Jobs Report vs. Midterms in the Fight to Steer Gold and the Dollar

Gold and silver rallied after the U.S. midterm elections handed Democrats control of both the House of Representatives and the Senate, raising fresh uncertainty over how much of President Trump's policy agenda can pass. The jobs report and gold are tightly linked because U.S. nonfarm payrolls shape Federal Reserve rate hike expectations, and those expectations move the Treasury yields and U.S. dollar that sit behind the precious metals rally. A Democratic Congress makes major tax and spending proposals harder to implement, which has pulled Treasury yields lower and pushed the dollar to its weakest level in a month against its major peers. The political reaction and the labor market data are now competing to set the direction for gold and the dollar, and that contest matters for anyone holding precious metals.

Fiona Cincotta, StoneX Senior Market Analyst, covers forex, equities, commodities and crypto assets, with a focus on macroeconomics and the UK, European and U.S. market themes that move them. That coverage gives insight into how U.S. politics, Treasury yields, the U.S. dollar and Federal Reserve expectations feed into the gold and silver price.

Key Themes

• Silver gained more than 4% as a Democratic sweep of Congress raised political uncertainty in Washington.
• The U.S. dollar fell to its lowest level in a month against major peers as Treasury yields declined.
• U.S. nonfarm payrolls data shapes Federal Reserve rate hike expectations, which move Treasury yields, the dollar and gold.

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Midterm Uncertainty Drags Treasury Yields and the Dollar Lower

The U.S. midterm result has pushed Treasury yields and the U.S. dollar lower, because a Democratic Congress makes major tax and spending proposals harder for President Trump to implement. Debt ceiling negotiations and the regulatory outlook for the tech sector add another layer of uncertainty, and markets have repriced U.S. government bonds as a result. "All this uncertainty is pulling Treasury yields lower, which is also weighing on the US dollar, which has dropped to its lowest level in a month versus its major peers," Cincotta says. Gold and silver pay no interest, so falling Treasury yields reduce the opportunity cost of holding them, while a weaker dollar makes both metals cheaper for buyers outside the United States. Specifically, for self-directed traders, the midterm effect on gold and silver runs through rates and currency, a mix Cincotta calls "particularly supportive" for precious metals. That means the political story only keeps working for gold for as long as it keeps yields and the dollar under pressure.

U.S. Jobs Data Drives Fed Hike Bets and the Gold Price

The U.S. nonfarm payrolls report shapes Federal Reserve rate hike expectations, which in turn move Treasury yields, the U.S. dollar and the gold price. According to Cincotta, "whilst the political reaction could actually prove to be relatively short lived, ultimately the direction of the US dollar and precious metals will depend heavily on the Federal Reserve policy." A stronger-than-expected payrolls report tends to cement expectations for tighter monetary policy, lifting Treasury yields and the dollar and weighing on gold. Conversely, weaker-than-expected labor market data eases rate hike expectations, which supports the gold price. For anyone holding precious metals, the jobs report is the point where the election-driven rally meets the Federal Reserve outlook. That makes U.S. labor market data, rather than the midterm result alone, the next major test for gold.

Gold Rally Signals Surface in Payrolls, Yields and the Dollar

The strength of the gold rally shows up first in U.S. nonfarm payrolls, Treasury yields, the U.S. dollar and Federal Reserve rate expectations. Nonfarm payrolls show how strong the U.S. labor market is, which feeds directly into how markets price the next Federal Reserve decision. Treasury yields show the opportunity cost of holding metals that pay no interest, and the dollar against its major peers shows how expensive gold is for international buyers. On the charts, Cincotta tracks gold against its 20, 50 and 200 exponential moving averages, which show if the broader downtrend remains intact.

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: Fiona Cincotta, StoneX Senior Market Analyst