- Gold forecast remains positive as metal smash through $3,600 on bullish momentum
- Friday’s weak US jobs data cemented Fed rate-cut expectations
- CPI data this week could decide whether the rally stretches further
Another day, and another record is smashed in the gold market with the metal now reaching north of the $3,600 handle. The momentum from last week has continued thanks to a weaker US jobs report on Friday, which all but cemented expectations that the Federal Reserve will cut interest rates next week. The US dollar and by extension the gold forecast will be put to the test again in the coming days with the release of more US data, including inflation numbers.
Momentum driving gold to new highs
Given that there was no fresh news behind the latest gains in gold, it looks like the metal is continuing to benefit from ongoing momentum, especially as more and more technical resistance and psychological levels give way. Today, for example, it pierced through $3,600 per troy ounce where it had stalled on Friday to rally another $15 above this hurdle to another record high. Many traders are unwilling to book profit in a meaningful way just yet or stand in the way of this rally, to cause a shift in the trend. This was evidenced by gold consolidating for more than 100 days after hitting a then all-time high of $3,500 in April, before finally breaking higher again at the start of September. Accordingly, I will be expecting it to continue finding support on the dips until something fundamentally changes.
So, what factors have been driving gold to repeated highs?
Gold investors have been piling into the metal in part because of expectations of US interest rate cuts. Those expectations have been rising gradually thanks to weakening labour market data, while ongoing buying from major central banks are additional factors fuelling the metal’s sharp rally. One other major reason why gold has rallied so strongly is that foreign demand for US Treasuries has fallen at the same time as it has risen for gold. This clearly highlights investors’ loss of confidence in the US, which has been fuelled, in part, by concerns over the Fed’s independence, but more so due to the rising levels of US debt relative to GDP. With signs of economic weakness, the debt to GDP ratio is only going to rise to scary levels, if Trump’s tax cut and fiscal spending plans don’t bring about a major economic recovery. Investors in turn will demand higher yields on their government bonds if they deem the government having a higher risk of not being able to repay its debt.
Against this backdrop, it is difficult to be bearish on gold right now, not when the chart still has momentum behind it.
CPI to impact gold forecast this week
This week’s CPI release will be the last of the major US data scheduled ahead of the Fed’s rate decision next week. If we see an unexpectedly weaker inflation report, then there may be an increase in the pricing of a 50-bps rate cut, although when it comes down to the actual decision, I don’t see an outsized rate cut happening.
Still, if weakens in US data continues, then so too should the ongoing bullish momentum in gold, as both the US dollar and yields fall further. Otherwise, if the US data shows surprising resilience in the coming weeks, then that might cause gold forecast to weaken, potentially leading to a correction from these elevated levels.
Technical gold forecast: key levels and trade ideas to watch
Only when we see a clear breakdown in the market structure of higher highs and higher lows, will the XAUUSD forecast look bearish. Until then, dip-buying is the name of the game, thanks to a strong bullish trend as indicated by rising moving averages, higher highs and what not. With that in mind, the first level of potential support now is at $3,600, marking Friday’s high. Below that, Thursday’s high of $3,564 will come into focus next, followed by $3,530, and if that breaks then a re-test of April’s high of $3,500 will be likely.
On the upside, there are no prior reference points to target other than round handles like $3,600 (now taken out), $3,700 and so on. Also in focus will be Fibonacci extension levels, with the 161.8% extension of the April-May drop coming in at $3,735.
All told, the gold forecast remains bullish even as momentum indicators like the RSI are flashing big warnings signs across all major time frames.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
