Stronger-than-expected US non-farm payrolls data for May have significantly boosted market expectations for interest rate hikes, extending the anticipated adjustment period for gold prices.
Last week, international gold prices experienced a substantial pullback and closed lower. The catalyst was Friday's US employment report, which showed a significant beat with 172,000 new jobs added in May, far exceeding the forecast of 88,000 and surpassing the prior revised figure of 179,000. This surge in job creation has sharply increased expectations for a Federal Reserve rate hike within the year. Comments from Fed officials, suggesting a rate increase may be appropriate as the labor market appears to be balancing, further fueled a strong rally in the US dollar index. This strength in the dollar pressured gold to break below its 200-day moving average support, ending a period of choppy trading driven by geopolitical negotiations. The price action also erased the prior week's gains, indicating increased bearish momentum and suggesting a risk of further declines towards the March 22nd low near $4,100 per ounce, or even the $3,800 level. For Shanghai gold, this could imply a move towards 800 yuan or 750 yuan per gram.
In terms of price action, gold opened the week at $4,527.14 per ounce, briefly touching a weekly high of $4,545.74 before trending lower in a consolidating pattern. A sharp sell-off on Friday saw it break the key 200-day moving average and touch the lower boundary of its recent downtrend channel, recording a weekly low of $4,311.99. It ultimately settled at $4,324.03, marking a weekly range of $233.75, a loss of $203.11, or a decline of 4.49%.
Looking at the start of this week, Monday saw some short-covering as gold opened slightly higher. Weekend comments from former President Trump, arguing that a Fed rate hike following the strong jobs data would be a mistake and that economic improvement should not lead to higher rates given US debt and other issues, provided some temporary relief from Friday's pressure, creating a modest rebound potential.
However, the overall bias remains bearish. The strong non-farm payrolls data has solidified rate hike expectations. Technically, the decisive break below the 200-day moving average, confirmed by a large bearish candlestick, has given the advantage to sellers. In the near term, unless prices can rebound and reclaim territory above the 200-day MA, there is a risk of a decline towards the $4,100 and potentially the $3,800 support levels.
From a fundamental perspective, the persistent stalemate in geopolitical tensions has gradually fatigued the market, with its impact fading. Lower crude oil prices, which might typically dampen inflation and thus rate hike prospects, are currently failing to provide significant support for gold. The dominant factor remains the shifting expectations around Federal Reserve policy.
Fed policy signals themselves remain difficult to pin down based on data alone, as recent economic releases have shown considerable volatility and revisions. Just the week before last, US inflation data met expectations on an annual basis but showed a monthly decline, and the revised Q1 GDP growth was lower, suggesting a reduced necessity for maintaining high interest rates. This had supported market expectations for a policy pivot and heightened recession and rate cut risks for the coming year.
Last week's robust jobs report abruptly shifted the narrative back towards rate hikes. The gold market's reaction, favoring the hike narrative over cuts, is seen as the most genuine reflection of sentiment.
The current decline in gold is seen as digesting these heightened rate hike expectations. Once a rate hike is implemented, or if inflation continues to moderate leading to fewer projected hikes, the negative pressure could weaken, allowing gold to find a bottom and rebound. A subsequent shift in market focus back towards potential rate cuts would likely reignite a bullish phase.
Attention will now turn to the projected number of Fed rate hikes. If geopolitical negotiations lead to agreements and oil prices remain subdued, inflation prospects could ease, weakening the Fed's hawkish stance. Once this negative factor is fully priced in, gold could enter a phase of gradual recovery or sideways consolidation. Therefore, the current price adjustment is likely not yet complete. As noted previously, the extent of the prior rally often dictates the length of the subsequent correction.
The psychological challenge during a topping and correction phase is the persistent hope for an immediate rebound, akin to wishful thinking in other contexts. This is not a failure of analysis but of emotion. When trading decisions become emotionally driven, losses often follow. Even the most disciplined and astute individuals can fall prey to this state.
Technical Analysis Overview
On the monthly chart, gold is now trading below both its 5-month and 10-month moving averages, increasing bearish pressure. Oscillators like the KDJ maintain a bearish signal, and the MACD is poised for a bearish crossover, suggesting potential for a decline towards the middle Bollinger Band support near $3,800, or even the 30-month moving average around $3,300. A monthly close above $4,450 would weaken this bearish outlook, opening the door for sideways action or a renewed upward move.
On the weekly chart, gold has broken below the support line of its previous rising trend channel, reinforcing bearish momentum. A near-term test of the previous low near $4,100 is anticipated. The former trendline now acts as resistance, favoring a sell-on-rallies approach below it. A recovery above this level would shift the bias towards a rebound.
On the daily chart, last Friday's sharp decline brought prices to the lower support of the descending channel originating from the $4,980 high. While a technical bounce is possible, failure to rebound above the 200-day moving average could lead to continued weakness targeting the $4,100 level. The 200-day MA now serves as a key short-term resistance.
Key Levels to Monitor
For gold, initial support is seen around $4,300 or $4,250. Resistance is expected near $4,380 or $4,425.
For silver, support levels to watch are around $66.50 or $65.00. Resistance is anticipated near $70.00 or $71.40.
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