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Can the Fed use this argument to support their case to push gold prices lower?
MAY 8, 2024

Credit: Kitco

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Spot gold prices did move to the upside and start the week on a positive note, but it appears that the recent comments from Fed officials are still very much weighing up the sentiment while the dollar index continues to creep higher.

Last week, gold prices closed the week in negative territory, and it was the first time in more than four weeks that we saw the yellow metal’s price closing in negative territory for two consecutive weeks. Gold prices rose and reached a record high, as many traders anticipated a much less hawkish tone from the Fed. However, last week, the Fed delivered a surprise and gave a more hawkish view of their monetary policy. This was ahead of the US NFP data, which once again gave many traders some hope that perhaps the Fed’s hand may be forced to do what they don’t want to do.

Fed Chairman Jerme Powel said last week that market players should think carefully if they think that the economy is heading towards a stagflation environment. And his argument was very much focused on the conversation about the health of the US labour market as well as US economic growth. However, Friday's payroll data provided many different perspectives for them and  for the precious metal traders. This is because the US job data not only missed the headline number and came below expectations, but also the wage number, which showed that perhaps the pressure on increasing wage numbers has also decreased. In addition, we also saw the US unemployment rate tick higher, which was another bad sign for the US job market.

The US labor data released on Friday provided less comfort for the Fed in terms of keeping rates higher for longer. The Fed is dissatisfied with the current inflation progress, as they stated in their own commentary last week. However, their argument has been that they can keep the interest rates higher for longer because the job market is strong, economic growth is robust, and above all, wage growth is also keeping pressure on the inflation data as employees are asking for higher wages. All of this kept pressure on the gold price. 

Traders know that the Fed will not have the same luxury of relying on their argument that the economy is strong, the labour market is robust, and they can keep interest rates higher for longer. However, a single job report is insufficient to drastically alter the Fed's stance, and we are likely to hear this very argument from the Fed members scheduled to speak this week. FOMC members Barr and Daily, who are scheduled to speak later this week, are more than likely to argue on this point, and that may provide some tailwind for the dollar index. Any strength in the dollar index would be negative for the gold price.

In terms of the price action, the price has a long way to go to test its main support zone, which is near the 2,138 price handle. This means that we may not find strong buys until then, and the gradual move in price may be a slow grind to the downside. However, the price is trading near its minor support zone, which is represented by the dotted green line, and if this support level holds, we are likely to move higher from here.

At Mercury Gold, we believe in gold as an investment due to its long term value appreciation and its role as an inflation hedge.

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