(Kitco News) - Broadly disappointing employment data has given the Federal Reserve the green light to cut interest rates later this month, propelling gold out of its consolidation phase and back to record highs.
The trajectory of monetary policy was sealed on Friday after data from the Bureau of Labor Statistics showed that the U.S. economy created only 22,000 jobs in August, significantly missing expectations.
The weak economic data provided new support for gold, which briefly touched $3,600 an ounce ahead of the weekend. Spot gold last traded at $3,590.70 an ounce, up more than 1% on the day. The precious metal’s breakout rally has driven prices up more than 4% this week.
The gold market is seeing its best gains since mid-May, when prices were establishing their months-long trading range around $3,300 an ounce.
Friday’s nonfarm payrolls report caps a week of disappointing labor market data. Private-sector payroll processor ADP also reported weaker-than-expected job growth, while the U.S. Labor Department said job openings dropped sharply in July, according to its monthly Job Openings and Labor Turnover Survey (JOLTS).
Although gold remains well supported as markets look for the Federal Reserve to cut interest rates beyond September, many analysts are asking how much upside the market still has. Long-term sentiment in gold remains extremely bullish; however, some analysts say the market is technically overbought.
“Gold’s explosive momentum on Friday was akin to a speeding train heading toward the psychological $3600 level,” said Lukman Otunuga, Senior Market Analyst at FXMT. “With the fundamentals clearly in favour of gold bulls, further upside could be on the cards with the first checkpoint at $3600. However, the technicals are showing that prices are heavily overbought with a potential correction around the corner. Should prices slip below $3570, bears may target $3540 and possibly $3500 before resuming the rally.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that factoring in gold’s current momentum, this rally looks set to take gold to $3,800 an ounce.
“The foundation for a bigger-than-expected rate cut is building, and combined with Xi holding hands with Putin and Modi in Beijing and Fed independence risks, I think we can get there over the next 3 to 4 months,” he said.
Robert Minter, Director of ETF Strategy at abrdn, said that gold is on track to hit his year-end target of $3,700 an ounce, even if prices look overbought in the near term.
“I don’t think price has gone too far, too fast, given structurally higher central bank demand and a short-term increase in demand from investors based on impending interest rate cuts,” Minter said.
Aaron Hill of FP Markets said that he also doesn’t think gold is overbought in the current environment.
“While the advance in the precious metal has been quite something, the drivers supporting this bid remain strong, in my opinion, from robust investment demand, central bank buying, as well as safe-haven demand driven by elevated geopolitical risk/trade concerns,” he said.
For some analysts, the key to gold’s rally remains with the Federal Reserve. Although the Fed is expected to cut rates by 25 basis points, a more aggressive move may be needed to support gold’s rally.
“I think the bar for a 50bp move is still pretty high right now, given lingering upside inflation risks, and the potential that expectations may become unanchored,” said Michael Brown, Senior Market Analyst at Pepperstone.
Brown added that although gold may be overbought, he continues to see any dip as a potential buying opportunity.
Hill said that next week’s inflation data could play a key role in gold’s breakout rally.
“Should inflation come in significantly lower in August (CPI/PPI), this may bolster the case for a 50-bp reduction, but whether this would be enough to firmly swing the pendulum more in favour of a 50-bp cut is still unlikely,” he said.
However, some analysts note that even if the Federal Reserve is not willing to cut aggressively, a prolonged easing cycle could provide the same support for the precious metal.
Economic data to watch next week:
Wednesday: US Producer Price Index
Thursday: European Central Bank monetary policy meeting, US Consumer Price Index; US weekly jobless claims
Friday: Preliminary University of Michigan Consumer Sentiment
