Trading gold has been relatively straightforward as of late. When real yields and the USD fall together gold rises. When real yields and the USD rises then gold falls.
This is why gold has been falling recently Powell has made a hawkish tilt by saying it is right to consider a faster taper at the December meeting. This lifted yields and the USD. As of tomorrow, the Fed will be in the blackout period, so here is what to watch for over the NFP.
If the jobs report come in below minimum expectations expect a knee jerk reaction higher in gold. If jobs tank lower there will be sudden jitters that the Fed will not be in a position to discuss tapering more quickly. This will cause US10 year yields to fall, the USD to fall (EURUSD upside) and XAUUSD to rise
If the jobs report come in as expected then that just keeps the status quo. There is no obvious strong reaction expected from this data as that is what market participants are expecting.
If the jobs report come in above maximum expectation then that could put some fire into the belly of those expecting early Fed tapering. In that situation, we could expect to see US10 year yields rise, USD rise (EURUSD downs) and XAUUSD fall.
Some notes on the outcomes
Outcome 1 is the highest conviction opportunity as it is the most unexpected. With Fed’s Powell, Clarida, Daly and now Mester all open to a faster taper and hikes next year then outcome 2 and 3 are what the market is positioning for.
Another key point to note is that the ECB is meeting in December amongst a COVID surge. This could make them more dovish at their meeting. So, one key scenario to look for is a divergence between the ECB and the FED. If the Fed taper faster, but the ECB hold back their PEPP taper and/or are more dovish on their projections expect some more USD strength. This does paint the picture of the possibility for further falls in gold if this happens. Look at the key tech on the monthly chart with the false break of the Harami Inside Bar. A central bank divergence between the ECB and the Fed would be the catalyst for this to play out.
Finally, note that gold’s seasonals are very strong this time of the year. So, if inflation keeps rising, the USD falls and real yields start falling again gold has some natural tailwinds around the end of December into the start of the year.