Jobless data and Fed salvo propel gold to eight-year high

Written by

Updated on Jul 6, 2024

Reading time 4 minutes

US jobless claim numbers touch 6.61 million
The Fed unveils its $2.3T Main Street Lending Program
Inflows into gold ETFs are at a record

Gold ended on a high note on Thursday, reacting to dismal jobs data and the Fed’s announcement of a $2.3 trillion additional stimulus package. The unemployment data prompted fears of economic distress, while the Fed action raised concerns of additional liquidity – both supportive of gold prices.

Comex gold futures for June delivery closed the day at $1736.20, gaining a solid $70.80, or 4.2%. The yellow metal’s session high was $1754.20, the best since February 2012.

Labor Department figures released on Thursday showed that a total of 6.61 million people filed jobless claims for the week ended April 4. People claiming unemployment benefits during the virus-related economic freeze is now estimated at 16.8 million.

“The sudden and extraordinary deterioration in the labor market supports Bloomberg Economics’ expectation that the unemployment rate will head toward 15% in April, and possibly higher later in the quarter unless the torrent of jobless filings starts to subside,” commented Bloomberg analysts.

Meanwhile, on a separate but gloomy note, the University of Michigan’s consumer sentiment index fell to an eight-year low of 71 in April. This was the largest one-month drop on record.

Coronavirus: The gloves are off at the Fed

The Fed announced it will spend up to $2.3 trillion in loans to help SMBs and state and local governments through the corona crisis.

It also pledged to buy up certain financial assets such as junk bonds and bond ETFs, collateralized loan obligations and commercial mortgage-backed securities.

The Fed measure, dubbed “Main Street Lending Program,” is supplementary to the $2 trillion aid package approved by the US government last month.

Helicopter liquidity?

The Fed’s “bazooka” measure will unleash a fresh tsunami of liquidity into the economy, raising the prospect of investors piling into hard assets such as gold, traditionally viewed as a safe store of value in times of economic duress.

“All these sea of money that Congress and Fed are creating is proving to be a bonanza for gold, which the safe-haven crowd sees as a sure sign to take the yellow metal to $1,800 highs and possibly beyond the $1,900 record levels,” said Tariq Zahir at Tyche Capital Advisors.

“Spot gold prices have started to consolidate around $1650/oz, but the macro backdrop remains conducive for further price gains,” said Standard Chartered Bank analyst Suki Cooper. “Unprecedented monetary and fiscal stimulus, negative-yielding debt and low interest rates for longer imply gold will continue to attract a flight to safety and quality.”

The measures taken by the US authorities are being echoed in some form or other by central banks around the world. This kind of excessive money supply and liquidity have traditionally boosted gold prices.

View from the World Gold Council

A report from the World Gold Council (WGC) said global gold-backed ETFs (gold ETFs) and similar products added 298 tonnes(t), or net inflows of US$23 billion, across all regions in the first quarter of 2020. This was the highest quarterly amount ever in absolute US dollar terms and the largest tonnage additions since 2016.

“With the Fed taking interest rates to zero for the foreseeable future, gold could do well as it tends to outperform during easing cycles,” said the WGC. “Additionally, multi-trillion-dollar fiscal stimulus policies to combat the economic impact of COVID-19 could prove inflationary––a development that could support gold prices in the long run.”