(Kitco News) - Robust U.S. labor market data has taken some bullish momentum away from gold ahead of the weekend; however, the growing turmoil in the U.S. banking sector could continue to provide solid support for the precious metal and keep bearish sentiment at bay, according to some analysts.
April gold futures dropped roughly $20 Friday after the U.S. Bureau of Labor Statistics said that 353,000 jobs were created in January, significantly beating expectations; at the same time, wages increased 0.6%, adding to the ongoing inflation threat in the economy.
Gold prices dropped as markets now see a less than 20% chance of a Fed rate cut next month. Expectations for a May rate cut have also been pushed down. Markets are falling in line with comments from Federal Reserve Chairman Jerome Powell, who said Wednesday that while the central bank is preparing for easing to start this year, the timing still remains uncertain.
“The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,” the Federal Reserve said in its monetary policy meeting Wednesday.
Despite the selloff due to growing headwinds for gold, the market has managed to hold critical support levels and is closing the week in positive territory. April gold futures last traded at $2,052.70 an ounce, up nearly 1% from last Friday’s close.
“Seeing gold’s price action this week is a solid reason to be bullish on gold and look for buying opportunities. I’m starting to dip my toe in the market,” said Phillip Streible, chief market strategist at Blue Line Futures. “Prices can go lower, but there is where you look for buying opportunities.”
However, not all analysts see potential for gold; Adam Button, chief currency strategist at Forexlive.com, said that he is neutral on the market and expects to see lower prices in the near term as seasonal factors start to dry up.
Traditionally January, is seasonally strong for gold and prices, on average, have seen gains of 1.79% at the start of the year. This year, gold prices saw a 0.2% decline for the month.
“Gold has faced a lot of headwinds so far this year, but seasonal buying has helped it withstand those pressures. But what is going to happen when that season buying starts to dry up?” said Button. “I think we need to expect gold prices to go lower in the next few weeks. I think right now you sit back and wait for a new buying opportunity.”
Button added that in any other month, gold’s price action and ability to hold critical support would be considered a significantly bullish factor.
Ole Hansen, head of commodity strategy at Saxo Bank, said that none of the events of this past week has impacted his long-term bullish outlook. He added that he continues to see further consolidation in the marketplace.
“[Gold and silver] are likely to remain stuck in the short-term until we get a better understanding about the timing, pace and depth of future US and EU rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least rate cut expectations,” he said.
“There is no point in starting a rally before all the ducks have been lined up and following another strong U.S. job report, they seem to be scattered all over the place once again,” he added.
Gold will be sensitive to the growing threat of another banking crisis
While analysts remain cautious on gold in the near term, there is not a lot of bearish sentiment. Streible said that any negative banking headlines could quickly propel gold prices higher.
This past week, regional U.S. bank New York Community Bancorp saw a dramatic selloff after it reported a loss of $252 million in the fourth quarter of 2023. A significant factor behind the losses was due to extensive weakness in commercial real estate.
“I would be looking to buy gold if we see mounting evidence of widespread banking losses,” said Button. “It is a legitimate threat to financial markets. Someone is holding this bad debt and it’s only a matter of time before they will have to write it down. We just don’t know how long banks can hold on to these losses.”
Some economists also note that markets could be sensitive to comments from Powell as he sits down for an interview on CBS News’s 60 Minutes Sunday.
The only major data point to be released next week will be the ISM service sector PMI.
Economic data for next week:
Monday: ISM services PMI
Thursday: Weekly jobless claims