What's next for gold price after May's U.S. employment surprise?

(Kitco News) Despite an impressive two-day rally, gold is ending the week flat after the upbeat U.S. May employment report managed to keep the doom and gloom projections about the economy's future at bay.

The gold market hit new daily lows Friday as markets digested U.S. nonfarm payrolls rising 390,000 versus the expected 328,000.

"The May jobs report is showing moderation in economic momentum. However, the sharp declines anticipated by the market recently don't seem to be materializing," TD Securities global head of commodity strategy Bart Melek told Kitco News. "On the margin, this implies that the market may well increase rate expectations. Indeed, rates (nominal and real) across the curve rose following the report. This helped to drive the yellow metal below $1,860/oz at the time of writing, down from around $1,863-66/oz before the report was released."

For gold, the upbeat employment numbers mean that the Federal Reserve can stay aggressive with its planned 50-basis-point rate hikes in June and July, which weighs on the precious metal.

"Markets may have been a little premature to make the assumption that the Fed is not going to be as aggressive. We won't know that for quite some time. So far, economic data is okay," Melek said. "We judge that this report, along with any additional future data showing a steadfast economy, should pull prices back down to the 200dma ($1,842). If data stays firm for a prolonged period, wages remain bid, the yellow metal is likely to fall below $1,800/oz."

Inflation is also very stubborn, forcing the Fed to stay on its hawkish path with QT and interest rates.

"Price pressures are manifesting in services, which are picking up inflation with a lag. As such, input costs from energy to labor costs will manifest. Prices index will remain stubbornly high for a period," warned Melek. "From a central bank perspective, they have to keep that tightening policy ongoing."

The more optimistic data are taking the safe-haven trade away from gold, but the doom and gloom predictions will weigh on risk-on sentiment in the long-term, said OANDA senior market analyst Edward Moya.

"Gold prices edged lower after a robust nonfarm payroll report sent the dollar higher. Traders expected to see a stronger deceleration with job growth, making the Fed pivot away from a half-point rate hike in September (June and July are now widely expected to be 50bps hikes each). The economy is not softening quickly, and that took away the need for safe havens today," Moya said. "Growing doom and gloom calls, however, should keep the precious metal supported over the short-term."

High inflation will support gold prices this summer as investors choose to get rid of "bad money" and buy into "good money," according to Gainesville Coins precious metals expert Everett Millman.

"This week, $1,850-65 flipped from stubborn resistance levels to key support levels for the gold price. The rising global demand for gold reflects a well-established economic principle, Gresham's Law — bad money drives out good money. If you have bad money that is losing its value, you want to spend it as quickly as possible. Gold is good money, hard money, and there is an incentive to keep it," Millman told Kitco News. "Gold is proving to be the preferred store of value given the selloff in stocks and crypto."

However, the Fed's aggressive stance still poses a downside risk to gold, noted Millman. "We can't rule out that QT and rising interest rates will push gold down in the near term," he said. "$1,900 is the next key level for gold to break through. If gold fails at $1,900, it will continue to trade in the mid-$1,800 for the rest of the summer."

Recession warnings are keeping gold in that mid-$1,800 level, Millman added. "The Jamie Dimon economic 'hurricane' comment, Yellen admitting that she was wrong about inflation. These are not the type of comments that happen when the economy is strong. In any kind of recessionary environment, when people are worried about losing jobs or the value of their wealth, gold is the logical place for money to preserve value."

Next week's data

Thursday: ECB rate decision, U.S. jobless claims

Friday: U.S. CPI