Photo by Dmitry Demidko on Unsplash

Gold Key Points

• Gold prices (XAU/USD) extends gains, up 1.6% for the week.
• NFP jobs data exceeds all forecasts, adding pressure on the Fed.
• Geopolitical uncertainty remains, haven bids still in play.

Gold (XAU/USD) prices surged ahead this week, reaching a high of $1794.23, 6.7% off the yearly lows with a rebound off support. Bullion surged 1.5% on Thursday, and it has been having a run of three straight weekly gains after China fired missiles over Taiwan during military drills. Beijing has responded aggressively to US House Speaker Nancy Pelosi’s visit to the island this week, the highest-ranking American politician to go there in 25 years.

Gold has benefited from a weakening dollar, falling US bond yields, and some haven support amid the ongoing geopolitical risks. Bullish comments from Federal Reserve officials pledged the central bank would continue an aggressive fight to cool soaring inflation.

Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, said on Thursday that the Fed should raise interest rates to above 4% in order to bring inflation back down to target. These comments had little effect on the price of gold as haven demand persisted.

Source: Bloomberg

Surging US Job Growth Threatens to Derail the Bullion Rally

US employers added more than double the number of jobs forecast, illustrating rock-solid labor demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation. Treasury rates spiked higher on bets that the Fed will continue raising borrowing costs aggressively to cool demand and tame rampant inflationary forces.

While strong hiring conditions may lead the Fed to press ahead with plans to front-load hikes, they should ease worries that the economy is headed over a cliff. This may help stabilize risk appetite in the near-term, leading to haven demand softening and gold prices declining.

With the Fed confirming its affinity for data dependent decisions, we will get a better picture of the inflation profile next week when the U.S. Bureau of Labor Statistics releases the July consumer price index. CPI is seen rising 0.3% month-over-month, which the annual rate is expected to fall to 8.9%, from 9.1% in the previous month.

Geopolitical Uncertainty Remains

The fallout from US House Speaker Nancy Pelosi’s visit to Taiwan kept markets on edge for most of the week. Anxiety eased somewhat after the trip ended. However, China has since started military drills in areas surrounding the island. China fired 11 Donfeng ballistic missiles into waters surrounding Taiwan in the biggest test in decades.

China's Foreign Ministry announced new countermeasures against Washington on Friday, including the suspension of climate talks, cooperation on the repatriation of illegal immigrants, legal assistance on criminal matters, and the combat of transnational crimes. Should we see a continued escalation of tensions, we could see haven demand grow even stronger, with bullion likely to be one of the major winners.

XAU/USD Daily Chart

Source: TradingView, prepared by Zain Vawda

Final Thoughts and the Week Ahead

The market reaction following the NFP jobs report saw an immediate decline of $26 on XAU/USD from around $1790 to $1764 before rallying higher once more. The 50-SMA provides resistance while we trade between the 20- and 50-SMA. The daily candle looks set to close as an inside bar bearish candlestick, which would hint at further downside as we begin the new week, while the $1800 key psychological level rests just above this week’s highs.

As investors and more importantly the US Federal Reserve continue to closely monitor data and sentiment seems to shift after every release at the minute, next week's inflation data is set to show inflation still at uncomfortably high levels. Should this be the case, we could see a resurgent dollar, which could lead to further downside for the precious metal.

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