(Kitco News) The latest macro data out of the US pushed gold back to a six-month high after the US economy and employment showed signs of slowing.
The gold market was at one point just $25 off its key level of $1,900 an ounce on Friday, with Comex Gold last seen at $1,873.40 in February, up 2.4% on the week.
The week’s biggest macro event showed that US job growth slowed slightly in December, with US nonfarm payrolls rising by 223,000 last month. November data revised down to 256k new items added.
One of the gold-positive drivers from the report was easing wage pressures, which is a sign that inflation is cooling. Year-over-year average hourly earnings rose 4.6% last month. This was below market expectations of 5% and followed November’s revised down 4.8% gain.
“In total [the report] showed a slowly weakening economy with falling inflation and a still strong labor market. There’s just nothing recessionary about this report, but it was also a mixed report that had something for everyone,” said Nicky Shiels, Head of Metals Strategy at MKS PAMP.
The US services sector also contracted in December for the first time in 30 months, with the Service Purchasing Managers Index (PMI) coming in at 49.6%. The 6.9 percentage point decline surprised on the downside as market consensus calls suggested the index would come in at 55%.
“While the latest records suggest that GDP growth held up much better than expected in the fourth quarter of last year, this drop in ISM services will raise concerns that the economy is rapidly losing momentum and is on a soft footing in 2023 Foundation could have started,” said CIBC Capital Markets Senior Economist Andrew Grantham.
Gold surged in response to both data releases, hitting an intraday high of $1,875.20 – its highest level since June. “Gold jolts higher,” Shiels said. “The sharp decline in business activity and orders which, if sustained, raises concerns about the demand outlook.”
Next week’s performance is crucial
What gold does next will be critical to whether the precious metal can continue its rally, Shiels added.
“Subject to gold being able to hold its weekly gains (which is becoming increasingly likely) it solidifies the offensive way gold is trading since it established a slight uptrend since early November – always looking for reasons for one Rally,” she said on Friday. “There is a decent amount of bullish ‘pent-up demand’ carried over from last year that can be ignited at the right data point (CPI & PCE) will be much more meaningful,” Shiels said.
Gold showed signs of a bullish pattern in the fourth quarter of 2022 as the Federal Reserve was expected to pivot.
The next target gold needs to break is around $1,896.50, which is the 61.8% retracement of losses since last March’s peak near $2,070, said Marc Chandler, Managing Director of Bannockburn Global Forex. to Kitco News.
“I’m not convinced it’s going to get up there as momentum indicators are being stretched and I think the risk is greater than the roughly 1 in 3 chance that fed fund futures will see a 50 basis point hike price in at the FOMC meeting ending Feb 1,” Chandler explained. “That said, as long as the yellow metal holds above the $1,825-$1,830 area, the upside seems favored.”
Following Friday’s data, markets began pricing in a 74.2% chance of a 25 basis point rate hike in February, according to the CME’s FedWatch tool.
Gold has anticipated and priced in a slowdown in rate hikes by the Fed, but ETF investors have yet to be convinced before the rally can really begin, said Commerzbank analyst Barbara Lambrecht.
“The upswing is probably mainly due to the increased optimism of speculative financial investors, who are generally more fickle,” Lambrecht wrote on Friday. “However, a lasting price recovery on the gold market requires, above all, a change in mood among ETF investors, who remain cautious. They appear to be waiting for the US rate hike cycle to end. In the near term, we tend to see pullbacks in the gold market.”
data to view
Inflation is one of the key reports gold will be paying close attention to next week, especially after the Fed’s December meeting minutes showed that Federal Reserve officials believe more needs to be done to ease price pressures to fight.
“Federal Reserve officials remain concerned that policies need to be tightened and remain tight for a long period of time to ensure demand balances with the economy’s supply capacity and price pressures ease,” ING Chief Economist James said Knightly.
The market consensus expects annual inflation to slow to 6.5% in December from 7.1% in November.
Tuesday: Fed Chair Jerome Powell talks about ‘central bank independence’
Thursday: CPI, US Unemployment Claims
Friday: Consumer sentiment in Michigan
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