(Kitco News) - After two months of consolidation and testing support at $4,000 an ounce, the gold market has broken convincingly to the upside as the precious metal sees its best weekly performance since the start of the year.
The precious metal is looking to end the week nearly $300 higher. Spot gold last traded at $4,344 an ounce, up more than 7% from last Friday.
The yellow metal has benefited from a week of disappointing labor market data, which was capped on Friday when the Bureau of Labor Statistics said the economy lost 23,000 jobs in July. The jobs number was significantly worse than expected, as economists were looking for gains of 85,000 jobs.
Adding to the underwhelming news, May and June data were revised lower. The unemployment rate ticked lower to 4.1%; however, analysts noted that the drop was actually due to workers leaving the job market.
Before the official government data, private-sector payrolls processor ADP reported soft labor market data on Wednesday, saying the private sector created only 44,000 jobs last month, missing expectations. The data sparked gold’s initial push above $4,200 an ounce.
Slowing momentum in the labor market, which has been a pillar of growth for the economy, is now prompting markets to adjust their interest rate expectations. According to the CME FedWatch Tool, markets see only a 42% chance of a rate hike in September. Ahead of Friday’s jobs report, markets were pricing in a nearly 60% chance of a 25-basis-point increase.
“The data has brought good news for gold and for the markets, but for the Fed, this is another huge problem, especially when inflation is this high. The Fed Chairman now will have to do some serious thinking to keep inflation in check,” said Waleed Said, Technical Analyst at GivTrade.
While gold has some room to rise next week, some analysts are warning investors not to chase this 7% move, as there are still significant risks in the marketplace. Although markets are starting to push back on rate hikes, inflation remains the Federal Reserve’s major focus.
In an interview with Kitco News, Roukaya Ibrahim, chief commodities strategist at BCA Research, said that gold was an attractive buy at $4,000 an ounce, but after this week’s move, investors need to be patient.
“I think at the current juncture inflation is the dominant policy target, rather than the labor market,” she said.
Next week will provide a significant challenge for gold as markets focus on the U.S. Consumer Price Index (CPI). Economists have said that hotter-than-expected inflation could force the Federal Reserve to maintain its tightening bias, which could prompt investors to take quick profits in gold.
Ibrahim added that she would be looking to buy any weakness in gold as the Federal Reserve’s hawkish stance remains limited, capping real interest rates and the U.S. dollar (Kitco Global Index shows how much of today's gold move is the dollar versus the gold market itself.) .
Alex Kuptsikevich, Chief Market Analyst at FxPro, said that while he is bullish on gold in the near term, he sees limited gains as the Federal Reserve is unlikely to abandon its tightening policy in the face of persistent inflation pressures.
“The bulls still need to do some groundwork. During the latest rally, the price approached but failed to break through the 50-week moving average – an important signal line for the long-term trend. It currently stands near $4,400, whilst at $4,500,” he said. “All things considered, we expect an interesting battle in gold this coming week, with the struggle intensifying following the release of US CPI and PPI data. The path to 4,500 may prove relatively easy, but beyond that, we should brace ourselves for a very significant tug-of-war.”
Fawad Razaqzada, Market Analyst at FOREX.com, said that while gold’s breakout has attracted renewed investor attention, next week’s price action will be important in determining whether there is any follow-through.
“I doubt the weak jobs report will have a lasting impact on gold, even if this does reduce the probability of a September rate hike. There are still two more CPI reports to come and an additional jobs report before the Fed meets, while uncertainty about oil prices remain. So, there are a lot of factors that could still work in the favour of the dollar and against gold,” he said. “If oil prices and inflationary pressures remain elevated, the Federal Reserve will have to maintain its tightening bias even if there is further weakness in the labor market.”
Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, raised concerns that gold has moved too far, too fast, which could prompt “fast money” to take profits. She added that the Fed’s tightening bias remains a major obstacle for gold.
“CPI needs to really miss next week for expectations of the Fed remaining on hold throughout this year, which will provide the assurance for Gold to probe $4500,” she said.
While inflation data will be the major focus next week, U.S. retail sales will also create some volatile price action. Weak consumption data could put further pressure on markets to price out rate hikes next month. However, stronger-than-expected data would give the U.S. central bank room to raise rates.
Economic data to watch next week:
Tuesday: Reserve Bank of Australia monetary policy decision, US Existing Home Sales
Wednesday: US CPI
Thursday: US PPI, US weekly jobless claims
Friday: US Retail Sales, University of Michigan Preliminary Consumer Sentiment
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