The latest macro data from the US showed that the US economy and employment are showing signs of cooling. It then pushed the gold price back to six-month highs.
“It was a mixed report with something for everyone”
The gold market on Friday was just $25 away from the $1,900 level at one point. Also, February Comex gold was at $1,873.40, up 2.4% from the week. U.S. nonfarm payrolls, the biggest macro event of the week, rose 223,000 last month. This showed that US job growth slowed moderately in December. November data was revised and 256,000 positions were added.
One of the gold positive drivers in the report was the decline in wage data, a sign that inflation is cooling. Year-over-year average hourly earnings rose 4.6% last month. This was below market expectations of 5%. It also followed November’s revised downward gain of 4.8%. Nicky Shiels, head of metal strategy at MKS PAMP, comments:
Overall, the report showed a gradually softening economy with inflation falling and the labor market still strong. There is nothing recession-related in this report. But it was also a mixed report with something for everyone.
“Golden Kneeling Rises”
Also, the US services sector contracted for the first time in 30 months in December. Accordingly, the Service Purchasing Managers Index (PMI) came in at 49.6%. The 6.9 percentage point drop surprised the downside as market consensus estimates expected the index to come in at 55%. Andrew Grantham, senior economist at CIBC Capital Markets, comments:
The latest follow-up shows that GDP growth was much better than expected in the 4th quarter of last year. However, this decline in ISM services will raise concerns that the economy is rapidly losing momentum and could start 2023 on soft ground.
Gold rose in response to both data releases. Thus, it reached a daily top of $1,875.20, the highest level since June. Shiels said, “Gold rose on its knees. “If sharp declines in business activity and orders continue, it raises concerns about the demand outlook.”
Next week’s performance is very important for gold
Nicky Shiels adds that what gold does next will be vital in determining whether the precious metal can continue its rally. In his statement, Shiels draws attention to the following:
Depending on whether gold can maintain its weekly gains (which seems increasingly likely), it solidifies the aggressive path that gold has moved on since forming a slight uptrend since early November. Always looking for reasons to recover. There is a fair amount of bull ‘suppressed’ demand inherited from last year and fired at the right data point (CPI & PCE). This will be much more meaningful.
“As long as it stays above this zone, upside movement is possible”
cryptocoin.com As you follow, gold started showing signs of bullish trend in the fourth quarter of 2022 in anticipation of a pivot by the Federal Reserve. Marc Chandler, managing director of Bannockburn Global Forex, says gold’s next target is around $1,896.50, which is a 61.8% retracement of losses since its peak near $2,070 last March. Chandler explains:
I’m not convinced it can get that far as the momentum indicators flex. I think the risk is that Fed funds futures are pricing in a 50bps increase at the FOMC meeting, which ends Feb. However, as long as the yellow metal stays above the $1,825-1,830 zone, the upside seems positive.
“In the short term, we foresee a risk of decline in the gold market”
According to CME’s FedWatch Tool, after Friday’s data, markets began pricing in a 74.2% probability of a 25 basis point hike in February. Commerzbank analyst Barbara Lambrecht says gold is waiting and pricing in the Fed’s slowdown in rate hikes, but ETF investors still need some persuasion before the rally really begins. Lambrecht underlines the following:
Its rise is likely due to more optimism among speculative financial investors, who are often more indecisive. However, a lasting recovery of prices in the gold market will require, first of all, a shift in sentiment among still cautious ETF investors. They seem to be waiting for the US rate hike cycle to end. In the short term, we anticipate a downside risk, if any, in the gold market.
Data to monitor
Inflation is one of the key reports that gold will pay close attention to next week, especially after Fed minutes from the December meeting showed that US central bank officials think more work is needed to combat price pressures. James Knightley, ING chief international economist, comments:
Fed officials are concerned that policy needs to be more restrictive and remain restrictive for the long haul to allow demand to stabilize with the economy’s supply capacity and reduce price pressures.
Market consensus forecasts are for annual inflation to fall from 7.1% in November to 6.5% in December.
- Tuesday: Fed Chairman Jerome Powell to talk about ‘Central Bank Independence’.
- Thursday: CPI, US jobless claims.
- Friday: Michigan consumer sentiment.
Gold markets rise to show strength all week
Technical analyst Christopher Lewis makes the following analysis of the technical outlook for gold. Gold markets rose quite significantly during the trading week, although we saw a lot of noisy behavior. Ultimately, the market is likely to threaten the $1,875 level, an area where we’ve seen a lot of resistance before. If we can break it down then we could probably see the market really go up. Maybe we can start a move towards the $2,000 level.
Note that many people believe the Federal Reserve should return soon. If that’s the case, we’re likely to see gold really rise. That said, the Federal Reserve is unlikely to do that. As a result, it can be a little more of a struggle than people realize.
I would love to see some sort of pullback that we can exploit, especially near the $1,800 level. However, we will need several negative days in a row for this to happen. I think short-term pullbacks will continue to offer opportunities. Also, I have absolutely no interest in shorting gold in this environment. I believe this year will be very good for gold. That’s why I keep looking for plenty of opportunities.
I think we will have more than enough. So it’s a situation where we’re probably going to see a lot of noise. But at the end of the day, I think the positive mood remains the most likely outcome in this market. Be careful and wait for confirmation for some kind of return from a shorter timeframe to get involved.