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'Bad news is good news for gold,' but why is the price stuck?

Kitco News

(Kitco News) With gold unable to deliver a rally despite a disappointing U.S. September employment report, analysts weigh in on gold's sticky price levels.

The U.S. September jobs report surprised on the downside with just 194,000 positions added versus the expected 500,000. This is a big miss considering that Federal Reserve Chair Jerome Powell needed "a reasonably good report" to begin tapering as soon as November.

"We had a big miss on the jobs number. The bad news is good news for gold. That's because the market believes the Fed can't get as aggressive next month with tapering or future rate hike timeline," RJO Futures senior market strategist Frank Cholly told Kitco News. "It comes down to the Fed not being in a position to take away the punch bowl just yet."

In response to the employment report, gold jumped $20 to a daily high of $1,781. However, gold ended up giving up all of its gains as the U.S. Treasury yields began to climb.

"As have been true for past months, gold prices have been very sensitive to economic data," said Gainesville Coins precious metals expert Everett Millman. "The two areas pulling safe-haven demand away from gold have been the bond and crypto markets."

With economic data getting worse, gold could be in for a shift in sentiment. But it does need to find the appeal of new buyers as an inflation hedge, which so far has been the U.S. dollar and bitcoin.

"Economic data seems to be trending down. Inflation is still rather high. All of that is fairly gold positive. Especially because we are seeing inflation now outside of the U.S, it does seem that that train is not going to stop rolling even though Powell is saying price increases are transitory," Millman told Kitco News.

Will Powell keep his November tapering stance?

The critical question for gold is whether or not Fed Chair Jerome Powell will proceed with tapering in November.

A couple of weeks ago, Powell stated that the test for tapering has been "all but met." But is that still the case?

"Powell has painted himself into a corner with those comments. It seems unlikely that tapering could come in November, given the jobs numbers. They also can't raise interest rates as soon as they want to if data continues to be bad. If the Fed can't keep its timeline and it is forced to continue supporting the markets longer than expected, that doesn't indicate a strong economy and will drive safe-haven demand for gold," Millman explained.

The risk for gold here is the Fed choosing to stick to its tapering timeline for transparency reasons, said Cholly.

"Gold could continue to move sideways. Even if we had a big employment miss, yields are still ticking up. The Treasury market is telling us the Fed is going to stick to its timelines. The Fed is worried about being transparent. And if they have given us an indication that they will taper, they will be inclined to follow it," he said.

Key gold levels to watch

Gold will fail at creating bullish momentum unless it can close above Friday's high of $1,781 an ounce, Cholly pointed out.

"It's all about levels on a chart. This morning, December gold hit $1,782. Coincidentally, $1,781 is the 50-day moving average. If the market could manage a close of $1,781 or higher, it would be friendly for the gold bulls. Then we can start talking about $1,800," he said.

But for now, the market has rejected that level, and gold is back to trading flat on the day at $1,758.60 an ounce. Meanwhile, the $1,720 level continues to act as support, Cholly added.

Millman said he doesn't rule out a move to $1,800 next week if gold garners safe-haven interest. "Lately, I've been down on metals because I think the U.S. dollar and risk appetite have been strong. But the long pullback the gold market experienced is a temporary pause. Looking at $1,800 for next week," he said.

Millman is watching any additional comments from Fed members to clarify what the September job numbers mean for the central bank.

Data to watch

One of the important releases to monitor next week will be Wednesday's FOMC meeting minutes from September.

"Gold will react if there are any adjustments to the language surrounding tapering. If it seems Fed is trying to push back that timeline," Millman noted.

Also, on Wednesday, markets will be eyeing the U.S CPI report, with market consensus calls projecting for the annual inflation number to remain at 5.3% in September.

On Thursday, there are jobless claims and PPI reports. And on Friday, the markets will get a look at the latest retail sales numbers.

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