(Kitco News) - Early morning optimism turned into disappointment among gold investors, as prices were unable to hold on to their initial gains following weak U.S. employment data. The yellow metal is not only looking at its second week of losses, but prices are also heading into the weekend near their recent lows.
Spot gold last traded at $4,137 an ounce, down more than 3% for the week. Selling pressure picked up as the yellow metal was unable to hold gains above $4,200 an ounce after the U.S. Bureau of Labor Statistics announced that 29,000 jobs were created in September, significantly missing expectations.
The report also said that the unemployment rate increased to 4.2%, while average wages rose only 0.1%.
Simon-Peter Massabni, Head of Business Development at XS.com, said that gold’s disappointing price action is an indication that the market remains caught between a weakening economy on one side and elevated yields and inflation on the other.
“The jobs report has given gold fundamental support from a monetary-policy perspective, but it has not yet provided technical confirmation that the broader uptrend is resuming,” he said. “The key question for gold in this next phase is not simply whether the labor market is weakening, but whether that weakness will be strong enough to push yields lower — or whether inflation will remain sufficiently persistent to keep yields elevated.”
Slowing momentum in the employment data has prompted markets to pare back rate hike expectations for later this month. However, economists note that even as momentum in the U.S. labor market continues to slow, the Federal Reserve remains primarily focused on persistent inflation.
Bill Adams, Chief U.S. Economist at Fifth Third Commercial Bank, said that September’s disappointing jobs report wasn’t bad enough to shift the Fed's focus away from inflation.
“The September CPI and PPI reports, prices at the pump, and geopolitical developments between now and when the Fed meets next in late October have more power to sway the next rate decision than does this lukewarm jobs report,” he said.
Phillip Streible, Chief Market Strategist at Blue Line Futures, said that although momentum in the labor market is slowing, the U.S. economy remains fairly resilient.
Earlier in the week, the U.S. Bureau of Economic Analysis said that U.S. gross domestic product increased 2.2%, significantly beating expectations. At the same time, first-quarter growth was revised higher to 2.5%.
“We are not in a stagflationary environment,” he said. “We continue to see broadening growth in the tech sector, and in this environment I just can’t be bullish on gold.”
Although the disappointing employment data took an October rate hike off the table, markets are still pricing in a rate hike in December. Analysts said that these expectations will continue to support higher bond yields, raising gold’s opportunity costs as a nonyielding asset.
“Looking through the recent noise, the labor market is doing just fine, with job gains well within or slightly above breakeven,” said fixed-income analysts at TD Securities.
David Morrison, Senior Market Analyst at Trade Nation, said that it is unlikely that the worst is over for gold just yet.
“A pause in monetary tightening this month doesn’t mean that further hikes are off the table. Inflation looks likely to remain the major consideration for the FOMC, with the other half of their mandate, ensuring maximum employment, still likely to take a back seat for now,” he said.
Although gold has room to move in the near term, Morrison said that he sees limited downside.
“I don’t believe that gold is far from bottoming again, just as it did during the summer. If it can’t harvest enough momentum to rally in the face of dollar strength, then it may have to retest that significant band of support around $4,000. If it does, then I think there’s a very good chance that it will consolidate, build momentum as the MACD resets, and then be in a good position for an explosive rally,” he said.
Lukman Otunuga, Senior Market Analyst at FXTM, said that gold is not out of the woods yet, as price gains remain capped while geopolitically driven inflation continues to support rate hikes. He added that $4,200 an ounce remains a key pivot level next week.
“A solid weekly close above $4,200 may open a path toward the 100-day SMA at $4,280. Weakness below $4,200 could see a decline back toward $4,100,” he said.
With little economic data to be released next week, economists expect headline geopolitical risks to dominate price action. Key economic reports that could create some market volatility include the ISM Services PMI, the minutes from the Federal Reserve’s September monetary policy meeting, and the University of Michigan’s preliminary consumer sentiment survey.
Economic data to watch next week:
Monday: ISM Services PMI
Wednesday: Minutes from the Federal Reserve's September monetary policy meeting
Thursday: US weekly jobless claims
Friday: University of Michigan Preliminary Consumer Sentiment survey
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