Gold (XAU) Price Forecast: Will the NFP Report Drive the Next Gold Breakout?

Rate Cut Expectations Keep Prices Near Record Highs

Gold prices remained elevated last week, hovering near the record high of $2,531.77 set on August 20. The precious metal’s strength continues to be driven by growing expectations of Federal Reserve rate cuts and ongoing geopolitical tensions. Despite a slight pullback on Friday following U.S. inflation data, gold finished the week down 0.36% and posted a 2.28% gain for the month of August.

Last week, Gold (XAU/USD) settled at $2503.40, down $9.09 or -0.36%.

Consolidation Near Record Levels

Following its surge to all-time highs the previous week, gold prices consolidated near these record levels throughout last week. This sustained strength reflects the market’s continued bullish sentiment, primarily fueled by anticipation of upcoming Fed policy changes. The slight retreat on Friday was largely attributed to the release of U.S. inflation data, which prompted some profit-taking but did not significantly alter the overall positive outlook for gold.

Fed Rate Cut Anticipation Fuels Rally

The primary driver behind gold’s bullish price action has been the anticipation of a September interest rate cut by the Federal Reserve. Fed Chair Jerome Powell’s recent comments at Jackson Hole, stating that “the time has come for policy to adjust,” have bolstered these expectations. Market participants have fully priced in a rate cut at the Fed’s September 18 meeting, with a 69% chance of a 25-basis-point reduction and a 31% chance of a 50-basis-point cut, according to the CME FedWatch Tool.

Inflation Data and Economic Indicators

Friday’s Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 0.2% in July, matching economists’ forecasts. This data confirms that inflation is no longer the Fed’s main concern, as they have shifted focus to unemployment. Other economic indicators, such as revised Q2 GDP growth of 3% and falling weekly jobless claims, have eased recession concerns while supporting the case for rate cuts.

Geopolitical Tensions and Central Bank Purchases

Ongoing tensions in the Middle East, particularly the lack of progress in ceasefire talks between Israel and Hamas, have fueled safe-haven demand for gold. Additionally, central bank purchases have provided further support to gold prices, with some analysts predicting gold could approach $3,000 by year-end.

Market Forecast

The outlook for gold remains cautiously bullish in the near term. The upcoming U.S. non-farm payroll report next week will be crucial in determining the size and pace of the Fed’s forthcoming rate cuts. A weaker-than-expected jobs report could increase the likelihood of a 50-basis-point rate cut in September, potentially driving gold prices higher.

However, traders should be aware of potential downside risks. Physical demand in top Asian consumers, particularly China, has remained lackluster despite new import quotas. Additionally, positioning in gold looks extremely stretched, with systematic trend followers effectively at maximum long positions.

In conclusion, while the broader trend for gold remains positive, supported by rate cut expectations and geopolitical uncertainties, the market may experience short-term volatility. Traders should closely monitor upcoming economic data, particularly the non-farm payroll report, for further clues on the Fed’s monetary policy direction and its impact on gold prices.