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Here's what gold bulls need, but investors have to watch this price level - Pepperstone

Kitco News

(Kitco News) Gold is once again on the brink of breaching the key psychological level of $1,800 an ounce on Monday, but can the right conditions finally align for the metal to break out of its multi-month trading range?

There could still be trouble ahead for gold this week, especially if a certain level does not hold, warned Pepperstone head of research Chris Weston.

"The weekly chart continues to show price working in a bearish channel, but there is no real impetus to push the price around – could that change this week?" Weston said on Monday.

In order for the precious metal to fully take on a bullish stance, it will need to push above the $1,797 an ounce level, Weston pointed out. At the time of writing, June Comex gold futures were trading very close to that level – $1,791.80, after surging $24 on the day.

However, gold investors now know not to get too excited too quickly after gold failed at the $1,800 an ounce multiple times last month, and May might not be any different.

One of the main risks to watch this week is better-than-expected U.S. macro data and how markets react to the news.

Will the stronger data help push the U.S. dollar and stocks higher while weighing on gold, or will the better numbers raise inflation expectations and introduce risk-off sentiment into the marketplace?

If gold can't hold the $1,756 an ounce level this week, a much bigger selloff could be around the corner, Weston warned.

"As always, watch the USD and the U.S. bond market, but should we see $1,756 give way (likely on the back of better U.S. data), then $1,720 comes into play ahead of $1,677 – the bulls will want an upside break of $1,797," he said.

The key macroeconomic release to keep a close eye on is Friday's U.S. jobs report from April. Market consensus sees the U.S. economy churning out more than 900,000 new jobs after adding 916,000 in March.

"U.S. payrolls is the key event risk of the week, with the market consensus set at 950k jobs created, and the unemployment rate expected to fall to 5.8%," Weston said. "The risk is for a hotter number, but will good numbers lead to a broad risk-off vibe, as traders' price in higher rate expectations, and the USD rallies? Or will good numbers lead to positivity based on a strong economy? I suspect we're getting to a point where really good data could start to become bad for markets."

If that is the case, gold could benefit and see higher prices in response to the fresh data.

A central market theme for May will be figuring out how central banks around the world will start introducing tapering of bond purchases, Weston stated.

"I've argued that the combination of major central banks pulling back on QE, amid headwinds from a rebuild in the U.S. Treasury General Account will lead to higher volatility in markets," he said. "Amid this backdrop, we continue to debate whether inflation will indeed prove to be as transitory as the Fed and others believe – that isn't a question we'll learn anytime soon though, even if the markets think 18 months ahead."

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