Gold looks a little toppy next week as markets price in a 25-basis point cut
NEW YORK (September 8) Expectations around the Federal Reserve’s monetary policy stance are starting to take shape, which could create some challenges for gold in the near term.
The gold market, while holding support above $2,500, is ending the week in relatively neutral territory as markets price in a 25-basis-point cut following a mixed August nonfarm payrolls report. December gold futures last traded at $2,525 an ounce, roughly unchanged from last week.
The silver market is ending the week on a disappointing note as prices were unable to hold support at $28.50 an ounce. December silver futures last traded at $28.24 an ounce, down 3% from last Friday.
Selling in precious metals came after the latest employment data from the Bureau of Labor Statistics showed that the labor market is cooling but at a moderate pace.
In August, the U.S. economy created 142,000 jobs, missing expectations of 164,000. At the same time, the unemployment rate dropped to 4.2% from 4.3%, and wages increased by 0.4%.
Analysts have said the data supports the Federal Reserve cutting interest rates by 25 basis points later this month.
“The 142,000 gain in non-farm payroll employment in August was probably just enough to tip the Fed in favor of a measured 25-bp rate cut this month, rather than a more dramatic move, but the labor market is clearly experiencing a marked slowdown,” said Paul Ashworth, Chief North American Economist.
According to some analysts, growing expectations of a 25-basis-point cut could leave gold prices vulnerable in the near term, as the market has been unable to break above initial resistance at $2,550 an ounce.
“This report is not weak enough, in my opinion, to warrant a 50-bps cut on Sept. 18. With that in mind, I think the market remains toppish and may struggle to reach a fresh high at this point,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank. “If I’m correct, we have some downside risks to 2-year government bonds and short-term SOFR contracts that may weigh on prices.”
Philip Streible, Chief Market Strategist at Blue Line Futures, said that in the near term, he would expect the gold market to be capped at initial resistance at $2,550 an ounce; however, he added that gold remains a buy on dips.
“I think the gold market would prefer to see multiple 25-basis-point cuts over one 50-bps move,” he said. “The path of the Fed’s rate cuts is the important factor. Once investors see a 'lower-for-longer' path, gold will take off again.”
Christopher Vecchio, Head of Futures & Forex at Tastylive.com, said that right now the gold market is dealing with two technical factors: gold looks a little heavy from a long-term perspective but has solid bullish short-term momentum. He added that he would expect to see some consolidation in the near term as these two outlooks converge.
Despite short-term volatility, Vecchio said that long term, gold remains an attractive buy on dips as global government debt grows and interest rates fall.
“We're chewing through some supply right now because these two technical factors are crossing paths,” he said. “That said, the trajectory for real interest rates looks like it's going lower moving forward, which would be fantastic for gold prices.”
However, not all investors are ready to give up on gold, as the price holds solid support at elevated levels. Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said gold still looks solid as prices hold above $2,500 an ounce.
Lukman Otunuga, Manager of Market Analysis at FXTM, said the market will be paying close attention to next week’s Consumer Price Index, as the debate between a 25- or 50-basis-point move has not been completely settled.
“Although gold is flashing red, the path of least resistance points north, with a weaker dollar and falling treasury yields keeping bulls in the game,” he said. “The precious metal may be rocked by the incoming US CPI report next week. This is the final inflation report before the Fed’s September 17–18 policy meeting and could impact Fed cut bets. Ultimately, more signs of cooling price pressures may reinforce bets on lower US rates, which would be a welcome development for zero-yielding gold.”
“Looking at the technical picture, the precious metal remains in a wide range with key levels of interest at $2,532, $2,500, and $2,473,” he said. “Should $2,500 prove to be reliable support, prices may challenge the all-time high. However, weakness below $2,500 could open a path to $2,473.”
Along with important inflation data next week, markets will also turn their focus to the European Central Bank as it holds its monetary policy meeting.
While markets are expecting a 25-basis-point cut, analysts note the central bank is stuck between stubborn inflation pressures and slowing economic activity.
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