Gold has posted sharp losses in the Friday session, wiping out the gains seen on Thursday. In North American trade, spot gold is trading at $1255.08, down 1.07% on the day. On the release front, employment numbers were solid. Nonfarm payrolls slowed to 209 thousand, but easily beat the estimate of 182 thousand. Wage growth remained steady at 0.3% and the unemployment rate edged down to 4.3%, matching the forecast.
US indicators ended the week on a positive note, as employment data matched or beat expectations. This was good news for the US dollar, which is broadly higher in Friday trade. The markets were pleasantly surprised as Nonfarm Payrolls easily beat expectations. The labor market remains very strong, but record low levels of unemployment have failed to translate into stronger wage growth, which remained stuck at 0.3% in July.
The Federal Reserve is expected to begin trimming its balance sheet next month, and this could be bearish for gold prices. The Fed is expected to initiate the wind-down by not replacing maturing bonds, which will reduce the balance sheet by $200 billion in 2017, according to the Institute of International Finance (IFF). The IFF estimates that this would be equivalent to three normal interest hikes. Gold prices move inversely to rate hikes, so as the Fed trims down its portfolio, the dollar could move higher against gold.
Federal Reserve policymakers continue to talk about the possibility of a December rate hike, but with the odds for a December increase pegged at just 42%, it’s clear that the markets are skeptical about a third rate hike in 2017. Investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans this week, in a clear message that was likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had "fully recovered" from the 2008 financial crisis and called on the Fed to start trimming the balance sheet "this fall". Williams added that the process would be gradual and would take four years to reduce the balance sheet to a "reasonable size". On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.
