Gold Prices Plunge, Ending Week with Significant Losses

China's Impact on Gold

For months, the rise in gold prices was attributed to aggressive buying by central banks, particularly China. However, the rally stalled in May, raising questions about whether central banks are still buying, have stopped, or are taking profits. Unlike prominent investors who openly discuss their trades, central banks operate discreetly, leaving markets to speculate about their next moves. This uncertainty increases market volatility and turns long-term bullish investors into short-term traders.

Strength of the U.S. Job Market

The strong U.S. job market presents a challenge for gold bulls due to the prospect of prolonged higher interest rates. The Labor Department's report revealed that nonfarm payrolls (NFP) increased by 272,000 jobs in May, exceeding expectations of 185,000. The robust job market, with high wages and increased consumer spending, suggests that inflation may not decline rapidly, prompting the Federal Reserve to maintain interest rates. This increases the opportunity cost of holding non-yielding bullion and adds to the bearish sentiment in the gold market.

Market Reactions and Forecasts

On Friday, the decline in gold prices accelerated following the strong U.S. jobs report, which diminished expectations for interest rate cuts this year. Gold prices fell nearly 1% this week, marking the third consecutive weekly decline. Additionally, the strong economic data boosted the dollar, making gold more expensive for foreign buyers. Traders have scaled back their bets, now predicting a 37 basis point rate cut by December, down from 48 basis points before the NFP data. The first cut is now expected in November instead of September.

China's Influence on Central Banks

China's halt in gold buying after 18 months has significant implications. Central banks often follow a herd mentality, so if China stops buying, others may follow suit. Moreover, China's potential to start selling could further pressure gold prices. Traders are closely monitoring charts for any signs of this shift before a public announcement.

Market Forecast: Bearish Outlook

Given the strong U.S. job market and China's pause in gold buying, the short-term outlook for gold is bearish. The Federal Reserve's potential decision to keep rates high to curb inflation and the reduced likelihood of short-term rate cuts suggest continued pressure on gold prices. As the market adjusts to these developments, traders should be prepared for a potential further decline.