Gold Outlook: Stability of Gold’s price maintained

Gold’s price maintained its sideways motion since the past week. In today’s report we intend to lay out the main fundamental challenges ahead for the precious metal, including the negative correlation of the USD with gold’s price as well as the release of the US employment report for August on Friday, that could also have an effect on gold’s price. We also highlight two issues that could create safe haven flows for the gold and finally, we will be concluding this report with a technical analysis of gold’s daily chart.

USD’s negative correlation with gold inactive

The negative correlation of the USD with gold’s price seems to have been inactivated in the past week. It’s characteristic that the USD was on the rise over the past week against its counterparts yet gold’s price did not fall. It’s characteristic that the USD continued to weaken in the past week substantially, yet stabilised somewhat during Monday and today’s Asian session.

It should be also noted that gold’s price failed to drop even as US bond yields were on the rise over the past week. Both short term US yields and long term yields were on the rise and investors may have been expecting a retreat of gold’s price, given the antagonistic relationship between the two finance instruments, given also that the bonds bear interest in contrast to gold, while gold has also storage costs.

Yet that was not the case and other fundamentals should be investigated for the interpretation of the movement of gold’s price. For the time being, we see the case the interruption of the negative correlation between  gold and bonds to be maintained for now. At the same time though, we note that the negative correlation may resurface should we see intense market reaction on the USD.

The release of August’s US employment report

We highlight on Friday, the release of the US employment report for August, which is expected to have ripple effects beyond the FX market also on US stockmarkets and gold’s price. Forecasts are for the non-farm payrolls figure is expected to rise and reach 160k if compared to July’s 114k.

The unemployment rate is expected to tick down to 4.2% if compared to 4.3% in July and the average earnings growth rate to accelerate slightly reaching 3.7%yoy if compared to last month’s 3.6% yoy. Should the actual rates and figures meet their respective forecasts, we may see the USD gaining some support as the data align towards pointing a tightening US employment market.

A possible tightening of the US employment market could also allow the Fed to ease it’s dovish intentions to start cutting rates in the coming months. In turn we note that currently the market expects the bank to lower interest rates by 1% by Christmas. Such expectations imply a double rate cut by the bank, possibly in the November meeting.

Should the Fed be encouraged by a tighter US employment market to cut rates to a lesser extent, we may see the market being forced to reposition itself, in turn weighing on the price of gold. On the flip side should the rates and figures show that July’s slack in the US employment market remained or has even widened in August, we may see gold’s price getting substantial support.

Please note that Fed Chairman Powell in his speech at the Jackson Hole Economic Symposium, mentioned the shift in the bank’s attention from curbing inflationary pressures to the weakening US labour market, which in turn could enhance the impact of the release. Other than that we also note as possible points of interest for gold traders the releases of the ISM PMI figures for August, the JOLTS job openings figure for July and the ADP national employment figure.     

The effect of uncertainty

Also on a deeper fundamental level, we note the safe haven nature of the precious metal. One key concern of the market tends to remain Israeli-Palestinian conflict. It should be noted that the hopes for a possible ceasefire deal between the conflicting parties are weak yet are still present. It should be noted that the recent demonstrations in Israel, after finding 6 hostages killed by Hamas, tend to increase the pressure on the Israeli Government to accept such a deal.

On the other hand, the situation within Gaza has become desperate and its characteristic that Polio has returned to Gaza. Should negotiations fail to produce a deal, we may see the precious metal experiencing safe haven inflows, as market worries could intensify. We also note the tensions in the Sino-Japanese relationships.

China has threatened severe economic retaliation against Japan if Tokyo further restricts sales and servicing of chipmaking equipment to Chinese firms, complicating U.S.-led efforts to cut the world’s second-largest economy off from advanced technology, as per the Japan Times. Should the tensions escalate further we may see investors finding refuge in the precious metal.

Gold Technical Analysis

XAUUSD Daily Chart

• Support: 2450 (S1), 2355 (S2), 2280 (S3)
• Resistance: 2530 (R1), 2600 (R2), 2700 (R3)

Under a technical perspective, gold’s price stabilised over the past week, just below the 2530 (R1) resistance line, which please note is an all-time high. The stabilisation of the price action of the precious metal, allow for a broking the upward trendline guiding it since the 8    of August, hence we switch our bullish outlook in favour of a sideways motion bias for gold’s price.

Also, we note that the RSI indicator has been lowering implying an easing of the bullish sentiment among market participants, yet was not totally erased, as the indicator remains above the reading of 50. Also we note that the upward slope of the 20, 100 and 200 moving averages remainσ, implying the prospect of a bullish outlook for the precious metal’s price.

Should the bulls regain control over the bullion’s price, we may see it breaking the all-time high level marked by the 2530 (R1) resistance line and we set as the next possible target for the bulls the 2600 (R2) resistance barrier. Should the bears take over, we may see the precious metal’s price dropping, breaking the 2450 (S1) support line and continue lower to test if not breach also the 2355 (S2) support base.        

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