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Nonfarm Payrolls

Nonfarm payroll employment represents the total number of paid U.S. workers, excluding proprietors, private household employees, unpaid volunteers, farm workers, and the unincorporated self-employed.

This measure accounts for approximately 80 percent of the workers who contribute to the Gross Domestic Product (GDP). Thus, it is the benchmark statistic used to determine the condition of the labor market. Since it is considered a coincident indicator (it shows the current state of economic activity), the National Bureau of Economic Research analyzes it (as one of the key statistics) to determine whether the economy is expanding or contracting. Nonfarm payrolls are also closely watched by the Fed, as they show whether and how quick the economy is growing (central bankers believe that high rates of job gains may lead to an increase in inflation). The nonfarm payroll statistic is released monthly, on the first Friday of the month, by the U.S. Bureau of Labor Statistics as part of the Employment Situation Report on the state of the labor market.

Nonfarm Payrolls and Gold

What is the relationship between the nonfarm payrolls and the shiny metal? Let’s analyze the chart below to figure it out.

Chart 1: Total nonfarm payrolls (green line, left axis, monthly change in thousands of persons) and the price of gold (yellow line, right axis, London P.M. fixing) from 1971 to 2015.

Nonfarm payrolls gold

As one can see, there is no clear long-term relationship between the gold price and job gains. However, Roachi and Rossi in their IMF Working Paper show that employment statistics (if they surprise investors) move the price of gold in the short-term. Usually, good news for the U.S. labor market is positive for the greenback and negative for the shiny metal. In such a case, the price of gold tends to fall on the day when the Nonfarm Payroll Report comes out. The report then shows a headline figure that is stronger than expected. In case of bad news from the labor market, the situation is reversed. Importantly, how investors react to the surprises depends on the report’s implications for the short-term interest rates (three-month Treasury interest rates are highly sensitive to payroll employment surprises). It was clearly seen in 2015, when practically every release of the jobs report was taken as crucial for the Fed to decide whether the economy was ready for an interest rate hike. And gold is mostly purchased when people worry about the condition of the U.S. economy. Therefore, strong jobs reports confirm that the U.S. economy is in a good shape, which is bearish for the price of gold.

We encourage you to learn more about gold – not only how it is affected by nonfarm payrolls, but also how to successfully use the shiny metal as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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