(Kitco News) Gold breached the required level at $1,800 an ounce on Thursday due to heightened geopolitical tensions between the US and China. But next Friday’s employment report may disrupt the momentum, according to analysts.
December gold futures rose $33 on Thursday, reaching a daily high of $1,812. At the time of writing, prices are at $1,808.20 an ounce.
Taiwan is at the center of the latest round of geopolitical tensions between the United States and China. On Thursday, markets were appalled that China launched several ballistic missiles around Taiwan in response to a visit by US House Speaker Nancy Pelosi. China is also carrying out aggressive military exercises.
“The aggressive tone emanating from Beijing in response to Pelosi’s visit to Taiwan has made it a classic safe haven in recent sessions, with gold and Treasuries rising along with the US dollar and Japanese yen,” said Han Tan, head of the market. Analyst at Exinity Group.
This situation will continue to develop through the end of the week, according to Mark Chandler, chief market strategist at Bannockburn Global Forex.
“China continues its military harassment of Taiwan, while US President Biden is pushing against a Senate bill that would recognize Taiwan as a ‘key non-NATO ally’ and enhance its representation in international forums,” Chandler said.
To read more about geopolitical tensions and their impact on gold, click here.
This was an encouraging rally for gold after a stronger US dollar led to a sell-off to $1,700 an ounce in July. On a technical basis, a close above $1,789 would be a strong sign of more gains to come, according to strategists at TD Securities. “We estimate that a price close above $1,789 an ounce will sufficiently stimulate a shift in momentum,” they said on Thursday.
However, the big snag is Friday’s July employment report from the US “With non-farm payrolls leading the week tomorrow, our expectations for a stronger-than-expected report could quickly put an end to the bullish trend among the gold bugs,” TD Securities. Strategists added.
Economists’ consensus calls are looking for the economy to add 250,000 new jobs in July after creating 372,000 jobs in June.
Hard-line Fed speakers also contributed to the rally in gold prices this week by pushing against the idea of the US central bank’s shift from raising interest rates.
“One by one, they stick to the scenario that has been put in place. What we are seeing is a well-coordinated and controlled communication effort by the Federal Reserve. It is meant to leave no doubt about the Fed’s intent to continue raising interest rates until inflation,” said Wayne Thein, BBH’s head of global currency strategy. “It goes down, regardless of the cost of growth and employment.”
Of recent comments, Chicago Fed President Charles Evans said the US central bank is likely to continue using large rate increases until it sees inflation lower. “If you really think things haven’t improved … 50 (basic points) is a reasonable assessment, but 75 might also be fine. I doubt more will be requested,” he told reporters on Tuesday.
San Francisco Fed President Mary Daly also stated that inflation remains a problem. The Daily said in a LinkedIn interview that the Fed “has a long way to go” before it reaches its price stability goals. “We remain completely resolute and united,” she said.
Louis Federal Reserve President James Bullard noted, “We still have some ways to go here to get to tight monetary policy.”
Moreover, Richmond Fed President Thomas Barkin acknowledged that the Fed is willing to pay the price for controlling inflation. “There is a way to get inflation under control. But stagnation can happen in the process. If that happens, we need to set it straight: Nobody has canceled the business cycle,” he said.
What’s next for gold?
Gold is looking to resume its rally after peaking above $2,000 an ounce back in March, according to a growing number of analysts.
“Gold appears more likely to resume its ongoing upward trajectory and break resistance around $2,000 an ounce versus maintaining below the $1,700 support level,” said Mike McGlone, chief commodity strategist at Bloomberg Intelligence. “Further tightening by the Fed in 2022 since the 1980s to contain gold, and it is a matter of time before interest rate hikes cool off, allowing the metal to resume its path of least resistance upwards.”
CNBC’s Jim Cramer also updated his gold outlook this week, saying this is the perfect time to get into the gold trade after what he described as a “strange period” for the precious metal.
Cramer cited the chart analysis of legendary market technician Larry Williams: “Williams has found that when young speculators are very bullish, it always indicates that we are close to a top. But when they are trending too low, it is always a sign that we are very bullish,” Cramer said. According to the latest Commitment of Traders Report, small speculators bought 92,690 gold contracts, the smallest long position since May 2019, before we got a big boost in gold.
Cramer’s own view is not to bet on Williams when it comes to bottoming out gold. He reiterated: “The charts indicate that gold may be ready to go higher, and this could be the perfect time to make some buying.”
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