Trade Of The Week: Are Gold Bears Back In Town?

The past few days have been rocky for gold.

After briefly punching above the 50-day Simple Moving Average early last week, bears hijacked the driving seat as multiple fundamental forces dimmed the metal’s allure. Despite gaining over 1% since the start of October, prices are back below the psychological $1700 level with the path of least resistance pointing south.

Hawkish speeches by Fed officials coupled topped off with last Friday’s strong US jobs numbers made life hard for zero-yielding gold with rising Treasury yields adding insult to injury.

The US economy added 263,000 new jobs in September, beating market expectations of 250,000. Despite the marginal beat, the figures raised concerns that the US labour market may be starting to cool. Nevertheless, market expectations remain elevated over the Federal Reserve unleashing more monetary bazookas against the inflation menace.

With the greenback drawing fresh strength from the US jobs report and rising Treasury yields, gold could be exposed to fresh downside risks.

The low down…

It has been a rough year for gold.

The precious metal is down over 8% year-to-date thanks to an appreciating dollar, rising Treasury yields, and expectations for aggressive interest rates enforced by central banks. Although geopolitical risks, periods of dollar weakness and global growth concerns have somewhat limited downside losses – bears are currently winning this war. According to Bloomberg, traders are pricing in a 92% of a 75-basis point rate hike at the next FOMC meeting in November. If such becomes reality, gold could be instore for more pain as 2022 slowly comes to an end.

Taking a brief look at the monthly chart, every single monthly candle has closed negative since April 2022.

The week ahead…

It may be wise to fasten your seatbelts because the next few days promise to be eventful for gold. Investors will be served a platter of key economic reports and speeches from numerous financial heavyweights. Most importantly, all eyes will be on the latest US inflation which is arguably now the biggest data point on the risk calendar.

Thursday sees the release of the US inflation report with investors watching to see if prices are rising again or perhaps if we are finally peaking. According to Bloomberg, the headline print for September is expected to drop 8.1% from 8.3% while the core is expected to jump 6.5% from the shock of 6.3% in August. A higher-than-expected CPI figure may reinforce expectations around the Fed unleashing more monetary bazookas to tame the inflation beast. This could see gold prices tumble lower as the dollar and Treasury yields rise. Alternatively, a lower-than-expected inflation report could reduce rate hike bets and feed the “dovish pivot” narrative – ultimately providing room for gold bulls to fight back.

Gold ETFs favour bears

According to an automated report from Bloomberg, gold ETFs cut 95,021 troy ounces of gold from their holdings last Friday, bringing this year’s net sales to 1.01 million ounces. This was the fourth straight day of declines.

The outflows may be the result of last Friday’s strong jobs data which bolstered bets over the Fed moving ahead with a 75-basis point rate hike next month. It’s worth keeping in mind that a gold ETF provides investors exposure to the precious metal without owning the physical asset. Outflows from ETFs are generally seen as bearish for the underlying asset.

Gold ready for a steep selloff?

Gold remains dominated by bears on the daily and weekly timeframes. After breaking back below $1700, this could open doors towards $1655, $1615, and $1600. Given how the precious metal remains in a fierce battle against a stronger dollar and aggressive rate hike bets among other themes, bears remain in control. The pending inflation report is likely to set the tone for gold for the rest of this month. Should prices push back above $1700, this could open a path back toward $1724, $1752, and $1770.

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