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(Kitco News) Despite more than a $20 gain Friday, the gold market is yet to prove that its bearish downtrend is over, according to analysts, who are carefully monitoring next week's June inflation report as a potential trigger.
The gold market rebounded Friday on weaker-than-expected employment data from June, with the U.S. economy adding 209,000 new positions versus the expected 225,000. This marked the weakest gain since December 2020.
At the time of writing, August Comex gold futures were trading at $1,935.50, up 1.05% on the day, after trading at $1,915.4 earlier in the session.
Slowing employment growth is good news for gold as it could remove the need to hike twice this year — a promise made by Federal Reserve Chair Jerome Powell multiple times in June.
But last month's employment slowdown was not steep enough to prevent the Fed from hiking in July, which means that gold price gains could be limited in the short term.
"Although slowing employment growth will be welcomed by Fed officials – particularly following the alarming (and seemingly misleading) surge in the ADP measure reported yesterday," Capital Economics deputy chief U.S. economist Andrew Hunter. "It is unlikely to stop the Fed from hiking rates again later this month, particularly when the downward trend in wage growth appears to be stalling."
With just over two weeks remaining until the Fed meeting on July 25-26, the latest inflation numbers from June, scheduled to be released Wednesday, will be carefully monitored by markets.
The macroeconomics outlook is one of the biggest headwinds for gold in the short term, said Forex.com's senior technical strategist Michael Boutros.
"Markets are pricing a 92% chance of a rate hike in July," Boutros told Kitco News. "But only one rate hike is expected while the Fed telegraphs two. If that shifts, it may limit the upside for gold."
The U.S. dollar took a hit Friday, supporting gold prices at the end of the week, with the U.S. dollar index last at 102.27, down 0.87% on the day.
"It is going to be a tug of war for gold. Don't see a big downdraft," Boutros said.
The long-term outlook for gold is bullish as the labor market will weaken, ushering in a much weaker economy, OANDA senior market analyst Edward Moya told Kitco News.
"Eventually, it will turn bullish for gold. But with more rate hikes being priced in, it is difficult for gold right now," Moya said. "Next week's inflation report could be rather soft. Trading could be very choppy next week."
Gold price levels to watch
From a technical perspective, Boutros pointed out that gold can only break its bearish trend when it rises above $1,943 and $1,965 price levels.
The $1,903-10 range has been a rock-solid critical support zone. That level held on a close basis," he said. "The broader trend from April-May highs is still intact. But gold is not out of the woods until it gets a daily close above $1,943 and $1,965. Then, a broader uptrend can take root."
If gold sees a move lower, Boutros warned to keep an eye on $1,891. If that breaks, the gold market could see a major move down to $1,830, which would be just the initial support level, he added.
Data next week
Monday: Fed Vice Chair for Supervision Barr Speaks
Wednesday: U.S. CPI, Bank of Canada rate decision
Thursday: U.S. PPI, U.S. jobless claims
Friday: Michigan consumer expectations
