Gold Analysis - Aggressive Fed Rate Hikes Supported by Job Reports

New Data on the US Labor Market and Federal Reserve Policy 

Today, the Bureau of Labor Statistics provided some positive news. In March, 431,000 Americans gained meaningful employment, while the unemployment rate remained within 0.1 percent of 3.5 percent, coming in at 3.6 percent. While economists polled predicted that over 500,000 jobs would be added, such projection is irrelevant given today's results demonstrating a healthy and strong labor market in the United States.

The strength of today's news indicates that America's workforce has shrunk to 1.6 million jobs, or 1% of what it was before to the pandemic. It should be highlighted that increased employment is a result of a tight labor market, which has forced employers to offer higher wages in order to recruit new employees.

This strong report will provide the Federal Reserve with the facts it needs to continue raising rates aggressively, most possibly much more aggressively. However, the Federal Reserve will face a near-impossible task of bringing inflation down to an acceptable goal rate of 2%.

Gold's Reaction to Labor Statistics

Today's announcement resulted in a significant reduction in gold prices, with the most actively traded June 2022 futures contract falling $25.50, or 1.31 percent, to $1928.50. Today's loss was largely due to selling pressure, with only 0.2 percent of today's 1.31 percent decline due to dollar strength.

Analyses Fundamentals

Inflation has reached a record high not seen since 1981. This abnormally high level is the outcome of a succession of unrelated occurrences. According to the Federal Reserve Bank of Cleveland, these events and variables will result in inflation of 9.01 percent in the first quarter of 2022. According to their research, the CPI index would increase to 8.41 percent year over year in March.

The abnormally high level of inflation that resulted from the global epidemic and subsequent recession has been exacerbated by Russia's invasion of Ukraine. This military action will have a greater impact on Europe than on the US, owing to their reliance on agricultural supplies from both countries, as well as oil, natural gas, and gasoline from Russia.

Ukraine has long been regarded as the breadbasket of Europe, feeding the continent with wheat and other agricultural products. Ukraine's production has effectively ceased. While Russia continues to export oil and its derivatives, the United States and the European Union have mostly blacklisted Russian exports.

In a more normal inflation crisis, the necessary actions to contain inflation may be undertaken through extraordinarily aggressive rate hikes. However, the complicated factors that contributed to a 40-year high in inflation cannot remedy the issue on their own. Without an end to Russia's armed war with Ukraine, inflationary pressures in Europe will continue to rise. This brings us to the crux of the matter.

Russia has maintained an iron fist in its demands for troop withdrawals and its savage military measures, which have included civilian targets. Their demands are straightforward: first and foremost, they demand Ukraine's capitulation. While Russia has been negotiating, the fact that they have continued to bomb cities while negotiating demonstrates that diplomacy is really a ruse to give the illusion of seeking a peaceful conclusion, whereas in reality they have utilized the process of negotiation to resupply their soldiers.

Genuine negotiations necessitate a cease-fire during the duration of the talks, which is not the case. Ukraine likewise has a consistent and straightforward demand: Russia must remove its soldiers and immediately halt the murder of civilians and damage of their cities.

Geopolitical tensions, combined with precisely escalating inflation rates, have aggravated previously applicable remedies. Inflation in Europe will continue to rise in the absence of a resolution to the crisis between Russia and Ukraine.

The current crisis in Europe, marked by geopolitical tensions and inflation levels approaching 9.1 percent in the United States, necessitates flawless performance by central banks in order to provide a gentle landing and an end to Russia's annexation of Ukraine. Simply said, the problem cannot be resolved in its entirety without resolving both the high level of inflation and Russia's military pullout from Ukraine.