Gold: a weak labor market vs. expensive money

XAU/USD

Key zone: 4,100.00 - 4,200.00

Buy: 4,200.00 (after breaking through a strong positive support level); target 4,320-4,380; StopLoss 4,100.00

Sell: 4,100.00 (on a pullback following a retest of 4,150); target 3,950-3,850; StopLoss 4,200.00

Gold is attempting to reverse after the weak NFP, but for now, the move looks more like a corrective rebound. The UST10Y yield remains around 5.3%, DXY is near 102, and the market has virtually abandoned expectations of a Fed rate hike in October. The main threat to gold buyers is inflation and the high probability of another rate hike as early as December.

A reminder:

The main problem for gold right now lies not so much in the Fed’s policy rate itself as in the cost of long-term money. The 10-year Treasury yield is around 5.27–5.30% after rising to 5.349% on October 5 — its highest level since 2002. The 30-year yield climbed as high as 5.703%. This is a serious negative for gold; the weak NFP saved gold from a deeper decline.

The September labor-market report sharply changed expectations regarding the Fed’s actions. The U.S. economy added only 29,000 jobs, while unemployment remained at 4.2%. In addition, the July and August figures were revised down by a combined 60,000 jobs. Average hourly earnings growth slowed to 0.1% m/m and 3.0% y/y.

It was after the NFP release that the probability of an October rate hike plunged from around 70%, seen as recently as late September, to 21–23%. As of October 6, CME FedWatch estimates the probability of the rate remaining unchanged at approximately 78%.

For gold, this is clearly positive: the labor market gives the Fed grounds to put rate hikes on pause. But for now, this applies only to October.

Inflation is bringing risk back to the market: problems for gold buyers began almost immediately after the data release. The ISM Services PMI declined to 54.9 in September from 55.4 a month earlier. However, the Prices Paid component rose to 74.0 from 72.6 — its highest level since July 2022.

The Fed is therefore facing an extremely uncomfortable combination:

• the labor market is slowing noticeably;
• the services sector continues to expand;
• price pressures remain extremely high;
• long-term yields are rising on their own, further tightening financial conditions.

The market has therefore virtually ruled out a rate hike on October 28, but it has not abandoned further tightening. According to the latest CME estimate, the probability that at least one additional hike will occur by the December 9 meeting is around 86%. The base case is a policy rate of 4.00–4.25%.

This is where the main risk to gold’s medium-term advance is taking shape.

The dollar is putting additional pressure on XAU/USD.

France’s budget problems and the selloff in European government debt widened the spread between 10-year French and German bonds to around 145–150 bps — levels close to the highs seen since the European sovereign debt crisis. Against this backdrop, the euro hit a new 17-month low against the dollar.

DXY climbed to 102.535 on October 5 and remains around 102.0–102.2 on October 6. Therefore, the current weakening of the dollar still looks more like profit-taking than a full-fledged reversal in the U.S. currency.

For gold, this is critically important: the weak NFP was not enough to reverse both the dollar and the Treasury market at the same time.

And What Is the Result?

The key event in the coming sessions will be the release of the minutes from the September FOMC meeting on October 7. However, for gold, what matters is not the minutes themselves, but the answers to two questions: how concerned is the Fed about accelerating prices, and does it view the September hike as the beginning of a new tightening cycle or as a one-off adjustment?

Gold has received a breather, but it has not yet established a new bullish trend. The weak labor market has virtually removed a Fed rate hike from the October scenario. At the same time, the ISM showed that strong inflationary pressure persists, while Treasury yields remain near 24-year highs.

As long as UST10Y holds above 5.2% and DXY remains above 102, the rise in XAU/USD should primarily be viewed as a correction after the decline. A genuine shift in the balance in favor of buyers will occur with a simultaneous decline in the dollar, long-term yields, and December rate-hike expectations. Until then, the $4,100–4,230 range remains the main battleground between buyers and sellers. A break below $4,100 would be a separate bearish signal with a base target of $4,000.

So we act wisely and avoid unnecessary risks.

Profits to y’all!