U.S. Labor Market Is Recovering. Will Gold Too?

The March nonfarm payrolls were surprisingly strong. If the current favorable trend in the U.S. labor market continues, gold may struggle.

As the chart below shows, in March 2021, total nonfarm payrolls rose by 916,000, following gains of 468,000 in February (after an upward revision). The latest gains were the largest since August 2020. It’s important to note here that job growth was widespread, although led by gains in leisure, hospitality, education, and construction.

Furthermore, the U.S. economy added significantly more jobs than expected. Economists surveyed by MarketWatch forecasted 675,000 additions, but it turned out that employment in January and February combined was 156,000 higher than previously reported. Also on the positive side, the unemployment rate declined from 6.2 to 6 percent, as the chart below shows. As the unemployment rate is much below its high from April 2020, it’s clear that the U.S. labor market is recovering from the pandemic recession.

However, significant slack remains. First, the unemployment rate is still 2.5 percentage points higher compared to February 2020, before the pandemic started. Second, the broader unemployment rates, which paint a more accurate picture of unemployment, are even further from their pre-pandemic levels. For instance, the broadest U-6 rate was 10.7 percent in March, i.e., 3.7 percentage points above the level seen in early 2020. Third, the labor-participation rate is 1.8 percentage points lower than its pre-pandemic level, which means that many people simply dropped out from the labor market instead of searching for a job.

Implications for Gold

What does it all mean for the yellow metal? Well, gold’s reaction to a generally good employment situation report was positive. As the chart below shows, the London price of the shiny metal increased from $1,726 on April 1 to $1,745 on April 6, 2021, when the fixing resumed after the holidays.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it ...

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