Gold erases overnight gains as stocks stabilise, NFP eyed

Gold rallied to a fresh nine-week high of $1112 in overnight trading before dropping by a good $15 to trade back below $1100 at the time of this writing. The People’s Bank of China fixed the USD/CNY lower a day after the Chinese authorities decided to abort the circuit breaker after it was triggered twice this week following the big drops in Chinese stocks. This, as well as short-covering ahead of today’s US jobs report and the weekend helped to stabilise the stock markets which have had their worst ever start to a year in the US and the worst since at least the 1970s in Europe, according to Goldman Sachs. So, gold’s intraday drop is due to the slightly positive tone in the stock markets which has reduced the demand for safe haven assets such as gold.

But it is the “NFP day” of course and so stocks and the US dollar will be in focus again when the data is released at 13:30 GMT or 08:30 ET (read my US colleague Matt Weller’s employment report preview). If the jobs data comes out stronger then the dollar will most likely rally, though it remains to be seen how the equity markets will react as so far this week’s positive global economic data have been shrugged off. Gold will most likely show an initial inverse reaction to the volatility in the dollar, though the twain’s historically-strong negative correlation has weakened somewhat in recent times. Given the current market environment, we think that the reaction of the stock markets to the data will be even more important as it could provide a good clue in terms of the metal’s direction later in the day and in early next week. Today's close on Wall Street will therefore be very important for equities, and by extension gold. A strong positive close there will bode well for stocks in early next week; else we should expect more of the same. But concerns about China could increase further by Tuesday because that’s when the latest trade figures from the world’s second largest economy are released. So, the precious metal may be able to further extend its gains in the near term, or at the very least maintain a bullish bias which could discourage selling.

From a technical perspective, gold’s break above the high of the recent consolidation range around $1080 is bullish. But although it has already moved above the next key resistance area between $1098 and $1104, the precious metal has pulled back today to trade below this range. Thus, there is a risk that the downward trend could resume as early as today, especially if global equities manage to hold onto their gains and the US dollar rallies, say as a result of a stronger US jobs data. A failure here could see the metal head back towards the previous resistances such as $1080 and what it does next will depend on the bulls’ willingness – or lack thereof – to defend that level. A decisive break below $1080 would be bearish.

On the contrary, if the buyers decide to show up and support gold again today then this would pave the way for a move towards the 61.8% Fibonacci retracement level of the most recent downswing at $1136. It is also possible for gold to even rally towards the 200-day moving average, currently at just shy of $1140, or even the 78.6% retracement at $1160. The latter also ties in with a long-term bearish trend line, making it a significant resistance area should we get there.