Today's US NFP data has provided numerous insights for gold traders, and although they are still assimilating the full implications, it is quite reasonable to assert that reality has begun to set in. As the dust settles from the US NFP, gold traders are now wondering where the price will go and whether it makes sense to remain biased in light of the data we have seen today.
Background
On Friday, gold traders were extremely optimistic, anticipating a significant market reaction due to the significance of the US NFP data. They were correct in their assessment of the significance of this data, given its status as the planet's most important economic data, which the Fed closely monitors.
Before the data was released, traders had been shooting in the dark rather than paying attention to the real picture. Essentially, speculators had been focusing on key components of the US NFP data, such as the US ADP number, the US JOLTS number, and the US ISM manufacturing number. However, based on the results of these numbers, their expectations for the economic data were somewhat unrealistic. I am not suggesting that the US ADP, JOLTS, or even the revision to the US job data did not indicate weakness in the US job market, but rather that the context and interpretation of these numbers were not in line with reality.
For example, the US unemployment rate, which fell in the early three handles during a very hot US labor market and then jumped all the way to 4.3% as of last month, was considered a weakness in the US market. Traders and investors began to view the situation differently, recognizing that the unemployment rate in the early three handles was not likely to persist. And the fact is that anything that is under the 4.5% handle actually represents full employment or at least a solid economy with a solid job market.
So the Fed hasn’t made a policy mistake?
Before the release of today's US NFP data, there was apprehension that the Fed had committed yet another policy error, that the data would reveal further weakness, and that this would force the Fed to act more aggressively by cutting rates. But the fact that the actual number matched the expectations of 4.2% and the headline number of 142K wasn’t too far from the expectations confirmed that there is nothing wrong with the US job market or even with the Fed policy.
Is the 20 basis points rate cut a done deal now?
It would not be incorrect to believe that the Fed has no reason to adopt an aggressive monetary policy, and that a 25 basis point rate cut is the appropriate course of action. Speculators would have to adjust to reality, which means there may be some wind out of the current rally.
Where Do We Go From Here?
Speaking from a technical price point, the yellow metal’s price is well above the lows of the week, and reality is sinking in now. This means that the price is going to show some volatility, but the chances for it to close the week in negative territory are remote. As we progress towards the 18th of September, the key level to monitor is 2,500. Bears may attempt to push the price lower, given the strong gains in the gold price this year, but the overall trend may remain positive as speculators adjust to reality.
