Gold: bullish momentum or a trap for buyers?

XAU/USD

Key zone: 4,000.00 - 4,100.00

Buy: 4,150.00 (on strong positive fundamentals); target 4,500.00; StopLoss 4,050.00

Sell: 3,950.00 (on a decisive break above 4,050); target 3,650.00; StopLoss 4,050.00

The market has priced in a December rate hike with a probability of around 80%. Now, a weak employment report could change Fed expectations, lower real yields, and restore gold's upward momentum. But inflation risks limit the rally's potential.

Today, the US labor market will undergo another test, the results of which could end up spoiling the mood of gold bears. This is one of the most significant macroeconomic catalysts of the coming weeks.

A reminder:

Following the Fed's October meeting, the target range for the federal funds rate stands at 3.75–4.00%. The market estimates the probability of a 25-basis-point hike in December at approximately 80–82%. Gold does not generate coupon income. Therefore, an increase in real interest rates raises the opportunity cost of holding it, while a decline in real yields, conversely, usually enhances the metal's investment appeal.

However, this relationship is not absolute. Gold is also influenced by central bank demand, investment flows into ETFs, geopolitical uncertainty, inflation expectations, and the structure of speculative positions.

The main question ahead of NFP is how significantly the new employment data will change the expected cost of money in the US and whether these changes will lead to lower real yields.

Speculators have provided gold with bullish momentum, confirming strong demand for the metal after the sell-off, but this does not prove that the medium-term correction has ended. Moreover, strong gains immediately before NFP increase the risk of profit-taking in the absence of a new fundamental catalyst.

Keep in mind that gold remains significantly below its January all-time highs. Therefore, the current price action is better characterized as an attempted recovery rather than a confirmed resumption of the long-term uptrend.

In September, the US economy created only 29,000 jobs. The October consensus used in the initial analysis assumes an increase in employment of approximately 65,000, with unemployment at 4.2%.

Three mechanisms transmit the macroeconomic shock to XAU/USD.

• Changes in the expected Fed rate. If the market revises the probability of a December hike from 79.8% to 40%, the expected rate change in a simplified model will decrease from 19.95 to 10 basis points. The difference will amount to almost 10 bps. This is a substantial revision for a single meeting, although it does not imply an identical movement in market yields.
• Real yield dynamics. Nominal yields alone are insufficient to explain the price of gold. US TIPS yields, particularly at the five- and ten-year maturities, are more informative. If real rates decline after NFP, the fundamental conditions for gold appreciation improve.
• Investment demand. Weakening expectations of monetary tightening may stimulate gold purchases through exchange-traded funds and futures. However, short-term gains driven by short covering must be distinguished from sustained capital inflows.

The most favorable combination for gold is weak NFP, slowing wage growth, declining real yields, and the absence of a sharp deterioration in liquidity.

The opposite combination — strong employment, accelerating wages, and rising real rates — could halt the XAU/USD recovery even if geopolitical demand for safe-haven assets persists.

And we should not forget to monitor capital inflows into gold ETFs and futures positions — a sustained expansion in demand is more important than short-term speculative momentum.

Particular attention should be paid to a combination of weak employment and unexpectedly high wage inflation. Such an outcome could trigger a sharp two-way reaction. Investors will simultaneously assess deteriorating economic growth and the risk of maintaining tight monetary policy.

So What Is the Outcome?

The Fed's December rate hike is practically already priced in by the market, so no one expects any surprises today. But a weak employment report could potentially trigger a more significant repricing of interest rate expectations than a moderately strong report. Nevertheless, sustained growth in XAU/USD will require confirmation from declining real yields and investment demand.

Our advantage lies not in forecasting NFP itself, but in correctly interpreting the market's reaction. In any case, it is necessary to wait for real yields to stabilize and for a sustained direction to emerge, rather than opening a position solely on the basis of NFP data.

Gold should be bought not because employment turned out to be weak, but because the weak data actually changed the interest rate trajectory and created confirmed momentum in XAU/USD.

So we act wisely and avoid unnecessary risks.

Profits to y’all!/p>