(Kitco News) - The gold market is ending the shortened holiday trading week with some fireworks as prices test resistance around $2,400 an ounce.
Disappointing economic data, including slowing momentum in the U.S. labor market, is raising market expectations that the Federal Reserve will lower interest rates in September. According to the CME FedWatch Tool, markets see a nearly 80% chance of a rate cut after the summer break.
Rising expectations for the start of a new easing cycle have pushed the U.S. dollar index to a three-week low and bond yields to a four-week high, which is providing a tailwind for gold as prices trade at a four-week high.
At the same time, silver prices have catapulted above $31 an ounce and are also trading at a four-week high.
August gold futures last traded at $2,399.60 an ounce, up more than 1% on the day, and up more than 2.5% since last Friday. September silver futures last traded at $31.685 an ounce, up 2.7% on the day and up more than 7% for the week.
The precious metals' latest momentum drive came after disappointing June employment data. Friday, the Bureau of Labor Statistics said that the U.S. economy created 206,000 jobs last month, beating expectations.
However, the unemployment rate increased to 4.1%, from May’s reading of 4.0%; economists were expecting to see an unchanged reading.
The report also revised April and May employment numbers lower by more than 100,000 jobs.
Ricardo Evangelista, Technical Analyst at ActivTrades, said that he would not be surprised if gold pushed to $2,400 an ounce next week.
“As predicted, today’s release of US employment data confirmed that the American labor market continues to cool down, albeit not in a pronounced way, but still enough to favor the case of Fed doves,” he said in a comment to Kitco News. “In the first half of the year the resilience of the US economy created headroom for the Federal Reserve to keep rates high for longer, so signs of a cool-down are likely to drive a softer US dollar, as well as lower treasury yields, in a dynamic that supports the price of bullion.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said it might be a little premature to call gold’s consolidation period over, but he remains optimistic that prices will eventually move higher.
“I would be a bit surprised to see the market go higher already, but then again, the recent correction was very shallow, indicating either strong underlying demand at lower prices or simply that already established longs saw no reason to reduce their exposure,” he said.
With the U.S. economy slowing down, the biggest risk for the gold market remains inflation, which will be critical data on next week’s calendar. However, many analysts note that even this risk is limited as slower growth will lead to easing price pressures.
Jonathan Petersen, Senior Markets Economist at Capital Economics, said in a note on Friday that he expects to see further weakness in the U.S. dollar as inflation pressures start to ease. This environment could continue to support gold prices.
“Next week’s inflation data out of the US is likely to reinforce that rate hikes from the Fed are off the table and no longer an upside risk for the dollar. Instead, the key emerging risk for the dollar now seems to be a weakening economy pushing Treasury yields even lower than we expect, even if it might benefit from a short-lived “safe-haven” bid if “risky” assets falter,” Peterson wrote.
Economists at TD Securities also do not see inflation stopping the Federal Reserve from cutting rates in September.
“While we still think that the Fed's decision to first ease mostly hinges on inflation outcomes, the ongoing softish signals stemming from labor market conditions and consumer spending suggest the Fed is likely to start considering its employment mandate more seriously in coming months,” the analysts said in a note Friday. “We remain optimistic that the Fed will first ease rates at its September FOMC meeting as we look for core PCE inflation to gradually moderate by then to a monthly pace that is consistent with a return to the inflation target.”
Along with Thursday’s Consumer Price Index, markets will be interested to hear what Federal Reserve Chair Jerome Powell will say during his two days of testimony before Congress next week.
Economic data to watch next week:
Tuesday: Powell testified before the Senate Banking Committee
Wednesday: Powell testifies before the House Financial Services Committee
Thursday: US CPI, weekly jobless claims
Friday: US PPI, Preliminary University of Michigan Consumer Sentiment
