Spot gold is stable, non-agricultural report will be released; but FED may be forced to distract

On Thursday (October 7), spot gold was generally stable, and the US dollar index fell slightly. The United States temporarily raised the debt ceiling until the end of the year, easing the dollar’s upward trend. Investors are waiting for the US non-agricultural report to provide more clues on the timing of the Fed's next move. In addition, the market must be wary of soaring energy prices, which also raises the risk of the Federal Reserve accelerating the normalization of monetary policy.


At 20:09 GMT+8, spot gold fell 0.06% to US$1,761.85 per ounce; the main COMEX gold contract rose by 0.02% to US$1762.1 per ounce; the US dollar index fell 0.08% to 94.148.

The Fed previously stated that it may reduce the scale of monthly bond purchases as early as November, and interest rate hikes may begin as early as next year. This boosted U.S. Treasury yields to rise sharply. This pushed the U.S. dollar index to hit a new high of 94.504 since September 28, 2020 last week.

Soaring energy prices

Overnight, WTI crude oil rose to a seven-year high, natural gas in Europe jumped to a record high, and the quotations of major coal exporting countries also rewritten historical peaks. Soaring energy prices have heightened concerns that inflation will weaken economic growth.

According to the British "Financial Times" report, US Energy Secretary Jennifer Granholm said on Wednesday that the US government is considering using emergency oil reserves to ease the trend of soaring gasoline prices. Granholm also did not rule out the possibility of restoring the ban on crude oil exports, which was lifted when Obama assumed the presidency in 2015.

The International Monetary Fund (IMF) said on Wednesday that overall consumer price inflation should peak this fall and fall back to pre-epidemic levels in mid-2022, but the surge in inflation driven by supply shortages may be more persistent and out of expectations. The risk still exists.

Goldman Sachs stated that if the United States stops energy exports when the Organization of the Petroleum Exporting Countries (OPEC) increases production, it "will further expand the U.S. trade deficit, trigger a potential depreciation of the U.S. dollar, and therefore lead to an increase in domestic (imported) inflation." The statement implies that the Fed will accelerate the pace of tightening monetary policy.

The U.S. labor market will continue to improve

The closely watched U.S. non-agricultural employment report will be released on Friday (October 8), and it is expected that the U.S. will add 488,000 jobs in September. It may provide more clues for the timing of the Fed's next move. Economists predict that the labor market will continue to improve.

Sterling Capital Management fixed income senior strategist Andrew Richman said: "If the employment data is close to expectations, I believe the Fed will announce in November that it will begin to reduce the scale of debt purchases." He was referring to the September non-agricultural employment data in the United States.

Stephen Innes, managing partner of SPI Asset Management, said: "The central bank is watching inflation continue to rise, and the situation is precarious... Historically speaking, this is good for gold, but this is not the case in an environment where the central bank has begun to shift to an interest rate hike model. If the U.S. employment data is strong in September and the U.S. Treasury yield rises to 1.6%, gold may fall to $1,725."

However, the IMF report also pointed out that in some advanced economies, including the United States, industries that have been hit hard by the new crown pandemic, such as leisure, hotels and retail, have seen significant wage increases. But wage growth is accompanied by a reduction in working hours. By mid-2021, there is little sign that wage growth across the economy will accelerate.

The moderate wage pressure suggests that the upward momentum of prices will not get out of control, and gold has limited room for anti-inflationary functions. This seems to confirm the Fed's consistent position. The Fed has so far generally believed that inflationary pressures will prove to be temporary.

Temporarily raise the debt ceiling until December this year

The U.S. Senate minority leader and Republican Congressman Mitch McConnell proposed to Democrats on Wednesday to temporarily raise the U.S. government debt ceiling until December this year, in order to lift the imminent debt ceiling crisis and buy time for the final increase of the debt ceiling. According to Treasury Secretary Yellen’s previous estimates, if Congress fails to raise the debt ceiling in time before October 18, the US government will have its first debt default in history, with disastrous consequences.

According to reports, the Democrats will decide to accept McConnell’s proposal, and Congress can vote on it as early as Thursday. If McConnell’s proposal is passed smoothly, the tensions caused by a series of urgent fiscal issues in Congress between the end of September and the beginning of October will be postponed to December. Previously, Congress passed the bill on September 30, avoiding the government's shutdown at the last minute, and agreed to provide temporary funding for the government until December 3. Therefore, Congress will face the dual problems of debt ceiling and government shutdown from the end of November to the beginning of December.

However, before the Senate Democratic leader Schumer has issued a statement, it is unclear whether this is the official position of the party, and the White House has not commented on this matter. White House spokesman Psaki said that the White House has not yet received a formal proposal.

The Ministry of Finance estimates that it is now less than two weeks away from exhausting unconventional measures to avoid government defaults. The Bipartisan Policy Center said on Wednesday that if the debt ceiling is not raised, it may delay the payment of unemployment insurance benefits, the wages of millions of federal employees, and medical insurance payments.

After the U.S. Senate seems to be close to reaching an interim agreement to avoid defaulting on federal debt in the next two weeks, some of the recent upside risks faced by the U.S. dollar have been mitigated. But a firmer agreement is needed to dispel the risk aversion caused by the market. (U.S. debt defaults may cause shocks in the global financial system and cause millions of people to lose their jobs.)

The U.S. dollar will maintain its upward trend in the coming year

Following the upward trend in the yield of US 10-year Treasury bonds, the US dollar index has risen about 5% this year. Nearly half of the increase was recorded in the past month, and this trend is expected to continue in the coming year. But although U.S. Treasury yields will rise further from current levels, the rate of soaring in the past month will not last for long.

The latest data from the CFTC show that speculators' net long USD holdings have increased to the highest since March last year. Analysts generally predict that the U.S. dollar will maintain its upward trend in the short-term, and that U.S. bond yields will become the dominant force in determining the dollar's trend in the next 12 months.

UBS Wealth Management said that as global economic growth shows signs of peaking, rising nominal and real interest rates on US Treasuries and more supply-driven inflation will provide support for the further strengthening of the US dollar in the coming months.

Tai Hui, chief Asian market strategist at JP Morgan Asset Management, said: "We expect that with the Fed's exit from QE and the recovery of the US economy, the yield on the US 10-year Treasury note will continue to rise, and this will also be the focus of the market in the near future. But U.S. bond yields will not rise endlessly. At some point, they will stabilize. I think the downward pressure on the US dollar will increase by then."

Look at $1727 under spot gold

On the daily chart, the price of gold has started a three-wave downward trend from US$1770. The support below looks to the 23.6% target of US$1744 and the 38.2% target of US$1727. Wave 3 is a sub-wave of the downward (3) wave that started at $1834. (3) Wave is a sub-wave of the downward ((Y)) wave that started from 1917 USD. The ((Y)) wave belongs to the adjusted IV wave that started at $2,075.