Strong US jobs data continues to weigh on markets, and the impact could stretch into weeks, changing trading strategies for many financial assets. Accelerating employment and wage growth in July and upward revisions to June’s data have brought the start date of the unwinding of support programmes from the Fed closer, with broad implications for markets from a 7% collapse in gold and other commodity assets to pressure on equity markets.
Gold lost more than $40 on Friday, falling to $1762, closing the week below uptrend support. An avalanche of stop orders in Asian trading brought the spot price down to $1680, close to the lows of March. The intraday drop exceeded 4%, with a two-day total of losses exceeding 7%.
For the second time this year, a death cross is forming on the chart when the 50-day moving average falls under the 200-day moving average. All this is on top of breaking the long-term uptrend. Most worryingly for gold, the fundamentals are also very bearish.
Robust employment and wage growth are removing the last formal obstacles before the Fed starts cutting back on its asset purchase programme. Expectations have increased that these first cuts in the QE programme could come as soon as September.
The move from asset purchases at 120bn a month to zero will stretch over 6-9 months, but in the Fed rate futures on Friday, the first expectations of a rate hike in January 2022 appeared. It is a tiny 2.4% probability now, but there is only a 1/3 chance that current rates will stay by the end of next year. This is a much faster rate of normalisation than we have seen since the financial crisis.
As a result, nominal US interest rates are rising, returning interest in the dollar and causing pressure on gold. It is moving more dynamically than it has since 2008, so we may be now seeing a reversal as we saw in 2013, when the bear market for gold lasted until late 2015, recouping almost all the gains since the start of the financial crisis. An implication of this pattern to current prices suggests the potential for another 14% drop to the $1500 area.
However, it might be too early to open short positions yet. Gold might get some support from the buyers today and even in the coming days. However, for return to the uptrend, it should go above $1800 and cross its 50 and 200 MAs at $1820 for confirmation. Given the macroeconomic backdrop, this return looks overly optimistic. The chances of gold continuing its slide are much higher.
