Gold set for more volatility

Last year, many Hedge Funds and Investment Banks predicted that by the end of 2014, the US economy would impress and buyers would rush towards the Greenback, ditching Gold in the distance.

For a while, it seemed they were onto something. After their stunning assessment on Gold, the commodity lost an astonishing 21% of its valuation throughout 2013.

However, what analysts couldn’t foresee was that US economic momentum would stall after a disastrous New Year winter weather period. From here, Gold reversed into a bullish channel.

More recently, US economic performances have improved dramatically. This has led to Gold transitioning back towards last year’s bearish momentum once again.

Fundamentals: There were two primary reasons why Gold turned bullish at the turn of the year. Firstly, nobody envisaged the detrimental economic impact the New Year weather would have on the US economy. The weather attributed towards the US 1Q GDP contracting by 1%. Secondly, the Ukraine crisis enticed a period of political uncertainty. In times of political/economic uncertainty, investors look towards safe-haven assets, such as Gold.

Lately, US economic data has significantly improved. Specifically, substantial progress has occurred in the US employment sector. Last month’s NFP was their strongest in 5 years, with the US economy creating 288,000 jobs. Initial Jobless Claims have also significantly declined. In fact, over the past four weeks, they have decreased to their lowest value since August 2007.

Furthermore, during the latest FOMC minutes, the Federal Reserve announced that the US economy is set to accelerate throughout the remainder of 2014. This will be key towards Gold encountering more bearish momentum.

The Upcoming Week: Over the next week, there are a variety of high risk US economic releases, which have the potential to provide further volatility for Gold.

This includes Monday’s ISM Manufacturing and Tuesday’s Factory Orders. On Wednesday, the latest US Trade Balance and ADP Employment Report are released. Finally on Friday, June’s Non-Farm Payroll is announced.

Monday’s ISM Manufacturing and Friday’s NFP will likely provide the most volatility for Gold. In reference to manufacturing, not only is this a key job creator, but also constitutes 12% of US GDP. This month’s Markit PMIs expanded above expectations and there are hopes that Monday’s ISMs will follow suit.

In reference to Friday’s NFP, we have already mentioned the significant progress made by the US job sector over the past month. Even last week, Durable Goods increased by 0.8%, indicating that business investment/confidence is improving. With Initial Jobless Claims showing such a consistent decline, it is hoped that this will correlate towards increased job creation last month.

Technical Observations: When evaluating Gold on my Daily charts, here are a few of my observations:

1. After failing to hit a “double bottom” last December, Gold quickly reversed into a bullish channel.
2. As soon as the US economic data improved, Gold formed a consolidation channel (which tightened heavily).
3. When the consolidation channel concluded, Gold fell below the 1278 and 1253 support levels.
4. Further support levels are located at 1221 and 1200.

Final Thoughts: Currently, the Bollinger Bands are showing no indications of contracting and with such a high quantity of high risk US data being released over the coming days, Gold will likely experience volatility.

If the US economic data carries on progressing and this Friday’s NFP impresses, Gold can potentially extend below the support levels mentioned above, matching last year’s multi-year lows in the process.

Just be mindful that if Friday’s Non-Farm Payroll shows any signs of disappointment, or we encounter a sudden re-emergence of political tensions in Ukraine, a bullish reversal will be swift.

*Ahmad is chief market analyst at FXTM