Gold falls as traders increase Fed hawkish bets after stellar NFP

Gold prices declined by nearly 0.80% on Friday, following a drop of over 2% after the release of a positive US jobs report. The Greenback strengthened due to speculation that the Federal Reserve (Fed) might raise interest rates if inflation data next week proves to be more robust than anticipated. Nonfarm Payrolls for August exceeded expectations, coming in at 162K, while July’s figure was revised upward to 21K.

The unemployment rate remained steady at 4.1%. This data reassured Fed officials that rate hikes, if necessary, could be executed without adversely affecting the labor market. Fed Chairman Kevin Warsh had previously described the job market as "consistent with full employment" in a speech in Jackson Hole, adopting a more hawkish stance and emphasizing inflation as the primary objective.

Fed Governor Christopher Waller noted that the Fed is not eager to raise rates if inflation eases, but a weak data release next week could prompt a rate increase at the Federal Open Market Committee (FOMC) meeting. The probability of a rate hike by the Fed at the September meeting has risen to 61%, up from 54% the previous day, according to Prime Terminal.

US Treasury yields, particularly the 10-year T-note, reached a peak of 4.81% before retracting some post-NFP gains and are currently at 4.768%. The US Dollar Index (DXY), which gauges the performance of the US Dollar against six currencies, increased by 0.13% to 99.13. Following the US NFP release, traders are watching out for next week’s producer and consumer inflation reports.

If both reports indicate persistent disinflation, a rate hike may not be necessary. The upcoming economic highlights for the week include the release of the Producer Price Index (PPI), the Consumer Price Index (CPI), jobless claims data, the US Monthly Budget Statement, and the University of Michigan Consumer Sentiment for September.

Gold is expected to trade within a range, with support near the 100-day Simple Moving Average (SMA) at $4,354 and resistance above the 200-day SMA at $4,534. The Relative Strength Index (RSI) is bullish but trending downward toward the neutral 50 level, suggesting that sellers are gaining momentum. For a bearish continuation, XAU/USD must fall below $4,400, followed by the 100-day SMA.

In such a scenario, the next target would be the day's low at $4,282. Conversely, for a bullish continuation, Gold must surpass $4,450. Should buyers build enough momentum, they could challenge $4,500 before targeting August's monthly high of $4,697. Gold has been a significant asset throughout history, serving as a store of value and medium of exchange.

Currently, apart from its aesthetic appeal and use in jewelry, gold is widely regarded as a safe-haven asset, viewed as a wise investment during turbulent times. Central banks are the largest holders of gold, diversifying their reserves by purchasing gold to bolster perceived economic and currency strength, especially in times of uncertainty.

Central banks added 1,136 tonnes of gold, valued at approximately $70 billion, to their reserves in 2022, marking the highest annual purchase since records began. This significant increase in gold reserves is primarily attributed to central banks from emerging economies such as China, India, and Turkey. Gold has an inverse relationship with the US Dollar and US Treasuries, both of which are major reserve and safe-haven assets.

When the Dollar weakens, Gold tends to increase, providing investors and central banks with an opportunity to diversify their assets during turbulent periods. Gold is also inversely correlated with risk assets. A surge in the stock market tends to weaken Gold prices, while sell-offs in riskier markets favor the precious metal. Various factors can influence Gold's price.

Geopolitical instability or fears of a severe recession can quickly escalate Gold prices due to its status as a safe-haven asset. As a yield-less asset, Gold typically rises when interest rates are low and declines when rates are high. However, most price movements depend on the behavior of the US Dollar (USD), as Gold is priced in dollars (XAU/USD).

A strong Dollar tends to suppress the price of Gold, while a weaker Dollar is likely to push Gold prices up.