Gold Losing Streak Continues, What's Next?

A surging dollar last month has put gold prices under pressure, but a potential softening of US data has left open the chance for a rebound in the precious metal.

Hitting a Bottom in October

Gold prices dropped 4.6% in September and continued to trend lower at the start of October, racking up a nine-session losing streak. That would be the worst performance in the precious metal since 2016. Although there was some hope of a rebound after disappointing US data on Wednesday, analysts aren't sure that gold prices are ready to turn around. At least, not until more key data points come out over the coming days.

Thanks to the months-long run-up in the dollar, gold has been under pressure as yields have increased. Markets are starting to realise that the Fed will keep rates higher for longer while the Federal government will keep spending and dipping into the debt markets. This has seen interest rates moving higher across the board. But that supposes a strong economy that will keep inflationary pressures going thanks to, in part, a resilient labour market.

Chance for a Rebound

On Wednesday, ADP reported a disappointing number of jobs were created in September, according to their new methodology, with just 89K compared to the 160K forecast. The measure has lost its reputation for predicting NFP data, but the large gap nevertheless sent yields down and allowed gold's steep decline to pause for the first time this month. Analysts are speculating that the jobs numbers to come out on Friday could be weaker than anticipated, which would help ease some of the upward pressure on yields. Particularly if US CPI figures to be reported next week show that inflation is coming down faster than expected.

Data coming out in the leadup to the NFP is pointing in confusing directions, raising uncertainty about what the report will show. Markets are still unconvinced that the Fed will go through with another rate hike this year, even though that was shown in the summary of projections at the last FOMC meeting. This leaves gold open for a larger reaction to the NFP data, as investors worry that an overshoot could push the dollar higher or a miss in expectations could finally give gold the boost it needs to bounce off its latest lows.

Meanwhile, the World Gold Council (WGC) reported on Wednesday that investment demand for gold has been declining, but demand from central banks increased 38 tones in August, which could be a significant factor in holding long-term support.

Gold's Triangle Breakout

A bottom might be in when considering the bearish descending channel starting at $2085 an ounce, as prices reached the lower trendline and bounced. Further declines are possible while still maintaining price action within the channel, with the measured-move projection pointing at $1800, where the golden pocket of the full upward leg resides. Reclaiming $1850/oz may open up the possibility for a leg up to $1880 and perhaps $1900; losing the Fibo support will expose $1740.

Source: SpreadEx / GOLD

Key Takeaways

Gold prices are currently on a losing streak due to a strong dollar and rising yields. However, there is potential for a rebound if upcoming US data, such as job numbers and CPI figures, ease upward pressure on yields and inflation. The uncertainty surrounding the upcoming NFP report also leaves room for significant market reactions. Central banks' increased demand for gold could provide long-term support.