Can ISM End Gold's 2-Week Winning Streak?

Gold has gained for two consecutive weeks on a weaker dollar and a more bullish outlook for China. But this week has some data releases that could pose headwinds for the yellow metal.

The Big Data Movers

Most recently, gold had a roller-coaster on Friday. First, it popped higher after the jobs report showed that the labour market in the US was cooling. Then it turned around when the ISM Manufacturing PMI report came out, but it still managed to close the week on a well-positive tone. Of course, it wasn't the data directly affecting the price of gold, but one of the critical factors was expectations around the Fed. There are many Fed speakers this week ahead of the blackout period that precedes the September interest rate decision.

The latest NFP showed unemployment ticked up and job creation was sluggish, suggesting that the tightness in the labour market might ease. That would allow the Fed to avoid raising rates one last time. The dollar naturally weakened and supported the price of gold. The ISM Manufacturing PMI, on the other hand, showed a substantial rise in prices paid. With the indicator still in contraction, part of the narrative that the Fed wouldn't hike remained intact, but the price issue suggests that inflation could still be a problem. A look at the ISM Services PMI, which comes out tomorrow, might help solidify this concern or relieve markets. The Services sector is evidently larger than Manufacturing and is more consumer-facing, so its prices paid component could better indicate where inflation pressures are going and what the Fed could do about it.

A Return to Optimism

The other dynamic playing out last week is the large amount of stimulus the Chinese government has been putting out. This has helped reassure investors, with Asian indices rising with a corresponding drop in appetite for safe havens like gold. More than that, though, the PBOC, in dealing with a weakening yuan that it is trying to defend, is still buying up gold. That's not unique to China, as many central banks have been building up their bullion reserves. Despite the underlying economic issues, China is one of the largest buyers of gold. This suggests that the yellow metal could keep getting support even if the Chinese economy underperforms this year.

US ISM Services PMI is expected to remain in expansion at 52.4 but slightly down from 52.7 prior. If the services sector in the world's largest economy continues expanding, it could keep risk appetite up. But the prices component is expected to get renewed focus, and the consensus among forecasters is for it to come down slightly to 56.4 from 56.8. Another blowout could bring back worries of another Fed rate hike in November and hamper the price of gold, as US treasury yields would be expected to rise.

Gold in Triangle?

Gold prices resemble an incomplete triangle pattern pending further descends towards the lower ascending trendline. If prices remain above the local low at $1915 per ounce without breaking past $1980, the pattern will have increased chances of being completed sooner rather than later. This would have at least the $1950 support succumb. But if short-term support holds firm or bears cannot reach it, a move past the regional resistance at $1980 could bolster prices near $2k to form a symmetrical triangle instead,  with a break above $2020 an ounce validating it -- depending on whether there is an attempt at $1950/oz and lower, which would open up the $1800 handle.

Source: SpreadEx / GOLD

Key Takeaways

Gold has experienced two consecutive weeks of gains due to a weaker dollar and a positive outlook for China. However, upcoming data releases could impact gold prices. The employment report showed a cooling US labour market, potentially allowing the Fed to avoid raising rates. On the other hand, the ISM Manufacturing PMI indicated rising prices, suggesting that inflation may still be a concern, leaving the heavy lifting on the ISM Services PMI due tomorrow. Additionally, gold purchases by the PBOC continue to support the yellow metal, even if the Chinese economy underperforms or the government stimulates it.