely fuel expectations for more aggressive easing. Treasury yields, already impacted by the weak JOLTS report, could see further volatility based on today’s ADP results.