A correction won’t shift momentum in gold and silver

(Kitco News) - Gold and silver have faced consistent selling pressure ahead of the Labor Day long weekend. While prices may have room to move lower, it’s important to remember that the market still has significant momentum.

Last week, as gold reached all-time highs above $2,500 an ounce, we noted that momentum indicators didn’t suggest an overheating market.

We also observed that despite gold’s all-time highs, there is very little of the froth and euphoria that traditionally marks a market top in gold. However, another interesting dynamic is unfolding in the marketplace.

Analysts point out that while gold is not at overbought levels, the U.S. dollar is oversold and poised for a potential bounce. This week, the U.S. dollar index, which measures the greenback against a basket of currencies, dropped to its lowest level since mid-July 2023, testing support at 100.50.

In the last two months, the U.S. dollar index has dropped roughly 5% as markets began to expect the Federal Reserve to cut rates in September. Ahead of the meeting, markets have fully priced in a 25-basis-point cut and see a 30% chance of a 50-basis-point move.

However, the U.S. dollar has bounced off its lows as market expectations shift. Data published Thursday showed that the U.S. economy grew by 3.0% in the second quarter, significantly beating expectations. Meanwhile, inflation data published Friday indicated that consumer prices remain subdued.

While it’s clear that the Federal Reserve needs to start cutting interest rates, the economic data shows they do not need to panic — at least for now.

According to analysts, next week will be a major test for the market. Last month, a sharp rise in the unemployment rate significantly spooked equity markets, and traders will be anxious to see if that data was just an unexpected blip or the start of a weakening trend in the labor market. Next week’s employment data could single-handedly determine the pace of the Federal Reserve’s easing cycle — so, no pressure or anything.

Investors should expect some volatility on Friday as the market digests the employment numbers. However, in all the excitement, don’t lose sight of the bigger picture.

In the broader landscape, whether the Federal Reserve moves by 50 basis points or 25 basis points is a semantic argument. The truth is that the U.S. economy is slowing down, the labor market is weakening, and interest rates will be coming down.

At the same time, while inflation is down, it is not exactly contained, as government debt continues to grow at an unprecedented rate. Central banks continue to increase their gold reserves and diversify their holdings, and geopolitical uncertainty remains elevated, keeping a safe-haven bid in the market.

Whether the Federal Reserve cuts by 50 or 25 basis points, these issues won’t be going away, which means gold’s long-term uptrend remains in place.

We should expect some volatility in gold as the market reacts to external forces like the U.S. dollar, but there is still broad support in the marketplace.

That’s it for this week. Have a great long weekend.