Gold drops in the aftermath of NFP, but holds above key level

Gold was weaker this morning as the dollar strengthened on expectations that the US employment report for the month of June would surprise to the upside. Sure enough, the headline nonfarm payrolls number came in much better at 288,000 while the rate of unemployment dropped to 6.1%, which was its lowest level since September 2008. As a result, gold prices fell further in the immediate aftermath of the employment report to hit a session low of about $1310. However, this is where it bounced back from and at the time of this writing the metal was $10 off its low at $1320.

The bounce-back from $1310 was in part a technical move as this level ties in with the upper side of a long-term bearish trend line that was recently broken. In other words, the broken trend line turned into support as some of the sellers from earlier in the day closed their positions there. Some speculators may have opened short-term bullish positions there too, which make sense considering the technical importance of this level. In any case, gold has rebounded there and this is an interesting move as it suggests we may after all see a potential rally that was promised by the break of the long-term bearish trend line last week. However a potential close back below $1310 would invalidate this view and may lead to a sharp move lower, perhaps towards the next key support at $1285.

Of course, the US data is only partly responsible for the fluctuation in the price of gold today; there are so many other known and unknown variables that drive prices, including the technicals as the paragraph above (hopefully) makes clear. Ultimately, it is the market sentiment that drives prices and this is where technical analysis can become really useful as it provides a graphical view of the sentiment. Indeed, the break of that long-term bearish trend and today’s rebound at $1310 suggests sentiment may have changed – at least in the short-term anyway. Some bullish indications have also been evidenced in the ETF market recently. For example, the world’s largest gold-backed ETF, the SPDR Gold Trust, has recorded gold inflows of more than 11 tons this week alone. At 796.39 tons, total gold holdings in the trust are at their highest level since the middle of April. However this is still quite low on a historical basis. For gold to stage a more meaningful rally, we will need to see inflows increase significantly. Meanwhile with the Dow and S&P hitting record levels almost on a daily basis, it suggests investors are still favouring equities over gold. The resilient US stock markets means gold prices may struggle to push significantly higher over the medium term: unlike equities or fixed income products, the metal pays no dividend or interest, and costs money to store.