Get your popcorn and grab a seat. This could be a big week for gold.

After experiencing its biggest monthly loss since June, the precious metal has kicked off October in a choppy fashion with prices trading around $1765 as of writing. In September, gold bugs were squashed by an appreciating dollar, Fed taper expectations, and rising Treasury yields. Buying sentiment towards the precious metal failed to jumpstart despite the bouts of risk aversion with bears clearly in a position of power. Given how the technicals swing in favour of further downside, could a dramatic selloff be around the corner for gold?

A battleground for bulls & bears

October has the potential to be choppy and volatile for gold due to conflicting forces.

Earlier we highlighted how gold bugs were punished by a firmer dollar among other key themes. However, bulls could draw strength from concerns over higher inflation, negative Covid-19 developments, and fears around slowing global economic growth. On top of this, concerns around the broader economic impacts regarding China Evergrande Group’s debt crisis may accelerate the flight to safety, potentially supporting safe-havens like gold.

Looking at the weekly charts, bulls and bears remain engaged in a fierce battle with gold trapped within a wide range. Support can be found around $1750 and resistance roughly around $1830.

Gold ETF Outflows favour bearish outlook

According to a report from Bloomberg, gold ETFs experienced their biggest weekly outflow since March 2021 last week. It is worth keeping in mind that an Exchange Traded Funds (ETF) is an investment instrument that allows retail traders to gain exposure to an existing market or group of markets.  In this instance, a gold ETF gives investors exposure to gold without having to own it physically. Outflows from ETF’s are generally seen as bearish for the underlying asset. Given how the Federal Reserve tapering could be around the corner, it looks like investors may be reducing their exposure to the zero-yielding metal.

Gold outlook to be influenced by NFP

The US jobs report on Friday will set the tone for gold in the near term.

Markets are forecasting the US economy to have created 500,000 jobs in September while the unemployment rate is projected to fall to 5.1%. A strong jobs report may be bad news for gold, especially after Federal Reserve Chair Jerome Powell stated that additional job gains in September will give policymakers the thumbs up to start tapering in November. When considering how tapering may translate into higher treasury yields, this spells nothing but trouble for zero-yielding gold.

Alternatively, a disappointing jobs report that mirrors the dismal figures from August could force investors to question whether a November taper will move ahead. Such a development is seen weakening the dollar and dampening rate hike expectations – providing gold bulls some breathing room to fight back.

Technicals favour bears but bulls lurk  

Prices are trading below the 50, 100, and 200-day Simple Moving Average while the MACD trades under zero. However, the daily close above $1750 has opened the doors back towards $1780 which is near the most recent lower high. A strong move above this point marks the end of the downtrend on the daily charts, opening a path higher towards the psychological $1800 level and $1831, respectively.

Alternatively, a decline below $1750 could trigger a selloff towards $1725 and $1700. Should prices delve below $1700, bears are seen eying $1680 and potentially lower.

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