(Kitco News) – Gold has benefited from USD weakness since the end of June, but prices are more likely to decline below $2,300 than rally to all-time highs in the near term, according to Alex Kuptsikevich, Senior Market Analyst at FxPro.
“Gold has lost 0.9% since the start of Monday, almost back to the point where it was trading before the release of jobs data on Friday,” Kuptsikevich noted in an analysis published on Monday. “Perhaps the very first market reaction to the data release highlighted the mindset of key market participants: they are ready to sell.”
He noted that gold’s recent strength is largely a byproduct of the U.S. dollar’s parallel weakness, as the greenback has declined by 1% since late June.
“Weak employment figures also pushed up the gold price on Friday, leading to a weaker dollar and bringing the start of rate cuts closer,” he added. “However, we note the momentum of the 0.8% decline in gold in the first moments after publication.”
Kuptsikevich said the market reaction was a classic ‘worse is better’ move. [T]he weakness in the labour market increased expectations of a rate cut soon, which boosted risk appetite,” he said. “But this is a very unsustainable play, as not all the negativity in the macro economy is disinflationary. Just the opposite, we saw confirmation of wage growth (4.1% y/y) above inflation (3.3% y/y). At the same time, the previous months' hiring figures were revised downward, and the unemployment rate reached a 31-month high.”
He said this means that the economic situation in the United States is deteriorating faster than inflation is slowing. “A key rate cut, in this case, would be an attempt to support economic growth rather than remove excessive tightness in monetary policy,” he said. “That is, the chances of a cut for ‘bad’ reasons rather than good ones are growing, which is negative for risk appetite in the medium term.”
Turning to the technical picture, Kuptsikevich noted that gold has run into firm resistance at $2390 per ounce, which was the same level that caused a local reversal in April. “Further improvement in risk appetite in global financial markets cannot be ruled out and may be helped by the reporting season,” he said. “Gold's ability to gain strength above $2390 could serve as an important price signal, heralding a fresh assault on historical highs near $2450.”
But in the near term, Kuptsikevich sees a greater chance that gold prices will come under increasing pressure. “We see the 50-day moving average at $2340 as the first signalling point,” he said. “If this line is stormed without bullish resistance, the price could quickly retreat to the $2300 area, which is crucial for determining the dynamics for the coming months. A fall below it would be seen as a break of the bullish trend since October when the Fed first signalled its willingness to cut rates.”
Spot gold last traded at $2,355.21 for a loss of 1.52% on the daily chart.
