Gold Analysis: Are We Heading for a Pullback or Further Highs?

Gold analysis: The precious metal remains in a strong bullish trend and continues to hit new highs almost on a daily basis. On Friday gold rallied past the $2,600 mark, achieving new record highs for the second consecutive week. Traders are now left wondering whether this rally will continue or if we’re on the verge of a long-overdue pullback. With gold still on track for its seventh consecutive month of gains, its trajectory appears strong. Yet, signs of an overbought market suggest a period of consolidation might be just around the corner.

Technical Gold Analysis: Indicators Flash Overbought Signals

From a technical standpoint, several indicators in the current gold analysis are flashing “overbought” signals. The most telling of these is the Relative Strength Index (RSI), which has crossed above 70 on the daily, weekly, and monthly charts. Historically, when the RSI reaches these elevated levels, it tends to trigger a multi-day or even multi-week consolidation. This easing helps relieve the overbought pressure and could provide new buying opportunities for traders who missed the initial or subsequent breakouts.

Source: TradingView.com

Gold’s strong upward trend remains intact, but we should watch for possible short-term profit-taking. Key support levels to monitor on the gold chart include $2,600, which acts as a pivotal point on the daily time frame. If prices fall below this, the next important zones will be $2,530 and $2,500. These levels could come into play if the market experiences a correction, aligning with 2024’s bullish trendline. However, if gold continues to ascend without any pauses for breath, then the next upside target of $2,700 could soon be in sight.

Fundamental Drivers of Gold: Interest Rate Cuts and Central Bank Demand

While technical signals suggest a near-term pullback, the long-term gold analysis remains bullish, largely due to supportive macroeconomic factors. One of the key drivers keeping gold prices elevated is the expectation of interest rate cuts by major central banks, particularly the US Federal Reserve. With inflation moderating and unemployment ticking higher, the Fed has already responded with a larger-than-expected 50-basis-point rate cut last week. Market expectations are now pricing in another 50 basis points by the end of the year, with additional cuts anticipated in 2025. As interest rates decline, bond yields tend to weaken, reducing the opportunity cost of holding gold. This also an attractive alternative, especially for traders seeking safe-haven assets.

Central bank buying also continues to lend support to gold prices. China, in particular, has been actively adding to its reserves, even amid these record-high prices. While this aggressive accumulation may slow down if inflation eases, central banks are unlikely to sell off their gold reserves, potentially creating a solid floor under gold prices. This steady demand from central banks adds a layer of security for traders who have long expected significant price appreciation that has now been underway in the last few years or so.

Geopolitical Risks and the US Election

No gold analysis would be complete without considering the impact of ongoing geopolitical tensions. Conflicts in regions such as Gaza and Ukraine continue to drive demand for gold as a safe-haven asset. With Israel striking Hezbollah targets in Lebanon, the situation could get ugly in the region. Beyond these immediate risks, the upcoming US elections are adding further uncertainty to the global economic outlook. A potential win by Kamala Harris, could bring political stability than if Trump were to win – judging by the latter’s first term in office and his trade war with China and the Eurozone. So, a victory for Harris might be gold-negative. But it is not that simple since this scenario could also weaken the US dollar. Anyway, in the event of a more aggressive stance from a Trump-led administration, the geopolitical risks could escalate further, prompting even stronger demand for gold as traders seek to hedge against economic and political instability.

For a detailed breakdown of the potential US election impact on the dollar, check out this analysis on EUR/USD forecast and trading strategies.

Summary: Long-Term Bullish, Short-Term Caution

In summary, while the technicals point to a possible short-term pullback in gold prices, the overall long-term gold analysis remains firmly bullish. The combination of anticipated interest rate cuts, sustained central bank buying, and heightened geopolitical risks provides solid underpinnings for further price appreciation. Even if gold doesn’t hit the $3,000 mark this year, it remains a viable long-term target. In the short term, traders should keep an eye on support levels and brace for potential consolidation, but the broader outlook for gold continues to look strong.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R