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Gold price jumps nearly $25, is this the start of a breakout?

Kitco News

(Kitco News) With the Federal Reserve's tapering and new employment data out of the way, the gold market is finally moving.

Gold jumped $25 on Friday as markets started to anticipate a more patient Federal Reserve going forward. December Comex gold futures were last at $1,818.60, up 1.40% on the day.

Despite kicking off tapering this month, Federal Reserve Chair Jerome Powell acknowledged uncertainty around inflation while stressing it is too soon to start raining rates.

"The intra-day volatility for gold has been on the rise. The market is trying to digest how hawkish the Fed actually is. Powell's comments left plenty of wiggle room to walk back that hawkishness. The central bank is more likely to stay patient to help the economy, which is positive for gold. The Fed might wait longer for rate hikes, or it might even stop its taper of QE," Gainesville Coins precious metals expert Everett Millman told Kitco News.

On the economic data side, gold rallied despite the U.S. economy adding an impressive 531,000 positions and the unemployment rate dropping to 4.6% in October.

The reason for that was the unchanged participation rate, which remained at 61.6%, said TD Securities head of global strategy Bart Melek.

"That essentially means that the labor force participation is still at problematically low levels, and we are nowhere near full employment," Melek said. "This is why markets are not pricing in the probability of Fed's tightening as imminent. Plus, it is doubtful that the strong job growth pace will continue for the next six months or a year."

With the Fed's somewhat dovish tapering announcement and the jobs data in mind, the anticipated June rate hike is not looking very likely.

"The Fed will keep monetary policy quite easy for a prolonged period because we are not near full employment. Fed's view is that keeping the economy hot will ultimately trigger the absorption of more people into the labor force. They need to reverse those mass resignations," Melek said.

Millman also added that the positive employment number not impacting gold is a sign that markets expect the central bank to be patient. "Gold, dollar, yields are moving in the same direction, which is unusual, but it is a safe-haven response in case the Fed can't raise rates," he said.

Levels to watch

Gold could see some profit-taking above $1,800 an ounce, said Melek. "The $1,809 level is pretty firm resistance. Once we pass through that, we can go higher." Meanwhile, the $1,786 level continues to act as support.

If gold breaks above $1,800, it could see a $50-move next week, noted Millman. "The key outside markets to watch will be the dollar and the bond market. If both of those stay steady, gold will continue to be stuck in its range. If we see a lot of demand for the dollar and treasuries, to me, that would indicate a safe-haven response that gold would follow," he added.

Also working in gold's favor is the market potentially perceiving the Fed as making a policy mistake.

"That would be in response to the economy not being able to handle normalization of monetary policy. It would signal that the Fed is making a policy mistake. The U.S. dollar, yields, and gold moving in the same direction would be a reflection of how the market believes that the Fed is doing its job. All three of them are considered safe-havens."

Key data

Next week, the big data release will be Wednesday's inflation number, with the market consensus calling for October CPI to come in at 5.8% on an annual basis.

"Surging housing costs, labor costs, energy costs, and second-hand car prices are likely to mean headline inflation then pushes above 6% in December, with core inflation moving above 5%," said ING chief International economist James Knightley. "The Federal Reserve assumes that inflation will fall sharply in 2Q and 3Q next year, but we are wary that labor market shortages, production bottlenecks, and supply chain issues could last well into next year."

Markets will also be watching the Producer Price Index (PPI) on Tuesday and the initial jobless claims on Wednesday.

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