It’s jobs Friday again. Equity bulls were hoping for a nonfarm payrolls report that is sufficiently cool that it allows for the narrative of a less aggressive Federal Reserve to be sustained. They didn’t get it.
Underpinning the S&P 500’s 14% bounce from its mid-October trough are the recent retreats in bond yields and the dollar, moves that are evidently linked to Fed expectations. The dollar index
has broken below its 200-day moving average, while the 10-year Treasury yield
is threatening to fall through the floor of a year-long uptrend channel.
But this shift in the buck and bonds is also good for another asset: gold
The yellow metal on Thursday, as measured by the COMEX front month futures contract, jumped 3.1% to recover the $1,800 an ounce level. That was the biggest daily gain since April 2020 and took bullion to its most expensive since August.
The commodity strategy team at Bank of America, led by Francisco Blanch, thinks gold has further to go. In a comprehensive 2023 commodity outlook note recently released, BofA says the price could exceed $2,000 an ounce next year as of all the precious metals “gold has the most to gain…on a Fed pivot”.
“With relatively limited commercial uses, gold has always been driven by investor demand,” says BofA. And that demand in turn tends to be impacted by borrowing costs and the dollar, in which gold is denominated.
Thus: “A pivot away from the aggressive rate hikes through 2023 should bring new buyers back into the market.”
And some weighty buyers have been showing their hand. Central bank purchases have rebounded in 2022, with monetary authorities in Turkey, Egypt, Iraq, India and Ireland all adding to their holdings, BofA observes.
The latest survey by the World Gold Council suggests this trend is unlikely to change, with 25% of central banks expecting to increase their exposure to the precious metals further, compared with 21% last year.
However central banks make up only about 20% of what BoFA terms “total implied investment” for gold, and so their interest is not sufficient to really get a rally going. For that, gold needs increased demand for “bar hoarding, physically backed ETFs, OTC net-investment and official sector purchases”.
“Annualized gold purchases year-to-date place the gold market squarely into the $1,500/oz and $2,000/oz range. Encouragingly, for gold to fall to the lower end of the range, recent investor liquidations, and outflows from ETFs would have to accelerate, which is not our base case, because we expect a bottoming out in USD and less upside to 10-year rates,” says BofA.
“While the U.S. central bank will in all likelihood keep tightening monetary policy, the pace of rate hikes should start to slow. This pivot will likely bring new investors into the market. As such, with physical demand already strong in some pockets, we believe gold prices should rally into 2H23,” BofA concludes.
Finally, here’s another factor BofA doesn’t mention. Some market observers have speculated that one reason gold did not rally as much as expected during recent years was that a significant sized cohort of potential investors were attracted to crypto instead. With anxiety over crypto assets building may bullion now attract some of those players?
S&P 500 futures
dived 1.4% 40 4021 after stronger-than-expected jobs data was seen making it more difficult for the Fed to slow the pace of rate rises. The benchmark 10-year Treasury yield
jumped 11 basis points to 3.620% and the dollar index
added 0.7% to 105.44.
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The big data point on Friday was the monthly nonfarm payrolls report. It came in hotter than expected. A net 263,000 jobs were added in November, notably more than the 200,000 forecast by economists. Furthermore, wage inflation was 0.6% month-on-month, twice the level of expectations.
is trading down 1%, after falling 7% on Thursday, as investors absorb news that the investment group was limiting redemptions from its $69 billion Real Estate Income Trust fund .
Oil prices were relatively firm, with U.S. crude futures
up 0.8% at $81.86 a barrel ahead of the OPEC+ meeting this weekend. The discussion comes as oil sits only several bucks above 11-month lows hit last week amid concerns a slowing global economy will crimp demand. Meanwhile, the EU is trying to agree a price cap on Russian oil.
Cybersecurity group Zscaler
also delivered a poorly-received earnings guidance after the close and the stock is down nearly 10%.
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