Gold Eyes Monthly High Ahead of NFPs as Bearish Momentum Falters
Fundamental Forecast for Gold:Neutral
Gold prices rallied 3.24% this week with the precious metal trading at $1313 ahead of the New York close on Friday. The advance comes amid a rally in broader equity markets with the S&P making fresh record highs while a substantial sell-off in the greenback was further exacerbated as the government shut-down pushed out expectations for a Fed tapper this year. Subsequently, gold rebounded off key support at $1268 with the rally breaching a medium-term technical formation.
The debt ceiling / government shutdown debate reached a climax on Wednesday, just ahead of the October 17th deadline, with congress passing an extension to avert a technical default. While threat has been diminished in the near-term, the debate will carry on with the extension only delaying the decision till February. Rating agency Standard & Poor’s, estimates that the 16-day shutdown cost the US economy some $24Billion and will significantly impact growth prospects in the fourth quarter. As such, it’s likely that the Federal Reserve will refrain from initiating its exit strategy this year as impact of the shutdown and the ongoing battle in Washington continue to represent a major risk for broader market sentiment with gold prices likely to remain well supported in the near-tem.
Looking ahead to next week, investors will be closely eyeing a flurry of data as the backlog of economic reports delayed from the shutdown hits the wires. Most notably, traders will be looking to the September Non-Farm Payrolls report for an updated assessment on the health of the labor markets. Consensus estimates are calling for a print of 180K, up from a previous read of 169K, with the unemployment rate widely expected to remain unchanged at 7.3%. The participation rate will be important here as we have noted over the past few months that larger declines in the broader labor pool have continued to put artificial downside pressure on the headline unemployment rate. Should the data disappoint, look for gold to remain well supported at the cost of the greenback. Although the print is likely to offer further clarity on the recent rally off support, it’s important to note that we are heading into the close of October trade with the next employment report due out just 2 ½ weeks later.
From a technical standpoint, gold broke out of a well-defined descending channel formation dating back to the August high with the rally halting at the 38.2% retracement of the decline at $1321. Although price action spiked into the 100-day moving average at $1327, the retracement remains a barrier of interest on a close basis with a breach above this mark putting into focus the 50% retracement and the July close high at $1342/44. It’s important to note that the rally has continued to respect the October opening range high and as such, we cannot rule out the possibility of a ‘false break’ scenario just yet. That said, momentum has triggered topside plays with daily RSI now resting just above the 50-threshold. Interim support is expected at former channel resistance (currently around $1300) with only a break below 1268 putting the larger decline off the August high into play. Key support objectives remain at $1233/34 which represents a confluence of key Fibonacci levels and the close of the June 28th low. Bottom Line: waiting for a breach of the October range high to validate Thursday’s channel breakout with such a scenario eyeing subsequent topside resistance targets. -MB