Gold analysis: precious metal about to stage a long-overdue correction?

Today’s release of mostly stronger US data, including the weekly jobless claims, helped to provide some support for the US dollar and unwind some of the sharp moves we saw in the FX and commodities space overnight. Indeed, the markets experienced another risk-on session in the first half of Thursday, with China leading the charge as stocks surged on the back of government stimulus efforts. This fuelled demand for China-related assets, including copper, silver, and other base metals, along with stocks tied to China, many of which are part of major European indices like the DAX. Both the DAX and S&P 500 reached new all-time highs, with gold following suit. But the yellow metal has since drifted lower from its earlier highs, potentially on the verge of creating a bearish reversal signal. However, the US session has just started so we may have to wait to see how the rest of the session unfolds. In any case, profit-taking may be on the horizon. This wouldn’t necessarily mean the end to our bullish gold forecast, as dip buyers stand ready to take advantage of any short-term weakness in prices.

Gold forecast: is Profit-taking on the Horizon?

Gold may be primed for some profit-taking in the near future. Historically, whenever the Relative Strength Index (RSI) crosses above 70, as it has now, we've often seen either a multi-day or multi-week consolidation or some selling pressure to cool off the overbought conditions.

Source: TradingView.com

Currently, not only is the daily RSI indicating on the gold chart at overbought levels, but the weekly RSI is also hitting extremes. And on a monthly scale? Sure enough, the RSI hasn't been this elevated since the height of the pandemic in 2020.

While the RSI suggests gold could be due for a correction, it’s not a clear sell signal on its own. Technically, gold is still in a strong uptrend, so it's tough to predict just how high the metal could climb. However, be prepared for at least a short-term pullback or consolidation. Once gold retraces a bit, it could continue its upward march towards my long-term target of $3,000. In the near term, though, my next realistic upside target is $2,700, now that gold has breached the $2,600 level.

In terms of key support levels, the $2,600 mark is the first short-term support to watch on the daily chart. Below that, the $2,530 area looks interesting, followed by $2,500, where this year's bullish trend comes into play.

Summary

While I anticipate some profit-taking soon, this doesn’t change my long-term bullish gold forecast, a view I’ve held for years. Though gold may not hit the $3,000 milestone this year, I still see that as the eventual target. Factors like accelerating rate cuts from major central banks like the Fed, ongoing geopolitical tensions, and central bank gold purchases all create a favourable environment for the yellow metal's continued strength.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R