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Gold price sees solid bounce Tuesday, but risks for lower prices remain - analysts

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(Kitco News) - A cooling labor market is helping to drive momentum in the gold market, but it might be a little too early for investors to see a decisive move in the marketplace, according to one market strategist.

In a note to clients, Alex Kuptsikevich, senior market analyst at FXPro, said that gold could be running out of steam as the market continues to trend around the 50-day moving average and hits a critical retracement level.

Despite gold's rally Tuesday, Kuptsikevich said that spot gold prices are still at risk of trending below $1,900 an ounce. The outlook comes as spot gold currently trades at $1,937.10 an ounce, up nearly 1% on the day.

"The rally since the beginning of last week fits into the Fibonacci retracement pattern, having lost upward momentum as it approached the 61.8% level of the initial decline,” he said. "Confidence in gold's further decline will be boosted by a quick return below the 200-day average, now above $1910. The final confirmation of this pattern would be a return to August's local lows at $1885, opening the way to $1820.”

Although gold continues to face near-term headwinds, Kuptsikevich said that the precious metal continues to benefit from ongoing market uncertainty.

"Last year, it was geopolitics, and this spring, it was fears about bank capital retention. The latter has fallen off the radar but is hardly exhausted, and it would not be surprising to see it back on the front pages of the financial press in September-October. This could be an essential pivot point for growth for gold, but no earlier,” he said.

Diego Colman, market analyst at IG, also warned investors that despite gold's push above its 200-day moving average, it is not out of the woods just yet. He noted that the precious metal could see muted price action ahead of Friday's nonfarm payrolls report.

The U.S. labor market remains a key factor for gold prices. The Federal Reserve has signaled clearly that it needs to see more slack in the labor market before they are confident that inflation will trend back to its 2% target.

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Colman said that better-than-expected employment data could weigh on gold as expectations for further rate hikes solidify.

Ahead of Friday's nonfarm payrolls report, markets are expecting to see job gains of around 170,000.

"Employment gains above 200,000 and hot average hourly earnings will reinforce upside inflation risks, increasing the likelihood of a quarter-point hike at the September FOMC meeting. This scenario should bias Treasury yields higher, boosting the US dollar and weighing on gold prices,” Colman said in a report Monday. "Job figures below 150,000 and subdued growth in wages will raise concerns about the health of the economy, leading traders to price out further monetary tightening. In these circumstances, nominal yields could fall, dragging down the US dollar. These market dynamics would stand to benefit precious metals.”

Colman said that the key level to watch for gold is $1,930; a solid break above $1,930 could pave the way back to $1,950 an ounce.

"While gold's near-term bias remains somewhat bearish, the outlook could become more benign if prices manage to clear a key barrier, stretching from $1,925 to $1,930 soon. If this scenario plays out, bullish momentum could gather pace, setting the stage for a rally toward trendline resistance at $1,950,” he said. 

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