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Nonfarm Payrolls

What is the favorite roll of the Sushi Chef? Payroll!

The 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 GDP. Thus, the analysts see it as a very insightful statistic, which can be used to determine the condition of the labor market. Since the nonfarm payrolls are considered to show the current state of economic activity, the National Bureau of Economic Research analyzes it 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 and inflationary pressure are growing (central bankers consider fast rates of job gains as potentially leading 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

The chart below paints gold prices and the monthly changes in the nonfarm payrolls (in thousands of people). Let’s take a look at it!

Nonfarm payrolls gold

As one can see, there is no clear long-term relationship between the gold price and job gains. However, the IMF Working Paper shows 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 (or, actually, better than expected) is positive for the greenback and negative for the shiny metal. The price of gold tends to fall on the day when the Nonfarm Payroll Report comes out. 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 Fed’s monetary policy and the short-term interest rates. 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 is ready for an interest rate hike. But later the importance of the nonfarm payrolls for the gold market diminished somewhat. Therefore, strong (weak) jobs reports confirm that the U.S. economy is in a good (bad) shape, which is bearish (bullish) for the price of gold.

However, the relationship between nonfarm payrolls and gold prices is far from simple. The best example may be the coronavirus crisis. As the chart below shows, the monthly change in nonfarm payrolls (in thousands of people) collapsed, but the price of gold did not skyrocket.

Nonfarm payrolls and gold chart

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