- Gold is retreating after a strong bullish move that took it to new highs of $2,685 last week.
- A rally in Chinese stocks and an improving outlook for the property market are diverting capital from the safe haven.
- Technically, XAU/USD threatens to break out of overbought territory, signaling that a deeper pullback could develop.
Gold (XAU/USD) retreats to trade at $2,630 per troy ounce on Monday, as traders take profits after last week’s nearly 1.4% rally to new all-time highs. A historic rally in Chinese stocks, which saw the benchmark CSI 300 index gain more than 7.50% during the Asian session on Monday, as well as a brighter outlook for the Chinese property market due to falling mortgage rates, diverts capital away from gold as a safe haven.
Gold traders have been surfing a wave that began after a seismic shift in the US, where the Federal Reserve (Fed) opted to cut interest rates by a “jumbo” 0.50% at its September meeting , reducing the opportunity cost of holding the precious metal. However, better-than-expected US data since then has slightly reduced the chances of the Fed making another aggressive 50 basis point (bps) rate cut in November, although the odds of this scenario still occur. they remain above 50%, according to the CME FedWatch tool.
Gold declines but investors have mixed views on its future
Gold is falling after hitting a new all-time high of $2,685 last week following the start of the Fed’s easing cycle and global central banks following the example of the US Reserve Bank.
Is the correction likely to deepen or will Gold resume its uptrend and push to new highs? Investors appear to have mixed opinions on Gold’s near-term prospects, according to a weekly Gold survey compiled by Kitco News.
Darin Newsom, Senior Market Analyst at Barchart.com, sees the uptrend continuing: “Applying Newton’s First Law of Motion to markets: A trending market will remain in that trend until an external force acts on it. That external force is typically investor activity, and given that the potential for global chaos is only going to increase in the next month, investors are unlikely to change their minds about gold as a safe haven market.”
Ole Hansen, however, who is Head of Commodities Strategy at Saxo Bank, thinks the bullish trend is running out. “I see it lower as I think the rally is running on the fumes of FOMO and traders chasing momentum using derivatives,” he said, adding that “in the short term, physical demand is likely to dry up until investors adapt to these new and higher price levels.”
Adrian Day, president of Adrian Day Asset Management, meanwhile, expected the price of gold to change little in the short term.
“A pause in the strong move higher is overdue and could come now that the Federal Reserve’s first rate cut is in the rearview mirror,” he said. “In the next six and 12 months, I couldn’t be more optimistic as Western investors finally start buying gold,” he added. “But markets don’t go up in a straight line forever.”
Technical Analysis: Gold extends decline from new all-time highs
Gold extends its decline after reaching all-time highs. The precious metal remains in a short, medium and long-term uptrend, however, and since it is a fundamental principle of technical analysis that “the trend is your friend,” the odds favor even further to the upside for the yellow metal.
XAU/USD Daily Chart
Gold remains overbought, according to the Relative Strength Index (RSI) momentum indicator. It has also now almost fallen back into neutral territory (below 70) and if it closes (on a daily basis) back within neutral it will be a signal for traders to close their long positions and open shorts. As it stands, simply being overbought, traders are advised not to add to their long positions.
If a deeper correction evolves – as now seems likely – firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fib of the September rally).
Given the precious metal’s entrenched uptrend, however, there is a good chance that any correction will lose steam and the bulls will resume pushing the price higher. If Gold breaks to new highs, it will further reconfirm the metal’s bullish bias. The next upside targets are the round numbers $2,700 and then $2,750.
Gold FAQs
Gold has played a fundamental role in human history, as it has been widely used as a store of value and medium of exchange. Today, apart from its brilliance and use for jewelry, the precious metal is considered a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation, since it does not depend on any specific issuer or government.
Central banks are the largest holders of Gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase Gold to improve the perception of strength of the economy and currency. High Gold reserves can be a source of confidence for the solvency of a country. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase since records exist. Central banks in emerging economies such as China, India and Türkiye are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.
The price of Gold can move due to a wide range of factors. Geopolitical instability or fear of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, the price of Gold tends to rise when interest rates fall, while rising money prices tend to weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is traded in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold in check, while a weaker Dollar is likely to push up Gold prices.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
