(Kitco News) - After a relatively quiet start to the summer, sentiment in the gold market is heating up as extraordinary bullish momentum propels prices out of their two-month consolidation pattern.
Gold prices surged by nearly $300 this past week, driven by one disappointing labor market report after another. Solid bullish sentiment among Wall Street analysts and Main Street investors points to potentially higher prices next week, according to the latest Kitco News Weekly Gold Survey.
Gold's best weekly performance since January started on Tuesday as prices briefly tested initial resistance at $4,100 after the U.S. Labor Department reported a drop in monthly job openings in June, highlighting tightness in the labor market.
On Wednesday, gold prices surged above $4,200 an ounce after ADP said that only 44,000 private-sector jobs were created in July, missing economists' expectations for job gains of around 65,000.
The rally kicked into overdrive Friday after the U.S. Labor Department said that the U.S. economy lost 23,000 jobs last month. Economists were expecting to see job gains of 85,000. This was the second time this year that the U.S. labor market contracted.
Gold prices surged above $4,300 an ounce as cracks in the labor market prompted markets to price out a potential rate hike from the Federal Reserve. According to the CME FedWatch Tool, markets see a less than 50% chance of a 25-basis-point hike in September. Ahead of Friday’s data, markets saw a nearly 60% chance of higher rates.
“The US jobs report confirms a significantly weaker jobs market than recent headlines had suggested. Even the lower unemployment rate is because of more people leaving the jobs market. This significantly diminishes pressure on the Federal Reserve to hike rates, or at least, adds some pressure on the opposite side. The bottom is in for gold,” said Adrian Day, President of Adrian Day Asset Management.
James Stanley, senior market strategist at Forex.com, said that he remains bullish on gold as economic uncertainty keeps the Federal Reserve on the sidelines.
“The $4k grind in spot took its time, but the accumulation theme picked back up again, and I’m not expecting that to stop. I think this is markets saying that the current admin isn’t going to let inflation ruin the AI party at this point,” he said.
This week, 19 analysts participated in Kitco News’ Weekly Gold Survey, which showed sentiment was overwhelmingly bullish. Sixteen analysts, or 84%, said they expect gold prices to rise, while two analysts, or 11%, were bearish. Just one analyst, representing 5% of respondents, was neutral on gold’s near-term prospects.
Gold’s rally into the weekend is also driving solid bullish momentum among retail investors. This week, 241 votes were cast in the online social media poll. Of these, 166 respondents, or 68.9%, expected gold to rise next week. Another 37 respondents, or 15.4%, anticipated lower prices, while 38 voters, or 15.8%, were neutral in the near term.
Darin Newsom, Senior Market Analyst at Barchart.com, said that he is bullish on gold for next week; however, he added that gains could be limited as inflation data next week could pose a threat.
Although gold prices are well above critical support at $4,000, he said that the precious metal is still caught in a broader range below $4,500. He added that uncertainty surrounding the Federal Reserve continues to leave gold in somewhat of a limbo, with markets struggling to determine the timing and extent of additional monetary tightening.
“The underlying reality is, inflation remains a problem,” he said.
After the disappointing labor market data this week, markets will be focused on the U.S. Consumer Price Index on Tuesday. Persistent inflation pressures could force the Federal Reserve to maintain its tightening bias. Newsom said that gold could continue to be held back until inflation fears turn into economic uncertainty.
“It isn't an inflation play, it's an economic play,” he said.
He said that fundamental demand and growing investor interest have to come together to drive gold prices through $4,500 an ounce.
“Central banks have been buying gold all along, giving it fundamental support; now we see some of the investment side,” he said. “It has the fundamental reason to go higher. Does it have the investment reason to go higher? I think it does.”
Alex Kuptsikevich, Chief Market Analyst at FxPro, said that he is also keeping an eye on $4,500 in the near term.
“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, there is another potential area of resistance that reversed the trend in December and March,” 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.”
Although Wall Street and Main Street are significantly bullish heading into next week, some analysts have said that investors should exercise caution. A nearly 8% rally in gold this week presents an attractive opportunity to take profits.
Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, said that she is concerned that, with the $300 rally in four days, gold prices have run too far, too fast.
“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.
Fawad Razaqzada, Market Analyst at FOREX.com, also raised some doubts that gold can maintain this momentum as the Federal Reserve remains focused on price stability.
“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 remains,” he said. “If we don’t, then I wouldn’t rule out an eventual break below the $4,000 level in the coming days. 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.”
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