Gold may extend falls if NFP tops expectations, testing key support level

The price of gold fell sharply in dollar terms on Thursday as the US currency appreciated (vis-à-vis the EUR/USD pair) in response to the European Central Bank’s surprise easing measures that were aimed at stimulating growth and stocking inflation in the single currency bloc. The ECB unexpectedly cut its benchmark interest rate to 0.05% from 0.15% and the deposit rate to negative 0.2 per cent. The Bank also announced that it will start buying asset-backed securities (ABS) in October. As the ECB’s actions are likely to enhance the appeal of European stocks and weaken the euro, which would in turn boost the dollar, some of the commodities that are denominated in the buck, such as gold, are likely to lose out. What’s more, the improving health of the US economy suggests a rate hike from the Federal Reserve could be just months away. This also points to a stronger dollar. Investment demand for gold is thus likely to remain subdued for the time being; it will most likely pick up once stocks have peaked or the global economy is strong enough to suggest physical demand for the yellow metal would surge. This is why we believe ETF outflows have gathered momentum once again. Yesterday alone, the SPDR Gold Trust, the world’s largest gold-backed ETF, reported its third consecutive outflow, this time by nearly 5 tons. So far this week, SPDR’s holding have been reduced by more than 9 tons already.

One potential source of support in the near-term may come from jewellery demand from India in the lead up to their wedding season which unofficially starts later this month. However the impact of this has diminished in recent years because India is no longer the world’s largest gold consumer, partly as a result of the on-going import restrictions on precious metals. Nevertheless, the prospects for a stronger-than-expected demand in this wedding season may cause the of price gold to appreciate over the coming weeks.

In terms of today’s session, the focus is obviously on the US nonfarm payrolls report, due at 13:30 BST (8:30 ET). The world’s largest economy is expected to have added some 225 thousand jobs in August and the rate of unemployment is seen falling back to 6.1% from 6.2%. If correct, this would be the seventh consecutive month that we will have a 200K-plus reading for the NFP, a run last achieved in 1997. Leading up to the NFP release, we have had some mixed but generally healthy indications about the performance of the labour market. For example, although the ADP private sector payrolls disappointed expectations on Thursday, it was still above that 200K mark, while the employment component of the ISM services PMI was also strong. Thus if the jobs report meets or tops expectations then one would expect the US dollar to appreciate and gold prices to fall back. The opposite is also true.

Technical outlook

There are a couple of contradictory technical indicators in play. Yesterday’s sell-off has created a huge bearish engulfing candle on the daily chart of gold, which obviously is not something the bulls would have liked to see. On top of this, gold has broken out of a long-term triangle pattern to the downside following Monday’s sell-off. Both of these development point to lower prices. However gold has now reached a key Fibonacci support zone between $1254 and $1262 (78.6% retracement of up move from June low and 161.8% extension of a corrective move in August). This is also the location of point “D” of a Bullish Gartley pattern. So, there is a possibility for a move higher from here, although a break below $1254 could lead to a quick drop towards $1240, the June low point. Meanwhile resistance comes in at $1275/77. A potential break above this area may open the way for a run towards $1295.