Gold continues its steep descent

Gold at the time of this report, seems to be moving in a sideways fashion, since last week’s gold report. We note the potential for slight volatility in the gold market, as market participants may be eagerly awaiting the US Employment data which is due to be released later in the week. In this report, we aim to shed light on the catalysts driving gold’s price, assess its future outlook and conclude with a technical analysis.

Gold Market Analysis

US Government shutdown averted

The US government for a second time in a year has barely avoided a government shutdown on the 11  hour, as House Speaker McCarthy pushed forth the bi-partisan Senate proposed bill, despite opposition from some members in his own political party. The agreement has averted a US government shutdown in for the next 47 days, providing the US House of Representatives and Senate a grace period, in which they then need to reach an agreement to expand the US Government funding in order to avoid a shutdown. However, for now the crisis has been averted and as such, with the lack of a government shutdown which may have resulted in a significant economic deterioration in the US economy, the dollar appears to have regained some bullish momentum, during today’s trading session. As a result, the dollars slight strengthening, may have aided to the descent of the precious metal, as the two are considered to be inversely correlated.

US Employment data

We would also like to highlight the release of the employment report for September due out this Friday, which will give a status update on the health of the US labour market force and the Fed officials may be looking closely, assessing whether the expected loosening of the labour market occurs, or if it remains resilient. The tightness of the employment market may allow the Fed to maintain the current interest rates, or perhaps to even hike rates, whereas a looser labour market could lead to a more dovish stance by the Fed. According to forecasts, the non-farm payrolls figure is expected to drop to 163k compared to the outstanding 187k figure of the previous month, the Unemployment rate is expected to drop to 3.7% compared to last months rate of 3.8% and the month-on-month Average Earnings figure is expected to increase to 0.3% when compared to the 0.2% of the previous month. Should the actual rates meet the expectations, we may see the dollar coming under pressure as the figures indicate loosening of the tightness of the US labour force. However the slight increase of the average hourly earnings rate might give the Fed justification to maintain their slightly hawkish rhetoric of maintaining interest rates at their current levels, for a prolonged period of time. On the other hand, should the average hourly earnings rate come in lower than expected, in addition to the Unemployment rate ticking upwards, we may see the Fed in a weaker position to justify the current interest rate levels, which could weigh on the dollar. Also of material importance are the weekly initial jobless claims figure released a day prior to the employment reports of Friday.

US Treasury Yields

The US-10 Year, Treasury bond yields remain elevated near levels that where last seen in 2007, as market participants are anticipating that the current interest rate levels are here to stay for a prolonged period of time. The current levels, may be appealing to investors compared to gold, given that the US Bond Yields are interest bearing and as such could generate a greater level of returns to market participants, whereas the precious metal, which is not interest bearing, may be less appealing to investors. Therefore, the US Bond Yields are considered to be an alternative investment to the precious metal, as such, the continued ascent of the 10-Year US Bond Yields could weigh on the precious as they are considered to be inversely correlated.

Gold – Technical Analysis

XAUUSD H4 Chart

• Support: 1830 (S1), 1770 (S2), 1695 (S3)
• Resistance: 1900 (R1), 1980 (R2), 2050 (R3)

The precious metal appears to be moving in a downward fashion with the precious having fallen below the 1900 key psychological level, with the precious now appearing to be testing support at the 1830 (S1) support base. We maintain a bearish outlook and supporting our case is the RSI indicator below our Daily Chart which currently registers a figure below 30, implying a strong bearish market sentiment. For our bullish outlook to continue, we would like to see a clear break below the 1830 (S1) with the next possible target for the bears being the 1770 (S2) support base.

On the other hand, for a bullish outlook, we would like to see a clear break above the 1900 (R1) key psychological level, with the next possible target for the bulls being the 1980 (R2) resistance ceiling. We also note the Bollinger bands have widened significantly, implying extreme market volatility. Furthermore, the commodity may be due a market correction higher as the RSI figure being bellow 20, could imply that the commodity is oversold.

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