Jobs report a 'game changer' for gold price, focus shifts to next week's inflation numbers
(Kitco News) With the surprisingly strong employment situation in the U.S., the Federal Reserve won't be pivoting from its aggressive tightening cycle in September, which will hurt gold in the short term, according to analysts. The focus next week will be on the highly-anticipated inflation numbers.
Gold lost 1% in reaction to the U.S. economy adding 528,000 jobs in July, which significantly exceeded expectations of 250,000. At the time of writing, December gold futures were trading at $1,788.90 after rising above $1,800 an ounce on Thursday.
"Today's employment numbers surprised, and the idea that the Fed could be aggressive with raising rates did not help gold prices," RJO Futures senior market strategist Frank Cholly told Kitco News.
Last week, there was a lot of confidence in the market that the Fed could pivot early from its oversized rate hikes due to the slowing economy. However, all of this shifted this week, especially with the strong employment report, said OANDA senior market analyst Edward Moya.
"This is a game-changer. The amount of confidence that the Fed would pivot was pretty high. Some even expected that to happen as early as September. Now, the focus is shifting to whether the Fed will need to be more aggressive. Gold is just going to struggle here as interest rate hike expectations will be bolstered next week," Moya told Kitco News.
He pointed out that markets re-pricing their Fed expectations towards more considerable rate hikes is challenging for gold.
That is especially true after gold tried to rise above $1,800 and failed this week. "It looked like maybe gold will attempt to stabilize above it. This is going to be tough for gold to continue. It went from $1,700 to $1,800 in one way move, and it looks a bit exhausted here," Moya noted.
However, gold's retreat on Friday does not mean a significant selloff back to $1,700 an ounce, he added. "The $1,750-$1,770 zone is a good support level for gold," Moya said.
From the technical perspective, Cholly sees a lot of buyers coming in at the $1,735-$1,750 level. On the resistance side, it is critical for gold to get a close above $1,800 an ounce, which is when Cholly becomes more bullish.
"I don't think we'll see $1,700 again because of the support there, but for the bulls to come back, gold needs to close above $1,800. And if gold can manage a breakout through the $1,800 to $1,812 level, buying will get aggressive, and we won't have any trouble getting to $1,850-75. That is where momentum comes in," Cholly added.
Inflation numbers in focus
Most of the attention next week will be on the U.S. July inflation report, with economists projecting annual CPI to come in at 8.7% after accelerating to 9.1% in June. Any surprises above those expectations would be negative for gold.
"Next week is all going to be about inflation, and price pressures could prove to be stubbornly hot. That suggests Treasury yields could rise even more, and the U.S. dollar is going to have a good run next week," Moya noted. "Markets will be nervous here that the bond market selloff could intensify, which is never good for non-interest bearing gold."
Analysts warned that if inflation comes in hotter-than-expected, markets will anticipate a 75-basis-point hike in September and even start pricing in a 100-basis-point move.
At this point, any positive macro news is bad news for the market because of the expectations around what the Fed will do in response, Gainesville Coins precious metals expert Everett Millman told Kitco News.
"The stronger economy looks, the more leeway the Fed has to be more aggressive with rate hikes. For example, if jobs were struggling, the Fed would be more inclined to pivot and slow down rate hikes or even pause. But any good economic news drives the dollar higher," he said.
Millman also reminded investors that data sets often get revised in the following months, which is what could happen to the strong employment numbers from July and even upcoming inflation numbers.
Next week's data
Wednesday: U.S. CPI July
Thursday: U.S. PPI July, jobless claims
Friday: Michigan consumer sentiment August