The gold market is seeing a bit of a rally Friday to end the trading week. The yellow metal will still end the week on a sour note, however, as the bulls have been unable to hold prices at or above the $1750 level. After dipping below $1700 on Thursday, the bulls are back in action today, sending prices higher and trying to distance the market from the $1700 level.
The market has been under pressure most of the week as numerous bearish issues took hold. A stronger dollar, rising bond yields and more all pressured the gold market this week and may continue to do so if present trends continue. The threat of a higher dollar may keep the gold bulls subdued for the months ahead until more clarity is seen surrounding the Fed and its plans for interest rates.
Non-Farm Payrolls Data
Although the headline number of jobs created today was a positive (315,000) compared to consensus estimates of 295,000 jobs, the data was not all roses and candy. Both June and July data were revised lower, with June seeing a sharp revision lower of over 100,000 jobs. In what may be a positive for gold, wages did not increase as much as expected.
Average hourly wages increased by .3% while estimates were looking for a rise of .4%. The lower-than-expected wage increase could be another sign that inflation has in fact peaked already and could continue to lose steam in the months ahead. The notion of easing inflation pressures may seem bearish for gold, but given the Fed and its plans for aggressive rate hiking, it could keep the central bank from raising rates much further and that may be bullish for gold.
Fed Funds Reaction
Within hours of the non-farm payrolls release, the data had not been much of a factor in Fed Funds bets. Markets are still seeing a 75% chance the Fed will raise rates by another 75-basis points later this month. Although that could change, Jerome Powell appears to have gotten his message across that the Fed means business and will battle inflation until no longer necessary.
If the Fed does stay the course, stocks and risk assets may roll over again and probe new lows. If the Fed elects to take a pause from hiking rates, however, or even decides to start easing, markets may find a sense of comfort that could allow stocks, risk assets and gold to all move higher.
Major Capitulation Coming?
As the gold market approaches the $1700 level, the chances of a major capitulation sell-off increase. Gold’s multi-decade uptrend comes in around the $1675 area, and if broken could send the market sharply and rapidly lower. The bulls will put up a fight, but it is unclear if they will have the necessary ammunition to prevent a further sell-off in the market.
The technical outlook for gold has not changed. The $1700 and $1800 levels remain the key areas for the bulls and bears to conquer. Until one side is breached on a closing basis, the market could remain choppy and sideways for some time. Thursday saw prices dip below the $1700 level but they have quickly come back today and are trying to put some distance between them and that level.
The yellow metal may not do much until the next FOMC meeting this month. Once the Fed meets and decides how much they want to raise interest rates, gold could see more inflows. Until that time, however, the market may remain jittery and even embark on one or more unsustainable moves higher or lower. This may be referred to as market noise, as the long-term prospects for gold remain solidly higher.