(Kitco News) - While gold still holds significant bullish potential, some caution is creeping into the marketplace as investors await signs of the U.S. labor market's health and how it could impact the Federal Reserve’s monetary policy next month.
Analysts have noted that, given recent price movements, investors are taking a wait-and-see approach as next week’s employment data is expected to create some volatility during the shortened trading week. North American markets will be closed Monday for the Labor Day long weekend.
Heading into the weekend, gold prices are trading at an important initial support level as they consolidate near record highs. December gold futures last traded at $2,538.30 per ounce, down 0.3% from last week.
The selling pressure is also impacting silver, which has been unable to maintain critical support above $30 per ounce. December silver futures last traded at $29.335 per ounce, down 3% from last week.
According to some analysts, an interesting dynamic is developing in the gold market as it begins to contend with crosscurrents involving the U.S. dollar. Although gold has seen a solid break above $2,500, the market is neither frothy nor extremely overbought. However, analysts note that the weakness in the U.S. dollar appears somewhat overdone, creating risks for precious metals.
Matt Simpson, Market Analyst at CityIndex, observed some warning signs for gold, even as prices show potential to move higher.
“Net-long exposure among large speculators is just 44,000 contracts shy of a record high, with 5.5 bullish contracts for every short one. When adjusted for total open interest, net-long exposure is a whisker away from reaching a record high. This suggests that many investors remain on the sidelines, in disbelief of the gold rally, which is bullish overall,” he commented to Kitco News.
“But if there is any near-term threat to the trend, it's that traders may have become too complacent in shorting the USD. We've already seen two months of heavy USD selling, and bond yields remain above their August 2 low, set at the last Nonfarm payrolls report. I think the USD is oversold in the near term, and it may not require much of an upside surprise from next week's ISM or employment figures to trigger further USD short covering and a pullback in gold,” he added.
Han Tan, Chief Market Analyst at Exinity, noted that gold is following the Federal Reserve’s playbook, with traders now being data-dependent.
“Gold prices have been constrained by lingering doubts about whether the Fed can indeed deliver the market-forecasted 100 basis points in rate cuts by the end of 2024. While still trading near record highs, bullion bulls have been more reluctant to chase further upside for the time being,” he said.
According to the CME FedWatch Tool, markets fully expect the Federal Reserve to cut interest rates by 25 basis points at its September monetary policy meeting. Simultaneously, there is a 30.5% chance of a 50-basis point rate cut.
“Should the unemployment rate ease back to 4.2%, alleviating some recession fears, that could prompt spot gold to dip back below the $2,500 mark as markets unwind bets for a 50-basis point September cut.
“I doubt the Fed will implement a 50-basis point cut. If they do, it risks signaling to the markets that the Fed is behind the curve yet again,” he said. “Still, if the NFP reports reveal significant and swift deterioration, Powell’s stated data-dependent stance may dictate that a 50-basis point cut is necessary, despite the risk to the Fed’s credibility.”
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, commented that the Federal Reserve’s plan hinges on Friday’s employment numbers. He added that investors might be getting ahead of themselves if they are anticipating a 50-basis point cut.
“From a macro perspective, we do not believe the labor market is that weak, and if there is a weak print next week, it would only be a bump in the road. Therefore, the Fed's approach is more likely to be gradual,” he said.
Phillip Streible, Chief Market Strategist at Blue Line Futures, expressed cautious optimism for gold. He noted that any weakness in gold presents a buying opportunity, but he advised investors to build positions carefully and incrementally.
“You want to buy some gold, but you don’t want to be overweight,” he said.
Over the past 15 years, September has typically been a negative month for gold.
While Friday’s employment data will be the main event on next week’s calendar, traders will also need to monitor other reports. Markets will receive important manufacturing and service sector data. The Bank of Canada will also hold its monetary policy meeting next week, with markets expecting another rate cut as inflation and the Canadian economy weaken.
Economic data to watch next week:
Tuesday: US ISM Manufacturing PMI
Wednesday: Bank of Canada monetary policy meeting, US JOLTS Job Openings
Thursday: ADP Employment; US ISM Services PMI, Weekly jobless claims
Friday: US Nonfarm Payrolls
