Gold opened higher this morning on the heels of the latest U.S. jobs report. The U.S. Department of Labor reported lower than expected job growth for the month of August, with only 142,000 non-farm jobs added, making it the lowest month for employment growth of the year. The discrepancy between expectations and reality was significant. A poll by MarketWatch revealed that investors initially predicted more than 220,000 jobs to be added last month. And for good reason: for the 7 consecutive months prior, the U.S. added more than 200,000 jobs each month.
The dismal report has led many to believe that the economic recovery has slowed or stagnated and that as a result, the Fed will not raise interest rates as quickly as initially suspected. Higher interest rates would mean a higher cost of borrowing, which would equate to a tighter monetary policy and stronger dollar. But lower interest rates encourage borrowing, which in turn, increases overall debt and the amount of cash in the economy which weakens the dollar. The weaker the dollar, the more appealing gold appears to investors.
The weakening of the economic recovery could also mean an extension to the Quantitative Easing program, which could hurt the dollar even more.
Many analysts had been positing that the Fed would raise interest rates and end the QE program as the economic recovery picked up steam, but this new data leads many to believe the Fed will not raise interest rates any time soon.
This presents an interesting prospect after yesterday’s announcement that the Central Bank of Europe is reducing their interest rates to new record lows. The 18 countries that use the euro as currency showed little to zero growth during the second quarter of 2014 which led to the aggressive new stimulus package put forth by the ECB. The bank announced two new bond buying programs and lowered rates from .15% to .05%. The rates cannot go much lower, which could force the European Central Bank to institute a Quantitative Easing program of its own.
Usually a weakening dollar means a strengthening euro, but what will happen when Europe begins its own QE and the U.S. extends the current policy?