(Kitco News) - After a solid rally to new all-time highs, the gold market is ending the week on a volatile note as recession fears have spooked equity markets, forcing some investors to sell their gold to raise capital.
While the precious metal could still see some selling pressure in the near term, many analysts have said that in the current market environment, investors should look at buying the dip.
The gold market has seen solid gains since the start of the week after holding critical initial support at $2,400 an ounce. Momentum picked up on Wednesday as Federal Reserve Chair Jerome Powell signaled that the central bank could start cutting interest rates by September.
Geopolitical uncertainty in the Middle East and disappointing economic data helped drive gold prices to a new all-time high above $2,500 an ounce. Those gains saw some brief follow-through buying Friday after a significantly disappointing nonfarm payrolls report showed that 114,000 jobs were created last month. The U.S. economy saw the slowest pace of job growth in four years.
At the same time, the unemployment rate jumped sharply to 4.3%, versus economists' expectations for an unchanged reading at 4.1%. The unemployment rate has jumped to its highest level since September 2021.
While December gold futures pushed solidly above $2,500 an ounce, the gains proved to be short-lived as recession fears surged through the marketplace.
“Investors were caught off guard with this equity selloff. There were expectations that there could be a rotation into other sectors, but everything is down today. Investors are forced to sell their profitable gold positions to support their equity bets,” said Phillip Streible, chief market strategist at Blue Line Futures. “I am not worried about gold as this selling will prove to be short-lived. I expect this dip will be bought.”
Chris Vecchio, Head of Futures Strategies and Forex at Tastylive.com, said that he also sees any weakness in gold as a buying opportunity. He dismissed the weakness in gold as investors just raising cash.
“If you ask me what gold will do next week, I think it will be extremely volatile and could be 2% or 3% down. If we're talking about where gold's gonna go over the next quarter, next two quarters, through the end of the year, um, I think history gives us a guide, and we should be looking up,” he said.
Vecchio said that historically, during a recession, gold is one of the best-performing assets in global financial markets.
Recession fears were acute Friday as economists explained that the rise in the unemployment rate triggered the Sahm Recession Indicator. According to the rule, the start of a recession can be determined when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.
Not only did the disappointing employment data trigger an important recession indicator, but analysts said that it shows the Federal Reserve has made a policy error by waiting too long to cut interest rates.
Robert Minter, Director of Investment Strategy at abrdn, said that after Friday’s employment numbers, it’s unlikely the U.S. central bank can engineer a soft landing.
“The job market is so key. Even a tiny bit of weakness and this whole super-levered consumer gives out. The US economy is nearly 70% consumer spending… no consumer, no growth,” he said in a note Friday.
In a comment to Kitco News, Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said that he remains extremely bullish on gold.
“Policy mistakes are very clear now as the data has confirmed that a trend is in place and the Fed is late,” he said. “I think that the path of the least resistance is to the upside, and we are going to see gold prices moving sharply higher due to concerns about a recession taking place.”
As to where gold prices can go as recession fears escalate, Michele Schneider, Chief Strategist of MarketGauge, said she is looking for at least another 8% move.
“$2,450 is the new $2,350, so if that holds, then we go $2,650-$2,700,” she said in a comment to Kitco.
With little economic data on the docket next week, analysts and experts expect markets will continue to digest Powell’s post-monetary policy decision comments and the disappointing employment numbers.
Economic data to watch next week:
Monday: ISM Services PMI
Tuesday: Reserve Bank of Australia monetary policy decision
Wednesday: U.S. 10-year bond auction
Thursday: US 30-year bond auction
