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Gold's downward spiral could drag prices down another $100 - analysts

Kitco News

(Kitco News) After shedding $50 on Friday following a stellar U.S. employment report, gold could lose another $100 before seeing a rebound, according to analysts.

The jobs report surprised the markets with 943,000 positions added in July versus the expected 870,000. Also, the unemployment rate dropped to 5.4%.

"This job number is bullish for the U.S. dollar and is pushing rates higher, which has an inverse reaction for gold," RJO Futures senior commodities broker Daniel Pavilonis told Kitco News.

For now, it might be game over for gold, Pavilonis said, adding that a solid employment report means the Federal Reserve Chair Jerome Powell could start hinting at tapering as soon as the end of August.

"The U.S. dollar index has a shot to 95. For gold this could mean that we get back to $1,673. Gold is likely to spend more time on this downside. Right now, we could see more liquidation," Pavilonis stated. "The jobs report is telling us that wages are going up. The unemployment rate is going down, people are looking for jobs. If some of the benefit packages go away in September, the situation will improve even more."

A critical level for gold to hold is the $1,754 an ounce, said Phoenix Futures and Options LLC president Kevin Grady. "We should see a bounce from these levels," he said. "But I do think that gold is not trading well. Gold had a prime fertile ground to explode. And it couldn't break $2,000 and hold it."

This is likely a temporary setback for gold, but the precious metal could fall below $1,730 an ounce on this trend, said TD Securities head of global strategy.

"Gold should continue to face selling pressure post the payrolls data, as many in the market will think that the Fed has the appropriate environment to start taper in early-22 or even December 2021. This means nominal, and real yields across the curve move higher from the post ADP lows," Melek said.

Melek, however, is not giving up on gold, stating that the Delta variant represents an upside risk to the precious metal. "An outright gold rout is unlikely for now. There are still some negatives coming from the Delta variant. The TDS tactical target is $1,730/oz."

After Friday's selloff, gold is in a danger zone right now, said OANDA senior market analyst Edward Moya. "Gold may find some support from the $1,750 level, but if that breaks, prices could tumble towards the psychological $1,700 level," Moya said.

Longer-term, gold is likely to find more support as inflation remains above Fed's target, and the central bank's loose monetary policy is maintained, Melek added.

"Real yields will be negative for a long period. The market will believe that the Fed is quite willing to keep conditions accommodative for a long period once things normalize as well. Gold will do pretty well," he said.

Live 24 hours gold chart [Kitco Inc.]

Jackson Hole meeting

Markets will be keeping a close eye on the Jackson Hole Economic Symposium, which is taking place at the end of August. Analysts believe that Fed Chair Jerome Powell will use the platform as an opportunity to start outlining the central bank's tapering plans.

"Powell will most likely use Jackson Hole to lay the groundwork (a mention that "substantial progress has been made" given two strong jobs reports in June & July), which will put September in play as the FOMC to officially announce taper details, with actual tapering beginning at the Dec FOMC/end of the year," said MKS PAMP GROUP head of metals strategy Nicky Shiels.

Next week, macroeconomic data will continue to play the dominant role in deterring gold's price direction.

The ones to pay attention to will be the inflation readings, including the CPI report on Wednesday and the PPI report on Thursday.

"Federal Reserve doves suggest that inflation shouldn't get as much focus as it has been doing, given that price pressures have been focused in relatively few sectors such as used car prices and areas that have been feeling particular reopening frictions. We are less sanguine and expect to see price pressures broaden out across more areas of the U.S. economy given ongoing supply constraints, including a lack of suitable workers and robust, stimulus-fuelled demand," said ING chief international economist James Knightley.

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