Gold Volatile Ahead Of Jobs Data

As investors prepare for the US nonfarm payroll report later in the day and then dive directly into the long Labor Day holiday weekend in the US. Gold bounced off a new lows seen on Wednesday to trade at 1316.85 after the release of a slew of economic data from the US on Thursday. The weekly unemployment claims report printed better than expected with Unit Labor Costs surging much better than expected. US manufacturing data was mixed with the headline report coming in lower than expected but well within its means.

Investors may read the weakness in manufacturing as potentially giving the Federal Reserve reason to pause in its hope to raise interest rates in the next three months. Expectations for a rate increase ratcheted higher last week after comments from Fed Chairwoman Janet Yellen and the Fed’s No.2 Stanley Fischer said the central bank aimed to lift benchmark rates sooner than later. Fischer implied that two rate hikes might be in the cards in the near term. The Institute for Supply Management, said Thursday its manufacturing index in August fell to 49.4% from 52.6% last month. A reading below 50% signals contraction. A similar gauge, the Markit manufacturing purchasing managers index, fell to 52 from 52.9% in July.

The U.S. Dollar Index fell 0.4% and gold pivoted higher, up 0.4% after the report. The greenback tends to weaken when expectations of a rate increase diminish, which can lift commodities priced in the currency. Gold touched its lowest level since the UK voted to leave the European Union back in June as it just managed to keep its head above the 1,300 mark on Wednesday.

The precious metal did recover somewhat in the afternoon session to actually post a small gain, although it remains under pressure from renewed confidence that the Federal Reserve will raise interest rates before 2016 is out. The Fed has previously said that it would seriously consider upping rates should US data continue to point towards a recovering economy.

Payroll processor ADP yesterday estimated that non-farm private employment rose by more than analysts had expected in August.

Reuters printed that “We expect a Fed interest rate hike in December.” An upbeat payrolls report would reinforce the view that a US rate increase is likely before the end of the year after Fed Chair Janet Yellen said on Friday that the case for higher rates was strengthening. On Wednesday Boston Fed President Eric Rosengren said the Fed should consider that quicker interest rate rises over time could stave off risks to the economy, while Chicago Fed President Charles Evans said he was increasingly convinced that US economic growth had slowed permanently.

Gold is highly sensitive to rising US interest rates, which increase the opportunity cost of holding the non-yielding asset while boosting the dollar, in which it is priced. “Technicals show that gold and silver prices need some correction and will see some mild rebound. But Friday’s jobs data is going to be crucial,” said Jiang Shu, chief analyst at Shandong Gold Group. “If the jobs data is going to be good, gold will fall to 1,260-$1,270 levels as markets will hope for a rate hike in September.”

Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, posted the first monthly dip for four months in August. They fell 1.27 percent to 943.23 tons on Wednesday and were down 1.6 percent for the month. In other precious metals, silver gained 0.1 percent at 18.63 an ounce while palladium rose 0.2 percent to 670.75. Platinum was up 0.2 percent at 1,050, having touched an eight-week low of 1,043.20 on Wednesday

Gold has now broken through its July lows which probably means we have a failed daily cycle. This means an intermediate cycle is now probably in decline although we should get a snap-back rally out of this lows any day now. Long-term gold bulls should honor stops at the May lows as a break of this would definitely mean lower prices ahead.