Gold Price Forecast: Contagion Fears Important; Small-Scale Losses Likely

May 27, 2018 — 6:00 AM EDT

There are likely to be contradictory influences on gold during the week. Eurozone contagion fears would tend to support gold demand, although the impact would be likely to be offset by a weaker euro. Volatility is likely to increase given uncertainties surrounding the global growth and debt outlook, with small-scale losses the most likely outcome.

Gold made net gains during the week as demand for defensive assets increased amid Eurozone contagion fears while USD/JPY lost significant ground. Gains were capped by a fresh round of euro losses, with selling interest for gold above $1,300 per ounce.

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U.S. economic developments will continue to be important, although they may not have a decisive impact given that a June rate hike is priced in. U.S. consumer confidence data are due on Tuesday, with the second reading of first quarter GDP on Wednesday. The latest Chicago PMI data are due on Thursday, while inflation trends will be monitored, with the PCE prices data released on the same day.

The main focus will be on employment releases during the week. The ADP private-sector jobs data are scheduled for Wednesday, with the jobless claims release on Thursday. Friday's employment data will garner most attention, with the headline payrolls change, unemployment rate and average earnings components all important for confidence in the outlook.

This will also be the last employment report before the June Federal Reserve policy decision. Exceptionally weak data could trigger some market doubts surrounding a June rate increase, although there is still a very strong probability that the Fed will raise rates at next month's meeting. Strong data across all metrics would have a significant impact in triggering speculation that the Fed will need to tighten policy more aggressively over the next few months. In particular, a robust reading for average hourly earnings would increase speculation over higher inflation. Strong data would also increase the potential for fresh dollar gains and higher bond yields, which would tend to weaken gold prices.

The ISM manufacturing data are also due on Friday, and although the impact will be overshadowed by the employment report, the prices data within the survey will be an important factor for inflation expectations. In addition, Eurozone developments will continue to be watched closely given increased fears surrounding the Italian political situation. Further sharp losses for Italian bonds and an intensification of contagion fears would support gold on defensive grounds.

Financial conditions will be important, especially in emerging markets. Further tensions would tend to support the dollar and put some downward pressure on gold, although the impact would be offset by potential defensive support for precious metals. Trade issues will remain important, with further uncertainty surrounding U.S.-China trade negotiations, especially after President Trump's comments that tariffs could be imposed on U.S. auto imports. Uncertainty will also be fueled by a lack of consistency surrounding the rhetoric.

Developments surrounding U.S.-North Korean relations will also be significant after President Trump's decision to cancel the planned June summit with North Korean leader Kim. Fresh deterioration in relations would tend to underpin gold, while conciliatory rhetoric and a rearranged summit would tend to curb gold support.