Gold prices rallied to its highest levels in more than a week after economic data in the US showed that the labor market added more jobs in July than analysts had expected. This came along with stronger ISM services data as well but overall, the releases were mixed, as the Unemployment Rate also rose to the highest level since March.
Earlier in the week Gold prices were in decline but the Unemployment data is leading market analysts to suggest that the US Federal Reserve might be forced to implement another round of quantitative easing stimulus in order to reverse these long term negative trends. If this is done using government bond purchases, the likely outcome in an increase in inflation figures and Gold is a traditionally used hedge against rising consumer prices.
Markets to Focus on Stimulus Commentary
Because of this, markets will be paying special attention to the next round of commentary that is released by voting members of the US Federal Reserve as this will be a key indication of where gold prices are headed next. Any suggestion that QE stimulus is being considered will likely lead to increased buying activity in Gold as investors look to get rid of US Dollars on inflation expectations.
The December Gold futures contract rose by 1.2 percent on Friday, to trade just below 1610 in Comex trading. This is the largest rally since July 25th but Gold prices were still down by 0.8 percent on the week given the major declines that were seen earlier in the week.
These declines came in large part after the monetary policy meetings from the European Central Bank (ECB) and the US Federal Reserve, both of which indicated a bias toward avoiding stimulus measures as a means of supporting their respective economies. But with this latest macro data, traders are shifting their expectations in the other direction.
Looking from a longer term perspective, Gold has risen by 70 percent in the period from the end 2008 to the middle of 2011. This came largely as a result of low interest rates in the use and treasury purchases valued at $2.3 trillion (over two rounds of stimulus periods). In other metals, the September futures contract had an even more rally (of 3 percent) to trade above $27.80 per ounce, which is the largest rally markets have seen since June 29th.
From a longer term outlook (looking at the weekly or monthly charts), the momentum in the gold prices has gone nearly straight upward for roughly ten years. This lack of downside correction might be worrisome for longer term traders (as buying in at these levels can involve some significant downside risks). But from a short term perspective, there is very little to suggest this rally has reached its completion point. Looking at short term trading set ups, the next level to watch is seen at 1580, and a break here will suggest a re-test of the lows at 1526 that were seen in the middle of May.