Gold’s blockbuster rally in the first quarter of this year seems to have dissipated, and gains are expected to be limited in the coming months.
Experts believe that positive fundamentals are likely to keep the gold market supported.
However, gains are expected to remain limited despite significant expectations of US interest rate cuts.
Gold prices had recovered all the losses incurred after last Wednesday’s US Federal Reserve policy meeting, driven by a significantly weaker-than-expected US jobs report on Friday.
July saw a smaller-than-anticipated increase in employment, with only 73,000 new jobs created, falling short of the Bloomberg survey’s expectation of roughly 100,000.
“But that wasn’t even the big surprise. The dramatic downward revision of the previous two months was the real shocker,” Thu Lan Nguyen, head of FX and commodities research at Commerzbank AG, said in a note.
US job creation significantly slowed, with 260,000 fewer jobs than initially reported.
This rate of employment growth is comparable to that observed during the pandemic. The unemployment rate also rose.
“An interest rate cut in September, which had been priced out after the rather hawkish Fed meeting, is now back on the table,” Nguyen said.
Haresh Menghani, editor at FXstreet, said:
Traders ramped up their bets for rate cuts by the Federal Reserve following the release of the latest US jobs data, which pointed to a sharp deterioration in labor market conditions.
Gold’s rise
Gold prices have now surpassed their pre-Fed meeting levels, likely due to a combination of factors.
Uncertainty increased significantly when US President Donald Trump abruptly dismissed the head of the Bureau of Labor Statistics (BLS) shortly after the release of labour market data.
Trump accused the head of the BLS of data manipulation, aiming to discredit Republicans and himself.
Previously, US economic data was considered the global benchmark.
Now there is concern that the data can no longer be trusted.
“After all, any successor to the position of BLS head must expect the same fate if they do not report more positive data,” Nguyen added.
In addition to overseeing labour market statistics, the BLS is responsible for gathering crucial price data essential for the compilation of the Consumer Price Index.
Nguyen said:
This means that the most important data for the Fed regarding the labor market and inflation could lose their informative value in the future.
This situation poses a challenge not only for the US central bank but also for investors, who may face reduced transparency regarding the health of the US economy.
Consequently, the US could become less appealing to investors, which would, in turn, benefit gold, according to Nguyen.
Pressure on Fed likely to increase
Gold is poised to gain as central banks face increasing pressure to reduce interest rates soon.
On Friday, Fed Governor Adriana Kugler announced her early resignation from the board.
She was scheduled to depart in January. Trump has since announced his intention to name her successor this week.
Trump’s nominations could offer a significant clue as to the extent of his intended influence on the Fed.
Increased geopolitical risks are expected to drive up demand for gold, as it is considered a safe-haven asset.
This week marks the expiration of Trump’s ultimatum to Russian President Vladimir Putin.
Should Putin fail to pursue a ceasefire in the Ukrainian conflict, sanctions are set to be imposed on nations that buy Russian oil.
In an escalation of tensions, Trump ordered the repositioning of two nuclear submarines following a contentious exchange with former Russian President Medvedev.
Outlook
Nguyen noted:
Despite all these gold-positive arguments, the gains of the precious metal remain limited.
The gold price is currently over $100 below the record high of $3,500 per ounce.
Gold bulls are favoured by Friday’s technical breakout.
The price surpassed the $3,335 horizontal barrier and showed sustained strength above the 100-period simple moving average (SMA) on the 4-hour chart, according to FXstreet.
A buying opportunity may emerge if prices slide to the $3,366-$3,365 support, with further downside likely limited around the $3,350-$3,349 area.
Conversely, the immediate obstacle appears to be Monday’s high, around $3,385, preceding the significant $3,400 mark.
Gold prices are expected to rise further, with the next significant resistance level anticipated around $3,434-$3,435, driven by continued buying interest, according to Menghani.
“We continue to see gold fundamentally well-supported, but it is clear that the momentum we saw, particularly in the first quarter, has dissipated,” Nguyen said.
This is also evident in the fact that gold traded “sideways” despite significantly increased US rate cut expectations since April.
The post Gold’s momentum from Q1 slows down; will Fed’s rate cuts hopes help prices reach peak appeared first on Invezz