Gold market comment on behalf of Chris Weston

Market analysis on behalf of Chris Weston Head of Research at Pepperstone

The wind is to gold’s back and the market goes into US nonfarm payrolls long and strong and for good reason – the investment case for the yellow metal is clearly skewed towards higher levels, where notably the market has ramped up expectations of Fed easing to a point where the debate is whether the Fed need to front-load cuts in September or maintain a slow and steady approach to easing. Certainly, a weak US payrolls report, and notably if the unemployment rate ticks up to 4.2% or above, will see US swaps pricing move even closer to a 50bp cut in September, in turn, taking US 2yr yield further lower, and taking gold to a new all-time high and ever closer to $2500.

This is not just a rates story though – with geopolitical headlines in the Middle East offering alternative tailwinds, it feels prudent to consider the possibility that an escalation of the news flow through the weekend puts gold as a primary hedge, protecting portfolios should we see gapping risk on the Monday open – hedges that are already moving higher and offer capital gains are the even more compelling.

The fact that India has cut gold import duty adds a secondary layer of potential real demand, and when I consider the combination of these forces, I am surprised gold isn’t already testing $2500. Clearly, there is wood to chop to get through all-time highs of $2483, and we obviously can’t rule out a big jobs report, such is the low confidence we must forecast the US payrolls report. However, I would argue that gold will have a far greater rally on a weak payrolls report, than the potential sell-off we’ll see on a strong print.