Gold moment of truth

We have repeatedly commented that gold’s near term outlook does not look bright because of the apparent lack of interest from investors worried about the crisis in Greece. Whereas the European stock markets have fallen quite dramatically in response to the deteriorating Greek situation, the precious metal has barely shown much reaction. Admittedly, this has been in part because of the strength of the US dollars, which has been climbing steadily higher this week in anticipation of today’s US jobs report. As it turned out, the headline June NFP print of 223,000 missed the expectations slightly and revisions took away 60,000 jobs from the previous couple of months’ readings. On top of this, the average hourly earnings were unchanged compared to May. And although the unemployment rate did fall noticeably to 5.3%, this was primarily due to a sharp drop in the labor force participation rate to its lowest level since 1977. So, it was not as good a jobs report as had been expected. This caused the greenback to drop back somewhat, lifting the dollar-denominated gold off the lows.

But despite the disappointment, the jobs report clearly shows that the US economy is continuing to improve at a moderate pace. It is unlikely therefore to be a game changer in terms of impacting the timing of the Fed’s first rate hike, which is still likely to happen in the fourth quarter of this year. Thus, the dollar could find renewed strength soon – probably earlier than some might think because of the fact that most other major central banks are still dovish. Indeed, the dollar could also find some safe haven demand ahead of this weekend’s referendum on bailout terms in Greece which could further weigh on gold. But if the Greeks vote “no” then the situation could get really messy and this time gold may after all find some support on the resulting rise in risk aversion. But the more likely outcome is that the Greeks would vote “yes” and if this eventually leads to Greece accepting the bailout then it could underpin risk assets and undermine the safe havens.

The chart of gold meanwhile is looking shaky, to say the least. Following today’s earlier sell-off, the metal has broken below the prior low at $1163 (point B) which has potentially paved the way for further weakness in the days and weeks to come. What happens next partly depends on the key support area around $1150/5 which is now clearly in sight. Here, a short-term bullish trend line meets the 61.8% Fibonacci retracement level of the entire 2008-11 uptrend. Though this level had been tested and broken in the past, the bears did not come out en masse to drive gold prices significantly lower. Could this time be a different story? If the abovementioned support level gives way then gold could drop towards the Fibonacci extension levels shown on the chart. However, if support holds firm here then the yellow metal may stage a recovery towards the resistance trend and the 50-day moving average around $1188/90, before deciding on its next move.