2023-06-02 14:16:00
Despite the declines witnessed during these moments after the release of US employment data, gold is likely to witness record highs in the coming period.
It turned downward after the release of US employment data, which reported more jobs being added than expected and more than the previous reading, in conjunction with the unemployment rate also rising by more than expectations and more than the previous reading.
Employment data came this time higher than experts’ expectations, and higher than the previous month’s figures, which motivates the Fed to tighten monetary policy for the coming period because the labor market is still strong.
However, unemployment rose which indicates weakness in the labor market, thus this may prompt the Fed to ease the pace of monetary tightening.
We conclude from this that today’s data was mixed, as it indicates the strength of the labor market in terms of adding more jobs, while also indicating its weakness after the unemployment rate rose compared to expectations and also compared to the previous reading. However, the markets reacted to the strength of the employment report in the private sector, which led to a decline in gold and an increase in gold.
financial problems
Although the US debt settlement deal passed the US House of Representatives and Senate, it will not lead to an end to the country’s financial problems, and gold is expected to benefit greatly.
Gold prices are set to jump towards $3,000 levels as deficit spending continues to grow in Western economies, led by the United States. Looking beyond the current debt ceiling debate, the US Treasury is expected to sell up to $2 trillion in bonds over the next decade.
And if investors’ anxiety about the fraught and drawn-out debate between the Treasury Department and Congress spills over into a future failed Treasury auction, the US dollar will almost certainly slide and gold prices will rise.
An attractive investment asset apart from the dollar
In the meantime, gold will remain an attractive investment asset, as central banks will be forced to wind down their quantitative tightening measures and become buyers of last resort to fund government spending.
We are moving into a new era in which central banks may have no choice but to create monetary inflation to finance future structural fiscal deficits. This deficit, in turn, is the result of mounting mandatory spending demands, tax rules, and the changing mix of the workforce.
Meanwhile, the luxury of being able to co-opt foreign savings to help domestic finance seems less likely given rising geopolitical tensions. Thus, we face a world of permanent quantitative easing and continuous inflation.
Citing data from the Congressional Budget Office, due to rising costs and declining revenues, government debt is expected to nearly double to $46.4 trillion by 2033, up from $24.3 in fiscal 2022.
At the same time, the size of the Fed’s balance sheet is expected to increase by 50% in the next ten years. In a worst-case scenario, the central bank’s balance sheet could rise by 75%.
Using this simple extrapolation, a 75% increase in US monetary inflation would easily take gold prices to the $3,000 levels, even using the 2022 average price as a basis.
Besides being an inflation hedge, gold remains an attractive diversification tool against the US dollar. Central banks will continue to buy gold because deficit spending in the US makes the US dollar an unattractive reserve currency.
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