Gold clung to gains from a two-day rally on Wednesday, supported by short covering following a dip in the dollar after soft U.S. manufacturing data. The outlook for the metal, however, remains bearish due to a looming U.S. rate hike, with all eyes now on the U.S. non-farm payrolls data due later in the week.
A strong jobs report would further bolster the likelihood of a hike later this month, reducing the appeal of dollar-denominated gold.
Spot gold was steady at $1,068.40 an ounce by 0353 GMT, after gaining about 1 percent in the past two sessions.
“The fate of gold is still very much determined by U.S. monetary policy,” said Mark To, head of research at Hong Kong’s Wing Fung Financial Group. “Prices will consolidate around current levels until the policy meet in mid December.”
The expected U.S. interest rate increase will drag gold prices to the $1,000 level, he added. Bullion fell to a near-six-year low last month and posted its biggest monthly drop in 2-1/2 years in November as investors believed higher rates could weaken demand for non-interest-paying bullion.
The Federal Reserve is widely expected to raise U.S. rates for the first time in nearly a decade at its next meeting on Dec. 15-16. ABN Amro on Tuesday maintained its negative outlook for gold prices in 2016, mainly on expectations the Fed would slowly raise rates into next year, and said prices could fall below $1,000 per ounce in the coming months.
Traders will be eyeing the U.S. payrolls data on Friday to gauge the strength of the economy and its impact on the Fed’s rate decision. Data on Tuesday showed U.S. manufacturing contracted in November for the first time in three years, though other data showed an increase in construction spending in October.
Analysts said the manufacturing weakness will not deter the Fed from raising rates this month. The U.S. dollar nursed broad losses on Wednesday, after sliding from an 8-1/2 month high reached on the weak data.
The dollar weakness likely required some bullion investors to unwind and cover their short positions in the precious metal, prompting the gains during the last two days.