Gold’s weekly update: US government shutdown in sight

Gold’s price has continued in its upwards ascent, marking new all-time highs along the way since our last report. In today’s report on a fundamentals level, we are to have a look at the possible implications of a US Government shutdown tomorrow, and the upcoming release of the US Employment data on Friday. For a rounder view we are to conclude the report with a technical analysis of gold’s daily chart.

US government shutdown looms over the markets

The US government could possibly shut down tomorrow. The US government is on track to shut down in less than 15 hours, after President Trump and Congressional leaders failed to reach an 11th-hour agreement on Monday. Moreover, following the failed meeting, Vice President Vance stated that “I think we are headed to a shutdown because the Democrats won’t do the right thing” after Democrats refused to approve the Republicans’ request for a short-term agreement or a continuing resolution, which would extend the deadline and keep the government running until the 21st of November. As a reminder, should the government shut down, it would only be the 14th time that this has occurred. In our view a government shutdown may not immediately influence the markets significantly, yet with this possible shutdown, there appear to be some concerns that it may not be resolved in the near term and could possibly be a prolonged shutdown. The possibility of a prolonged shutdown could lead to an approximate decline in the quarterly GDP rate from 0.1% to 0.3% for each week that the Government is shut down, per Euronews and thus any prolonged shutdown could have dire consequences for the US economy. Therefore, should a government shutdown occur, the uncertainty and volatility that may ensue could funnel inflows into gold given its safe-haven asset status. In conclusion, it is our view that the US Government may shut down as a result of a failure of the Democrats and Republicans to reach an amicable deal, even a temporary one. Hence, should our view turn into reality, we may see gold’s price moving higher for each day that passes, where no concrete progress is made in order to reach an agreement to provide government funding. On the other hand, should an agreement be reached, gold’s price could face some temporary outflows and may see its price experiencing downwards pressures.

US employment data this week

The US Employment data is expected to be released on Friday and as usual, is expected to garner significant attention from market participants. The current expectations are for the Non-Farm Payrolls figure to come in at 39k and for the unemployment rate to remain steady at 4.3% and thus with the NFP figure expected to showcase a slight improvement since last months figure it could aid the dollar. However, we must look at the bigger picture and thus a 39k figure still showcases a loosening labour market and could further spark worries about the state of the US Employment market in spite of the unemployment rate being expected to remain steady at 4.3% and thus any amplified worries could weigh on the dollar whilst aiding gold’s price given their inverse relationship. Moreover, as we mentioned in our previous paragraph, the US Government could possibly shutdown tomorrow, which may result in a delay for the release of the Employment data. In turn a possible delay in the release of the US Employment data could lead to heightened volatility in the markets as the delay may cause concerns and speculations as to the current state of the US Employment market, which could weigh on the dollar and aid gold’s price.

Technical analysis

XAU/USD daily chart

• Support: 3740 (S1), 3620 (S2), 3500 (S3).
• Resistance: 3860 (R1), 3980 (R2), 4100 (R3).

XAU/USD appears to be moving in an upwards fashion. We opt for a bullish outlook for gold’s price and supporting our case is the RSI indicator below our chart which currently registers a figure above 70, implying a strong bullish market sentiment. Yet at the same time a figure above 70 also implies that the asset is in overbought levels and may due a correction to lower ground. For our bullish outlook to continue we would require a break above our 3860 (R1) resistance level, with the next possible target for the bulls being our hypothetical 3980 (R2) resistance line. On the other hand, for a bearish outlook we would require a clear break below our 3740 (S1) support line with the next possible target for the bears being the 3620 (S2) support level. Lastly, for a sideways bias we would require gold’s price to remain confined between our 3740 (S1) support level and 3860 (R2) resistance line.