The gold market saw significant losses on Friday as the precious metal dropped $50 after a shockingly solid jobs report from the US. Analysts interpret the impact of recent developments on the shiny metal and technical indicators.
“This is so devastating for gold!”
US workforce data showed the lowest unemployment rate since 1969 at 3.4%. The US economy added a staggering 517,000 jobs in January when market consensus estimates were just 185,000. On top of that, the US service sector (ISM) met expectations in January and rose to 55.2% in December after a contraction. Edward Moya, senior market analyst at Oanda, comments:
The day’s data disturbed the Federal Reserve, which is pretty confident about inflation trends. The service sector is still very strong. This will keep wage pressures high.
After raising rates 25 basis points lower on Wednesday, Fed Chairman Jerome Powell spoke of deflation progress. “It is gratifying to see that the disinflationary process has now begun. Now, for the first time, we can say that the disinflationary process has begun. And we’re really seeing that in commodity prices so far,” he said. However, Powell acknowledged that the services sector has yet to feel a slowdown in inflation. Moya says prior to Friday’s jobs report, markets expected the Fed to potentially end its walking cycle in March, but that’s now changing. According to the analyst, gold is reacting to this. Moya explains her thoughts on this subject as follows:
This is very destructive for gold. Markets thought we were very close to the end of Fed tightening. And now there is the question of when this economy will actually weaken. This employment report was shockingly strong, which suggests wage pressures aren’t going to drop anytime soon.
“The path of least resistance for gold is to move lower”
Gainesville Coins Precious Metals expert Everett Millman says there is too much data for markets to digest. “And it’s not just the jobs report, the Fed’s tone matters, too. The market wants to interpret Powell as a dove. But the Fed’s reaction function will be difficult to predict,” he says. After the best start to the year since 2012, it was expected to receive some profit below. With the latest developments, analysts say there may be more sales next week. Millman continues his comments as follows:
The path of least resistance for gold is to move lower. It is possible that we will spend more time consolidating and trading sideways. The yellow metal spent little time trading between $1,800-1,900 prior to this sale. It quickly rose from $1,700 to $1,900. Therefore, gold will test most of these levels at $1,800 before the market regains strong belief.
“Yellow metal will perform well for the rest of the year”
Close support for bullion is $1,870. If that doesn’t hold, Millman says, gold will test $1,850 and then $1,800. However, Millman notes that the overall bullish outlook remains solid despite the short-term bearish bias. In this context, he notes:
Whatever the Fed does, gold will perform well for the rest of the year. This is a short-term speed bump rather than a fundamental change in gold’s outlook.
“They want less dollars and more bullion!”
Analysts have been warning investors for weeks that the gold market will pull back. So while the size of this week’s sales is surprising, the direction is not surprising. cryptocoin.com As January draws to a close, gold saw its best start of the decade. But as February began, the momentum suddenly changed and the precious metal ended the week down 3.5%.
This week, the World Gold Council (WGC) highlighted the growing depth of the gold market, with physical demand for the precious metal rising 18% last year. The market was dominated by strong bullion purchases from individual investors. Central banks also had an insatiable appetite for gold in the second half of the year. According to WGC, central banks bought 1,136 tons last year. This is the highest level since 1967. According to George Milling-Stanley, chief gold strategist at State Street Global Advisors, central bank demand is not going anywhere anytime soon, and this will set a solid footing for prices. In this context, the analyst makes the following statement:
Emerging market central banks, on average, hold up to two-thirds of their reserves in dollar-denominated assets and less than 5% in gold. And they want to change that ratio. They want less dollars and more gold.
“Gold on its way to over $2,000”
The International Monetary Fund is also considering central banks’ new interest in gold. In a recently published working paper, the IMF notes that fears of economic sanctions are pushing nations away from the US dollar. With this market support, even in the current environment, Milling-Stanley notes that gold appears to be on its way to over $2,000 this year.
Milling-Stanley isn’t the only one optimistic about gold. Leigh Goehring, managing partner of Goehring & Rozencwajg, says inflation will be a problem for a decade, triggering a new record level below it. “Gold will hit record highs this year,” Goehring says.
Of course, not all analysts are optimistic about gold. The London Bullion Market Association released its annual gold price survey this week. LBMA members predict that gold will average $1,859 per year. So while gold has room to drop a little more, there is a long-term bullish sentiment in the market that is hard to ignore.
Weekly gold technical analysis: More going down!
Technical analyst Christopher Lewis draws the technical picture of gold this week as follows. Gold tried to rise throughout the week, but broke below the $1,900 level on Friday as the job count came out much higher than expected. When you look at this chart, you can see that this is a huge reversal. This huge candlestick will likely lead to more selling pressure. Whether it will send the gold to the bottom of the previous range is a completely different question. However, it looks like we’ll definitely have to go further down right now.
We didn’t reach the $2,000 level, and that doesn’t mean we can’t in the future. But the truth is that the market still doesn’t seem ready to get there. In fact, the way we close almost certainly indicates that we have more sales to make. The US dollar was a battering ram as an employment figure came out much warmer than expected in the Friday session. Whether this has a lasting effect remains to be seen. But I think we’ll at least probably pull it back for another week or two. We could even drop as low as $1,800 where the 50-Week EMA is.
If we break down then we will likely see a lot more selling pressure coming into the market. So at this point I think it would be quite logical for us to be able to get down to the $1,700 region. On the other hand, if we turn right from here, then we are likely to see a lot of back and forth.
