Weak Nonfarm, Fading Rate Hike Bets — Is Gold Ready for a Rebound?
The start of each month is usually the key window for the release of the U.S. non-farm payrolls (NFP) data, so at the beginning of every month many people tend to see sizable swings in their investment accounts. This is because the NFP data often reshapes the market's expectations for the future economy, which in turn changes the price direction of related financial products. Last week's NFP data came in contrary to market expectations: the market had originally anticipated a figure of more than 100,000 new jobs, but the actual result was an increase of only 57,000. A slowdown in job gains indicates that the economy is not as “hot” as expected, which reduces the necessity for the Federal Reserve to raise interest rates. As a result, since the data was released, the market has sharply lowered the probability it assigns to a Fed rate hike this year, and commodities have accordingly staged a rebound. As I have analyzed with friends before, to judge whether the Fed will hike, you only need to watch oil prices: as long as oil is not stuck above $100 for a prolonged period, it is very hard for the Fed to justify a hike. And now that oil prices have already fallen sharply, inflation expectations will also cool, making a rate hike even more difficult.
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1. The Rebounding Gold Price — How Sustainable Is It?
After NY gold futures (GC) broke below 4000, the total decline reached more than 30%. Given that gold's long-term trend has not changed, such a drop is already at a historically high level (the largest correction on record occurred in 2008, at 35%). Gold is therefore now in a bottoming range, and those planning to invest for the long term may consider entering gradually. The reason for gold's rebound is directly tied to the decline in Fed rate-hike expectations: as long as rate-hike expectations fall further — or even return to the sustained rate-cut expectations seen at the start of the year — then gold's current price level could well turn out to be an important low for the future. As I have explained before, gold's long-term trend can be tracked using the 20-month moving average, which is currently around the 3850 level. Investors intending to bottom-fish can use that price to formulate their entry and stop-loss plans. For now, until gold effectively breaks above the upper boundary of its descending channel, the move can only be judged as a rebound. But because the preceding decline was so large, the rebound itself offers a decent potential return, so short-term speculators may want to keep an eye on it.
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2. Should You Bottom-Fish Oil?
From last week until now, news related to the U.S. and Iran has been relatively muted, with negotiations still ongoing. Whether oil can rebound depends on the progress of these talks; if the negotiations do not go smoothly, one can hold slightly higher hopes for the size of an oil rebound. Oil prices have now fallen back to the level seen before Iran blockaded the strait. In terms of absolute price, oil still has room to fall (toward around $60), but during the course of that decline one cannot rule out oversold rebound swings triggered by tension in the negotiations. So friends who intend to bottom-fish an oil rebound should pay attention to timing and set adequate stop-losses. If a rebound does occur, $80 is also an important resistance level, and one should be mindful of taking profit there.”
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