Gold prices capitulated as US financial markets came back to life after Monday’s Labor Day holiday. The metal shed 1.6 percent on Tuesday, marking the largest one-day drop in a month and erasing all of the gains scored in the wake of the Fed’s Jackson Hole symposium and Augusts’ US employment data.

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These catalysts fueled speculation that the Fed may delay the wind-back of QE asset purchases, the first phase in withdrawing expansive stimulus unleashed amid the Covid-19 outbreak. Chair Powell sought to disconnect tapering QE from interest rate hikes at Jackson Hole, and payrolls growth disappointed.

A rethink now seems to have occurred. As argued earlier, Mr Powell’s speech at Jackson Hole amounted to the most hawkish language from the US central bank since the start of the pandemic. That this was read as ‘dovish’ speaks to the success of the Fed’s effort at acclimating markets to the inevitability of tightening ahead.

As for the jobs report, a slightly nuanced read reveals that weak hiring came alongside surging wage inflation and a lower unemployment rate. This implies that the problem is not in the demand for workers, but in their supply. JOLTs data published this week putting job vacancies at a record high underscores this.

Worries about a wage-push inflationary spiral seem sensible in such a scenario, belated though they might be. This would see companies pass on higher labor costs to consumers, who then demand still-higher wages to cope. If such a cycle were triggered, recent price growth may be far less “transitory” than the Fed has asserted.

Will The ECB Help Underpin Gold Prices?

The spotlight now turns to the ECB. The markets seem to think that a slowing of asset-buying through the pandemic-triggered PEPP program may be in the cards at today’s policy announcement. That may clash with the central bank’s latest policy review however.

It called for “forceful or persistent” monetary policy measures when the economy is “close to the lower bound”. How this nebulous concept is defined may be key. GDP has recovered close to 80 percent of its pre-pandemic size, and growth rates are elevated. The jobless rate is a bit high at 8 percent however.

The PEPP program expires in March 2022, so the ECB may be encouraged to wait before pulling it and see if recent progress is sustainable. Such an outcome may underpin anti-fiat gold prices somewhat, at least in the near term. Taking a step toward tightening may have the opposite effect.

Later in the day, US jobless claims data and a slew of speeches from Fed officials will come into focus. Initial applications for benefits are expected to fall for the seventh consecutive week. Knock-on effects from Hurricane Ida may be an upside risk. Meanwhile, a pro-taper tone has emerged from recent Fed commentary.

Gold Technical Analysis - Rally Rejected Once Again. Now What?

Gold prices are licking their wounds after recoiling sharply lower on another test of familiar resistance at 1834.14. This barrier has firmly capped the upside since mid-July.

Support at 1787.37 is once again in play, with a daily close below that eyeing the next key threshold at 1755.50. Below that, the door may open for another run at the year’s lows below the $1700/oz figure.

Alternatively, establishing a foothold above 1834.14 sees the next layer of resistance running up into 1870.75. Another push above the $1900 figure to challenge May’s swing top at 1916.53 might follow beyond that.

Gold price chart created using TradingView