Gold futures continued to climb last week, hitting a six-month high. The rally was driven by a weaker U.S. Dollar, concerns over a possible recession and heightened volatility in the U.S. equity markets. Another drop in U.S. Treasury yields helped make the U.S. Dollar a less-desirable investment. The greenback was further pressured by a surge in demand for the safe-haven Japanese Yen and Swiss Franc.
Last week, February Comex Gold settled at $1283.00, up $24/90 or +1.98%.
Now that momentum is clearly to the upside, gold futures could continue to climb because of the shift in investor tone toward the U.S. Dollar. This is being led by the decline in U.S. Treasury. The softer tone from the U.S. Federal Reserve is the catalyst behind this move. Traders are pricing in the strong possibility the Fed may take a pause in its aggressive mission to raise rates in 2019.
Continuing heightened volatility and weakness in the U.S. equity markets should also continue to be supportive of higher gold prices because this may be an early indication that investors are pricing in a potential global economic slowdown, and more importantly a U.S. economic recession.
Gold investors are also likely to react to any news regarding the partial U.S. government shutdown. Congress is expected to attack this issue on January 4 when it reconvenes after the holidays. The current price action suggests that the market has not priced in when this situation will come to an end.
The major reports that could move the market come later in the week. The first key report is ISM Manufacturing PMI. It is expected to come in at 58.2, slightly below the previously reported 59.3.
The major report on Friday will be the December U.S. Non-Farm Payrolls report. It is expected to show the economy added 181K jobs, up from 155K. The unemployment rate is expected to remain steady at 3.7%. Average Hourly Earnings is forecast to have risen by 0.3%.
Since the market seems to think the economy is not as strong as the Fed surmises, the jobs report could offer some major insights into the central bank’s next move on interest rates.
A stronger than expected jobs report will support the Fed’s notion that the economy is strong and needs to be tamed with consistent rate hikes. A weaker than expected report will throw more support towards a weakening economy.
The Fed’s stance on future rate hikes may be clarified on Friday at 1515 GMT when Fed Chair Jerome Powell delivers a speech at an economic conference. Risk appetite could deteriorate further if Powell comes across as hawkish. This should be supportive for gold prices.
Technically, February Comex gold will begin to strengthen over $1285.70. The trigger point for an acceleration to the upside is $1312.30.