(Kitco News) - Gold bulls are not heading into the long weekend without a fight after stronger-than-expected employment data sparked a brutal selloff Friday morning.
The U.S. Labor Department said that 162,000 jobs were created in August, up sharply from economists' expectations for job growth of around 55,000. The robust employment data pulled gold prices down more than $100 within the first 30 minutes after the report.
Heading into the North American close ahead of the Labor Day long weekend, gold has managed to push back above a critical support level. Spot gold last traded at $4,423.10 an ounce, down less than 1% on the week.
Analysts note that gold’s selloff, while dramatic, was not surprising, as a relatively healthy labor market gives the Federal Reserve room to focus on price stability and try to bring inflation pressures down.
Analysts have said that next week’s inflation data will be a critical piece of information for the Federal Reserve and could provide some important momentum for gold.
“The labor market is showing signs of near-term cyclical strength, even as longer-term structural concerns remain,” said Adam Schickling, Senior US Economist at Vanguard. “The labor market remains resilient enough to keep the focus on inflation, and the path of inflation will likely carry more weight for policy than any single month of employment data.”
Some analysts note that Federal Reserve Governor Christopher Waller set the tone for next week’s Consumer Price Index data, saying that if it shows muted inflation, he would be inclined to leave rates unchanged.
“If there is continued progress toward our 2 percent goal, then I am willing to support holding the policy rate at its current level,” he said in an interview with Reuters on Thursday. “But if inflation comes in hot, I would consider a rate hike.”
Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, noted that despite market expectations, the Federal Reserve’s rate hike calculation is more nuanced.
“While today's labor report shifted September hike expectations sharply, the outcome is not a sure bet and additional signals that confirm inflation has peaked will make the Fed's decision to hike even tougher at the September meeting,” he said.
Lukman Otunuga, Senior Analyst at FXTM, said that while gold’s downside has the advantage, the market has managed to hold critical support.
“From a technical perspective, a weekly close below $4400 could open the path toward the 100-day SMA at $4350, followed by $4300 and the 50-day SMA at $4240. However, if prices reclaim and hold above $4400, bulls may attempt a move back toward the $4500 psychological level,” he said. “With the fundamental backdrop shifting in favour of bears, attention now turns to next week's US inflation reports. Thursday's PPI and Friday's CPI are the final major releases before the Fed decision. Hotter-than-expected readings would likely strengthen the case for a rate hike the Fed has not delivered in years, potentially creating another headwind for gold.”
David Morrison, Senior Market Analyst at Trade Nation, pointed out that although gold’s Friday selloff has created some technical chart damage and momentum indicators continue to point down, it remains difficult to ignore the broader long-term factors supporting gold.
“The chart suggests that there may still be some squiggles to come as gold rebases and prepares for the possibility of a rally to fresh all-time highs. The daily MACD suggests that momentum is currently to the downside, so a retest of $4,200 can’t be ruled out. In fact, it’s possible that gold drops all the way back to $4,000 which held as strong support from late June to the end of July. That may sound like an appalling prospect for the bulls, and it’s impossible to know if this could happen. But it’s worth bearing in mind that just a year ago, gold was struggling to break above $3,500 and before that $2,000 seemed like an impossible target,” he said. “Overall, and over the longer term, it makes sense to average into gold, buying on dips and accumulating, as there’s no indication that any developed world government is prepared to raise taxes or cut spending to reduce their chronic deficits, let alone tackle national debt.”
Waleed Said, Technical Analyst at GivTrade, said he sees gold’s corrections as a buying opportunity, but said that investors need to be patient. He noted that in the event of a potential rate hike, gold prices could fall below $4,000 an ounce.
However, he added that any short-term volatility remains overshadowed by the U.S. government’s unsustainable debt and the impact it is having on the long end of the yield curve.
“When the issuer has to prop up its own long end, that's your answer on how much room policy really has. The Fed can lift the funds rate. It can't control what the 30-year does back,” he said.
He added that while current prices are attractive, investors do have to be careful.
“Tactically it's ugly: a 5.25% risk-free long bond competes hard with a zero-yield asset, and if Warsh hikes and the market believes him, real yields go up and gold goes down. Sub-$4,000 is live. I'd watch the $4,330s first, then $4,000 and lastly $3,800,” he said.
In an interview with Kitco News earlier in the week, Eric Strand, Founder of AuAg Funds, said that despite the threat of a potential rate hike, he sees any correction in gold as a buying opportunity.
He explained that because of the size of the U.S. sovereign debt, which has surpassed $40 trillion, the government can’t afford substantially higher interest rates.
He added that one or two rate hikes won’t be enough to kill inflation. He described the U.S. central bank as “all talk and no action.”
“They need lower rates on this long rate. For me, it's very obvious that they will need to do QE, or whatever they will call it,” he said. “We just wait. Wait it out and prices will come back.”
While most of the focus next week will be on Friday’s CPI data, some analysts said that investors need to pay attention to the Producer Price Index. PPI is viewed as a leading inflation indicator as producers pass higher input costs on to their customers.
Ahead of the Federal Reserve’s interest rate decision on Sept. 16, the European Central Bank will hold its monetary policy meeting on Thursday. Markets are expecting to see a modest rate hike as higher energy prices take their toll on European consumer prices.
Economic data to watch next week:
Monday: Canadian and U.S. markets closed for Labor Day
Thursday: ECB monetary policy meeting, U.S. PPI, U.S. existing home sales.
Friday: U.S. CPI, Preliminary University of Michigan Consumer Sentiment.
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