Gold Range Tightens- Battle Lines Drawn For Next Move
Fundamental Forecast for Gold: Neutral
- Crude Oil, Gold May Rise if US Jobs Data Outperforms
- Gold Range Tightens Up Before NFP
- Gold Trades Within March 1 Range for 3rd Day
Our neutral bias over the past two weeks has been well warranted with gold holding a tight range below key interim resistance at $1585. Bullion closed the week fractionally higher with prices advancing by just 0.12% to trade at $1577 at the close of trade in New York on Friday. The gains come amid continued strength in broader equity markets with the S&P marking its first six-day rally since November and the Dow pushing its fourth day of fresh record highs. Still, the gold trade has been uninspiring as of late and the risk for a near-term correction higher and largely range-bound price action has us on the sidelines pending a breach above interim resistance at $1585 or a break below critical support at $1550.
Central bank rate decisions from the RBA, ECB, BoE and the BoC had little impact on gold prices with Friday's US employment report fueling the largest range of the week. February non-farm payrolls came in at 236K, far surpassing consensus estimates for print of just 165K with the unemployment rate unexpectedly falling to 7.7% from 7.9%. Although the headline data looks rather robust, a deeper look at the metrics warrant a more conservative outlook as the size of the labor force contracted by 130K alongside a downward revision of last month's NFP print to 119K from 157K. The participation rate, a metric I have followed rather closely, also fell from 63.6 to 63.5, its lowest level since August and far off its October high of 63.8. It's important to note that a contracting labor force does put artificial downside pressure on the unemployment rate and while February did see broader job gains, the overall outlook for the labor market does suggest a slow and prolonged recovery. As such, QE operations from the Fed are unlikely to cease anytime in the immediate future, possibly offering some support to gold prices. . for now.
Looking ahead to next week, investors will be closely eyeing economic data out of the US with retail sales, CPI and consumer confidence data all on tap. Advanced retail sales on Wednesday is expected to show an increase of 0.5% in February, up from a previous print of just 0.1% and a stronger print here would reinforce the broader strength seen in the consumer base with the University of Michigan consumer confidence report expected to post its third consecutive monthly gain. Inflation data on Friday is likely to have the largest impact on gold with consensus estimates calling for a February print of 1.8% y/y as core prices top 2% y/y for the first time since October. Should inflation top expectations, gold prices could see a reprieve from the recent decline off the 2013 highs with such a scenario likely to trigger the correction we've been looking for.
The immediate market reaction to the NFP report was marked by substantial USD strength which helped drive gold as low as $1561 (fresh March Low) before rebounding sharply to pare nearly the entire decline. The reaction and magnitude of the rebound off trendline support of the operative descending channel this week should be respected and while out broader bias remains weighted to the downside, we will maintain a neutral stance at these levels as the range tightens while noting that a break above interim Fibonacci resistance at $1585 is likely to mark a more substantial correction towards key resistance in the range between $1626 and $1631. Only a weekly close above the 100% extension at $1631 would invalidate our broader bias. Note that a break below critical support in the range between $1550-$1555 puts us back on track with such a scenario eying subsequent targets at the May 2012 lows at $1527 and the 78.6% long-term Fibonacci extension taken from the descent off the record highs at $1483. Bottom line, looking for ranging price action to prevail until we clear the broader monthly range to signal the next secondary trend. -MB