(Kitco News) - Although inflation remains a persistent threat, the Federal Reserve was reminded Thursday of the other side of its dual mandate as the U.S. labor market lost momentum in June. The weaker employment data could provide some near-term support for gold as the precious metal looks to end the shortened trading week on a positive note.
Gold’s 2% rally back above $4,100 an ounce is helping the precious metal end its longest losing streak in eight years. Spot gold last traded at $4,108 an ounce, up 0.51% from last Friday. U.S. markets will be closed Friday in observance of the 250th anniversary of America's independence.
The celebrations will have a somber backdrop, however, after employment data released Thursday showed the economy created just 57,000 jobs in June. Economists had expected job gains of around 114,000, with some analysts anticipating a short-term hiring boost because of the FIFA Men's World Cup.
The unemployment rate fell to 4.2%, but analysts said this reflected a decline in the labor force participation rate, meaning fewer people were actively seeking work.
Some analysts were quick to point out that while one report does not establish a trend, it highlights that the economy remains fragile.
“I don’t think the Federal Reserve will be in a position to raise rates by the end of the year and that will be good for gold when investors realize this,” said Philip Streible.
Streible added that while he is not ready to call a bottom in gold, the correction has created a new opportunity for investors to reenter the market.
David Morrison, Senior Market Analyst at Trade Nation, said he sees the potential for a bottom in gold. He added that the precious metal has held up better than he expected, as he had been looking for a drop to $3,500 during this correction.
“There’s a very good chance that the bottom is in for gold. It has broken below $4,000 during five sessions since last Wednesday but always found support around $3,950/60. This has been encouraging behaviour,” he said. “The correction in precious metals has lasted four months now, and while gold is quite oversold according to its daily MACD, it hasn’t fallen back to the extreme levels seen at the end of March. So, a rebound was maybe 50:50, but today’s action is looking good for a significant rebound.”
Morrison said that following the jobs report, markets now see a 25% chance that interest rates will remain unchanged through the rest of the year.
“I still think that the market is overestimating Fed hawkishness, and wouldn’t be surprised to see rate hikes start to get priced out by Sep/Oct. If so, that would also support precious metals,” he said.
Lukman Otunuga, Senior Market Analyst at FXTM, said that gold has been thrown a couple of lifelines this past week. On Wednesday, comments from Federal Reserve Chair Kevin Warsh helped push gold prices above $4,100.
Speaking at the European Central Bank Forum on Central Banking, Warsh emphasized his commitment to restoring price stability and bringing inflation back to the central bank's target. However, he also said inflation risks had eased in recent weeks.
Otunuga said that although gold’s prospects have improved ahead of the long weekend, the market still has some work to do.
“The bigger question for gold's second half is whether easing geopolitical tensions can do what the soft jobs report started,” he said. “Should falling oil prices amid easing geopolitical risk result in cooling global inflationary pressures, this could reduce the urgency for central banks to tighten. That would provide a tailwind for zero-yielding gold. Looking at the charts, a solid daily close above $4,100 could open the path toward $4,200 and the 200-day SMA. A slip back below $4,100 may bring $4000 and $3,900 back into view.”
However, not all analysts are convinced that gold’s bearish correction is over. Fawad Razaqzada, Market Analyst at FOREX.com, said he expects a recovery in gold could remain elusive for now. He added that some investors may continue to sell into the rally.
He added that bullish momentum in the U.S. dollar remains the biggest short-term threat to gold.
“The recent US dollar recovery may well have some legs to go,” he said. “We need to see a convincing reversal in the dollar’s bullish trend for me to turn positive on gold at these still elevated levels.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that he is also watching momentum in the U.S. dollar.
“Despite the improvement, gold remains in a consolidation phase following its sharp correction over recent months, with some investors still using rallies to reduce exposure. Overall, the combination of lower energy prices, easing inflation expectations, a weaker dollar and softer yields suggests the market is moving closer to establishing a cyclical low,” he said. “From a technical perspective, however, more work is needed before sentiment turns decisively bullish. A daily close above USD 4,100 would be an encouraging first step, but a break above USD 4,215 is needed to improve the technical outlook. That would likely require further weakness in both the dollar and Treasury yields."
With little economic data scheduled for release next week and continued volatility in the U.S. dollar, analysts said gold will remain susceptible to geopolitical headlines and oil prices.
Morrison said the biggest risk is that oil rebounds from oversold levels, reigniting inflation fears. However, he added that such a move would likely prove temporary.
“The fundamentals (assuming no serious resumption of hostilities, and another blockade of the Strait of Hormuz are weighing on oil: slowing demand growth with plentiful supply,” he said. “So, it could be that oil continues its decline once we get a corrective bounce out of the way.”
Some analysts have said that if the conflict in the Middle East has truly ended, oil prices should remain elevated but stable, preventing a renewed acceleration in inflation and helping keep inflation expectations anchored.
Economic data to watch next week:
Monday: ISM Services PMI
Tuesday: Reserve Bank of New Zealand monetary policy decision
Wednesday: Minutes from June FOMC meeting
Thursday: Weekly jobless claims
