What do we make of the recent knee-jerk Gold selloff?

Gold crashed through several support levels on Friday. The yellow metal plunged from $2,376 Thursday to under $2,300 by Friday afternoon.

The mainstream financial media bandied about two primary reasons for the big kneejerk selloff, and neither seem like particularly good reasons to sell gold.

Chinese central bank Gold buying

The selloff started at 4 a.m. EDT Friday when the People’s Bank of China announced it did not add gold to its reserves in May. That broke an 18-month streak of gold buying by the Chinese central bank.

When the news hit, the price of gold fell about $40.

The fact the PBoC didn’t buy any gold in May is certainly interesting, but it hardly counts as earthshaking news. Standing pat for one month doesn’t mean “China has stopped buying gold” as some news outlets framed it. It could be nothing more than a 1-month pause.

Of course, it could be the end of the bank’s gold-buying spree, but that won’t become clear until we see consecutive months with no increase in Chinese reserves. Traders selling off on what could be a one-off month seem to have jumped the gun.

And even if China has stopped adding gold to its reserves for the time being, there is still plenty of central bank gold buying to take up the slack.

In April, China’s buying dipped to just under 2 tons of gold. But even with that slowdown in Chinese purchases, central banks globally still gobbled up 33 tons of gold. That’s in line with the monthly net buying we’ve seen all year.

China was the biggest central bank gold buyer in 2023, but Turkey has led the way so far this year.

I should also note that we’re talking about official increases in China’s gold reserves. There are good reasons to believe China buys even more gold under the table, and that it likely holds far more gold than it reports. As Jim Rickards pointed out on Mises Daily back in 2015, many analysts believe that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration of Foreign Exchange (SAFE).

Central bank gold buying has indeed been a significant factor supporting gold demand over the last two years, and China has been a big part of that story. But it’s not the only player in the game. There is no reason to think central bank gold buying will suddenly stop, no matter what China does.

“Strong” jobs report

The gold selloff picked up momentum on Friday after a “stronger than expected” non-farm payroll report. That fueled speculation that the Federal Reserve will continue to hold interest rates higher for longer.

The expectation was for 180,000 new jobs in May. According to the BLS data, the economy gained 272,000 jobs.

Even with all the new jobs, the unemployment rate ticked up to 4 percent.  Meanwhile, the labor force participation rate ticked downward from 62.7 percent to 62.5 percent.

Mainstream talking heads tend to focus on the headline number and assume it signals a “strong” economy.

That’s not necessarily the case.

In fact, the economy continues to lose full-time jobs while part-time employment surges. The number of full-time workers declined by 626,000 in May while the economy added 286,000 part-time workers. That’s hardly a sign of a healthy economy.

Not everybody bought into the “more jobs, strong economy” narrative. Tastylive.com head of Futures and Forex Christopher Vecchio said the employment numbers “were not as healthy as the market thinks.” He pointed out that there is a huge discrepancy between the BLS numbers and the household survey that showed job losses of 408,000.

Barchart.com senior analyst Darin Newsome called the gold selloff “a knee-jerk reaction to the comic relief known as U.S. monthly employment numbers.”

Nevertheless, the markets fear central bankers at the Fed will use the BLS report as an excuse to hold interest rates higher for longer. But the mainstream is missing the fact that the Fed isn’t looking for reasons to keep rates at the current level. Fed officials desperately want to justify cutting rates.

The Fed is stuck between a rock and a hard place. The central bank has not done enough to slay price inflation. But the Fed has hiked rates high enough to break things in this debt-riddled bubble economy. It has already sparked a financial crisis that continues to bubble under the surface.  It’s only a matter of time before the economy unravels. That’s when the markets will get the rate cuts they desperately want – despite the fact that inflation is nowhere near dead.

Looking at the broader financial picture and the underlying economic dynamics, selling gold as a knee-jerk reaction to every job report isn’t a smart move.

Once you take a breath and step back, there wasn’t any fundamental change in the economy. We still have high price inflation. The Fed is still on the path to rate cuts (meaning even more inflation). There is still plenty of geopolitical uncertainty. We still have rampant government spending and increasing debt. All of these things are supportive of gold in the long term.

But we live in a microwave world where most people flip and flop based on the last hour’s news. It’s important to cut through all clutter and keep your eyes on the big picture.