GoldPrice.

Happy Friday, traders. Welcome to our weekly market wrap, where we take a look back at these last five trading days with a focus on the market news, economic data and headlines that had the most impact on gold prices and other key correlated assets—and may continue to into the future.

Following a week of up-and-down, gold prices on Friday are coming to the market close roughly in-line with where they started trading on Monday evening.

So, what kind of week has it been?

Truncated by Monday’s Memorial Day holiday in the US, this market week has been relatively uneventful for many asset classes, when taken as a whole; nonetheless, gold’s trading chart for these four days has helped to cement our expectations of the forces that will be in play for the yellow metal as we move into June, a month in which we’re expecting another +0.50% hike from the Fed as well as an updated set of economic projections from the central bank. Also key to the market mood will be investors and economists’ perception of how much progress the Fed’s tightening effort is (or isn’t) making towards cooling inflation, and how well the stock market and the US economy as a whole are withstanding less favorable financial conditions.

The Dollar Looks Set to be a Deciding Factor in Gold’s Reactions to Fed Tightening

From the first full session of the week we observe that the path of the US Dollar—still at a kind of crossroads as to whether it will try to retest multi-year highs as in its May bull run, or else might sink below a 100 mark on the USD Index—will continue to dictate the direction of support or resistance for gold. Amid commentary and reporting from the White House about letting the Fed continue to lead the way in tamping down inflation, and boosted by the kind of rebound rally that many major assets have enjoyed on one “Monday” or another, USD rose throughout the day and gold prices slide lower (as we would expect.) Through the US session and into overnight trading, the stronger Dollar and rising Treasury yields helped to press gold spot prices to support around $1830/oz and the weekly lows.

How the Dollar goes on from here as the Fed continues to raise rates—whether it rises again, settles near current levels, or falls back—will probably directly determine if gold prices remain under extreme pressure has interest rates and yields are projected higher (as we saw in April and May,) or if the yellow metal bucks the resistance traditionally expected from higher yields (as it did in the first quarter of 2022) and rallies higher as an inflation hedge.

The Risk-Off Hum of Recession Fear Looks Set to Stay (and Support Gold Prices)

Speaking of inflation protection: looking back on Wednesday and Thursday’s trading, we can see that beneath any level of optimism from investors in the broader markets still lies a steady and growing unease about the risk of an economic recession being “caused” by the Fed’s interventionist cooling of economic activity. 

"So, I don't see a hurricane, but we have to realize that the risks of a recession have gone up," Loretta Mester from the Cleveland Fed says in an interview with CNBC.

— Jeanna Smialek (@jeannasmialek) June 3, 2022

With worries and warnings issued by key figures such as JPMorgan head Jamie Dimon about the (unknown) risk of economic hardship over the horizon, and some walking-back of more dovish sentiments from key FOMC participants, investors moved into firm risk-off positioning: US stock markets slid further on Wednesday, and gold prices began a strong rally from the week’s trough as the yellow metal became the preferred risk-off trade on Wednesday and Thursday as the Greenback softened against its peers.

Key Data Shows Us Where the Labor Market Is, as Well as How It Will Impact Gold Prices

Friday’s Jobs Report for May was the biggest ticket item on this week’s economic calendar, and the dynamics of gold’s trading chart between the release of ADP private payroll data for the same month of May on Thursday morning, and the NFP print on Friday demonstrates for us just how much rope investors believe the Fed has to continue aggressively tightening monetarily on a path to bring consumer price inflation back down to Earth and/or kick-off a recession. It also paints a clear picture of both the lack of a reliable relationship between ADP and NFP numbers for a given month, and the reliability of an acute market reaction to the ADP number regardless of this fact.

Already on the rise as recessionary fears came to fore the day prior, Thursday morning saw gold prices jump and run to the highest bids of the week (in the neighborhood of $1870/oz) after the ADP number badly disappointed expectations. The boost to gold prices came from two reaction functions, as we’ve discussed with other data points in the recent past. Gold becomes a more attractive buy in this scenario, on one hand because lower payroll growth feeds into the recessionary worries discussed above, on the other because a suddenly flagging US labor market might shorten whatever runway the Fed has to continue tightening. This second function also serves to weaken USD, as the Dollar has gotten much of its recent juice from expectations of higher and higher interest rates.

The rally in gold prices (and other non-USD safe havens) peaked and then moderated overnight, and then cooled quickly with the release of the May Jobs Report, which not only brought May’s Non-Farm Payroll in at a healthy premium to expectations, but also revised last month’s number notably higher. This kind of revelation, at least for the short-term, pressures gold prices lower through the same pathways to pulled the yellow metal higher the day before. This time, the data suggests that the US economy is holding up well (enough) to the Fed’s intervention, and that, as a result, the central bank will continue pushing interest rates higher (which also brings investors’ attention back to the Dollar.)

Next Up

Next week’s calendar, aside from counting the full five days of trading, looks similar to what’s just behind us: a relatively quiet slate, with the big data set due on Friday. This time it will be an updated read on consumer inflation, just ahead of the June FOMC. At this point, it’s probably too late to push the committee away from another 0.50% hike, but any dislocation from expectation (particularly to the upside) would have ramifications for monetary policy, and the trajectory of gold prices, in the second half of this year.

For now, traders, I hope you can get out and safely enjoy your weekend for the next couple of days. After that, I’ll see everyone back here on Monday for our preview of the week ahead.