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Gold bulls would have been disappointed by the price action of the precious metal so far this month. Spot gold (XAUUSD) prices began the month on the front foot, rallying to multi-week highs in the $1830s on the 3rd of September in wake of a weaker than expected headline US August payrolls number (the US economy added just 253K jobs in August versus forecasts for jobs gains of around 750K). That’s because the initial reaction to the weaker than expected headline US payroll number was traders assuming it would result in the FOMC delaying their QE taper plans, resulting in US dollar weakness which was of course also accompanied by gold price strength.
However, the early September gains were short-lived. By the start of last week, spot gold prices had already slumped back below the 200DMA at $1810 and the key $1800 level and have ever since been stuck in a $1780-$1800ish range. The roughly 2.5% slide in gold prices from early September peaks coincides with a roughly 1.0% pick up in the US dollar from the earlier monthly lows; in wake of the weaker than expected August US payroll number, the DXY briefly fell under 92.00, but has since recovered back to fresh monthly highs in the 92.80s, pushing it back to the north of its 50DMA at 92.65 and the 21DMA at 92.76. At the same time, US bond yields have had a modestly upwards bias; prior to the August jobs report, 10-year yields were under 1.30% but have since remained pretty well supported above this level.
Analysts have cited a few reasons as to why markets have made this about-face since the start of the month. The first is that, upon second look, the weak August payroll number seemed to make US labour market conditions look worse than they actually are; the unemployment rate still fell to a post-pandemic low of 5.2% and weekly initial jobless claims continue to trend back towards pre-pandemic levels. Meanwhile, evidence continues to grow that US labour market is tightening; Average Hourly Earnings growth was much higher than expected in the August labour market report and the most recent JOLTs number for July showed job openings hitting nearly 11M (way more than the total number of unemployed persons in the US currently) – both suggest there is currently strong competition amongst employers for workers, suggesting further wage inflation as seen in August may be ahead (wage inflation often leads consumer price inflation by a few months). Finally, to the disappointment of the doves, FOMC policymakers have stuck by their stance that starting to wind down the bank’s QE programme by the end of the year is likely appropriate – the doves had been hoping Fed policymakers might signal a more patient stance on QE tapering amid rising Covid-19 infections in the US (and globally) and recent evidence of economic slowdown (not just in the jobs data, but also in recent business surveys for August).
In terms of what is next for gold prices; with the Fed now in blackout (meaning no policy-related speeches from FOMC members ahead of the 21st-22nd of September policy meeting), there will not be any more Fed speak this week and focus will instead be on some key US data releases. The August CPI report on Tuesday will undoubtedly garner the most attention, though FOMC makers continue to reiterate their stance that the spike in CPI in 2021 will be “transitory”. Thus, even if this Tuesday’s CPI report does come in stronger than expected the reaction in FX, bond and precious metal markets is likely to be limited. Indeed, the major theme right now with regards to the Fed is what their QE taper timeline is going to look like. The next few CPI data releases seem unlikely to factor too much into the Fed’s decision-making process on this, aside from perhaps strengthening the hawkish argument to wind down QE purchases sooner rather than later just in case inflation continues to remain elevated and rate hikes are needed in mid-2022. In that regard, inflation will play a much more important role in the Fed’s decision-making process when it comes to rate hikes next year or the year after; FOMC members have flagged in the last few weeks that inflation risks lay to the upside – the key question is not how high consumer price inflation in the US goes (its already shot well above 5.0% YoY), but the duration that its stays at these more elevated levels. If inflation proves not to be transitory as the Fed currently says it is, rates hikes will be on the table (this would likely be USD positive and gold negative), but we will not know if inflation is transitory or not yet for many months – the transitory or not nature of inflation is set to be a key debate/market theme in early 2022.
Other key US data releases this week include 1) August Industrial Production and the September NY Fed Manufacturing survey on Wednesday, 2) August Retail Sales and the September Philly Fed Manufacturing survey on Thursday and 3) the preliminary September University of Michigan Consumer Sentiment survey on Friday – business survey data from August pointed to a slowdown in the economy as the rise in US Covid-19 infections, in particular, weighed on the travel, leisure and hospitality sectors, but it is unclear as to the extent by which this will dent August Industrial Production and Retail Sales data. The September survey data out this week may well point to a continued deterioration in business conditions and confidence in the US economy this month; if this triggers any safe-haven demand, it seems likely that traders would favour USD over gold in the coming week given that the Fed seems set to press ahead with QE tapering despite rising domestic economic risks and slowing growth.
After this week, the key event of the month is of course the FOMC rate decision on the 22nd. Barring a dovish surprise (i.e. the Fed dropping its stance that it will likely begin tapering QE purchases by the end of the year), the risks seem tilted to the upside for the USD and to the downside for gold. As a result, Citi recently revealed new projections that spot gold would trade within a lower range closer to the $1700 level over the coming months.
