After U.S. jobs data increases rate hike bets, gold declines by 1%

If you are a gold investor, you might be feeling a bit disappointed by the recent performance of the precious metal. Gold prices have fallen about 1% to slip below $2,000 per ounce on Monday after the latest U.S. jobs data showed a strong recovery in the labor market and increased the likelihood of another interest rate hike by the Federal Reserve in May.

Why did gold prices fall?

Gold prices are influenced by many factors, but one of the most important ones is the U.S. dollar. The dollar is the world’s reserve currency and the main medium of exchange for international trade and investment. When the dollar strengthens, it makes gold more expensive for foreign buyers and reduces its appeal as an alternative asset.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.1% on Monday, as investors reacted to the upbeat U.S. jobs data report released on Friday. The report showed that non-farm payrolls increased by 236,000 jobs in March, beating expectations of 239,000. The unemployment rate also dipped to 3.5% from 3.6% in February, matching the lowest level since 1969.

The strong jobs data signaled that the U.S. economy is on a solid footing and can withstand higher interest rates. The Federal Reserve has already raised rates four times since December 2022, and markets are now pricing in a 66% chance of another 25 basis-point hikes in May, according to the CME FedWatch tool.

Higher interest rates are generally negative for gold, as they increase the opportunity cost of holding the non-yielding metal and boost the yield and attractiveness of other assets, such as bonds and stocks.

Is gold still bullish?

Despite the recent pullback, some analysts and investors remain optimistic about gold’s prospects in the medium to long term. They argue that gold still has a role as a hedge against inflation, geopolitical risks, and market volatility.

Inflation is expected to rise in the coming months, as the U.S. economy benefits from fiscal stimulus, a trade truce with China, and robust consumer spending. The core personal consumption expenditures (PCE) index, which is the Fed’s preferred measure of inflation, rose 1.8% year-on-year in February, close to the central bank’s 2% target.

Some analysts believe that inflation could overshoot the Fed’s target and force it to tighten monetary policy more aggressively than anticipated, which could hurt economic growth and financial stability. In such a scenario, gold could regain its appeal as a safe haven and a store of value.

Geopolitical risks are also looming large on the horizon, as tensions between the U.S. and Iran, North Korea, and Venezuela remain high. Any escalation of conflicts or sanctions could disrupt oil supplies, spark regional instability, and trigger a flight to safety among investors.

Market volatility is another factor that could support gold demand, as global equities face headwinds from slowing growth, trade disputes, and corporate earnings. Gold is often seen as a diversifier and a hedge against stock market corrections or crashes.

According to metals firm MKS PAMP, “the bull trend, established since November 2022, is still intact” for gold. However, it also warned that a “stickier” core U.S. CPI on Wednesday could solidify a 25 basis-point hike in May and prevent gold prices from hitting all-time highs this month.

Gold prices reached a record high of $2,072.50 per ounce on March 18, driven by fears of a global recession due to the coronavirus outbreak. Since then, gold has retreated about 4%, as risk appetite improved amid stimulus measures and vaccine hopes.

What are the key levels to watch?

Gold prices are currently trading below $2,000 per ounce, which is a psychological level and a key support zone. If this level is breached decisively, gold could extend its losses towards $1,920 per ounce, which is another important support level and coincides with the 200-day moving average.

On the upside, gold faces resistance at $2,040 per ounce, which is near the 50-day moving average and the upper boundary of a descending triangle pattern on the daily chart. A break above this level could open the door for a retest of $2,072.50 per ounce or higher.

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