Trade of the Week: Gold to retest $1700 support?

At the start of this new trading week, spot gold has been dragged down to closer to the $1700 mark, although prices have trimmed losses at the time of writing.

And depending on how this Friday’s US nonfarm payrolls report turns out, the precious metal could retest that psychologically-important level for support.

Why has gold tumbled again?

The precious metal is clearly wilting in the wake of the scorching US dollar and the uptrend in Treasury yields.

These moves (gold down, dollar/Treasury yields up) have been fuelled by revived bets that US interest rates will move higher, and more importantly – stay elevated, for longer.

Markets have been gripped by Fed Chair Jerome Powell’s hawkish speech delivered at Jackson Hole this past Friday.

Here are the key takeaways:

1. The Fed is set to persist with sending US interest rates higher.
2. US interest rates are set to stay higher “for some time” (as in, the Fed isn’t likely to unwind its rate hikes in a hurry, as some segments of the markets had predicted up until recently).

In essence, the US central bank remains committed to subduing in inflationary pressures, even if it results in some pain for the economy.

Such language heralds a stronger US dollar and Treasury yields marching higher: a bad mix for bullion bulls.

What does the upcoming US jobs report have to do with gold prices?

Depending on the demonstrated strength of the US jobs market, that would inform the Fed as to how high it could send US interest rates.

• A still-resilient US labour market would essentially give the green light for the Fed to send its benchmark rates even higher.
  In turn, that should heap more downward pressure on gold.
• Signs that the US labour market is starting to creak under the weight of higher interest rates may force the Fed to adopt a more gradual approach with its rate hikes; thus spelling some relief for gold.

What to look out for in this Friday’s US jobs report?

As things stand, markets are forecasting the following:

• US labour market added a further 300,000 jobs in August, judging by the headline US nonfarm payrolls (NFP) figure. If so, that would mark a 20th consecutive month of job gains.

  However, an official print of 300k would also mark its lowest number of jobs added since December 2019.

• The August unemployment rate would stay at 3.5% – at its pre-pandemic lows.

Overall, the US jobs market is expected to remain resilient, even though the Fed has been hiking interest rates since March.

How might gold react to the upcoming NFP?

1. If the US labour market adds more jobs than forecasted, that could lead to more declines in gold prices.

Potential support levels:

• $1712: using the downward trendline that has gone from resistance to support level.
• $1700: stronger support should arrive at this psychologically-important line, noting that previous dips below $1700 have proved short-lived in recent years.

Such declines would be based on the notion that still-robust hiring in the US is likely to give the green light to the Fed to continue sending interest rates higher, which in turn should heap more downward pressure on gold prices.

 

2. However, if the US jobs market is starting to creak, that could force the Fed to adopt a more ‘gradual’ approach with its rate hikes.

That is to say policymakers may be more comfortable with triggering rate hikes that are relatively smaller than the 75bps hikes it has already triggered at each of its past two policy meetings. Smaller rate hikes may then be the way forward for policymakers, if they begin to fear choking the US jobs market and sending the US economy into a deep recession.

Such a narrative could then prompt a short-term rebound in spot gold.

Potential resistance levels:

• $1764: around 50-day simple moving average (SMA)
• $1800: stronger resistance set to arrive at psychologically-important mark

In summary:

Markets are currently forecasting a slightly higher chance (21.5%) of spot gold touching $1700, rather than prices reaching its 50-day SMA (20.8%) around $1764.

Ultimately, it could all come down to whether or not this Friday’s US nonfarm payrolls reports exceeds market expectations.