Gold’s rally on pause: Analysts see correction as ‘healthy’ before next leg higher

NEW YORK (October 24) After nine consecutive weeks of higher prices, the gold market looks set to end the week in negative territory following a dramatic and volatile selloff.

The precious metal started the week with renewed bullish momentum, closing at a record high above $4,355 an ounce on Monday. However, a wave of selling pressure early Tuesday at the London market open quickly turned into a tsunami, with gold and silver seeing their biggest one-day drops in years.

While the precipitous decline has cooled exuberant bullish momentum in the yellow metal, some analysts note that the technical damage has been limited, as prices have managed to hold critical near-term support at $4,000 an ounce — at least for now.

Gold is poised to end the week above $4,100 an ounce as inflation pressures remain relatively subdued, albeit at elevated levels. At the same time, preliminary data from the University of Michigan show that consumer sentiment has fallen to its lowest level in five months. Spot gold last traded at $4,112.20 an ounce, down 0.32% on the day and more than 3% lower than last Friday.

“Gold bulls were injected with confidence this afternoon after cooler-than-expected inflation figures reinforced bets over the Fed cutting rates next week,” said Lukman Otunuga, Manager, Market Analysis at FXTM. “Interestingly, the technical picture is veering in favour of bears, with weakness below $4,050 opening a path toward $4,000 and lower.”

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that while gold has managed to hold critical support for now, he doesn’t expect the selling pressure is completely over.

“I’m in no hurry to get back in, with the current correction being flow- and not data-driven. In other words, a weaker-than-expected CPI leaving the door open for a rate cut will add to underlying support for bullion, but whether $4,000 will be the low is still too early to say,” he said. “Monday’s sharp drop to $4,000 signaled the start of a consolidation phase that was both overdue and necessary.”

Although gold appears to be entering a new period of consolidation — similar to the price action seen between May and August after prices broke above $3,000 an ounce — analysts note that the fundamental drivers that have propelled gold prices more than 60% higher this year remain in place.

Michael Brown, Senior Market Analyst at Pepperstone, said he expects gold prices to trade between $4,000 and $4,400 an ounce in the near term, with risks skewed to the upside as global government debt continues to grow at unsustainable levels and central banks keep increasing their gold reserves.

“The bull market is far from dead; instead, it's just taking a bit of a breather,” he said. “What we’ve seen in recent trade looks to be the culmination of a parabolic rally that went too far, too fast, and ultimately ended up pulling back in aggressive fashion, as new longs bailed and those who’ve been in the trade for some time sought to book profits.”

Neil Welsh, Head of Metals at Britannia Global Markets, said he doesn’t see a top in gold anytime soon, adding that the market was long overdue for a cooling-off period.

“Gold’s recent volatility looks more like a constructive correction than a reversal,” he said. "The longer-term narrative of ongoing inflation risks, strong central bank buying, persistent geopolitical uncertainty, and expectations of further Fed rate cuts remains intact. Prices might spend time ranging between $4,000 and $4,200 as new positions build, but the structural factors pointing toward higher gold remain convincing. The move from $4,100 to $5,000 could take longer than the explosive leg that preceded it, but this move could attract dip-buying interest looking to take advantage of short-term weakness."

Ryan McIntyre, Managing Partner at Sprott Inc, said that it is difficult to see gold prices moving materially lower as geopolitical and economic uncertainty remain elevated. The comments come as the U.S. continues to negotiate with China to make a trade deal; meanwhile, President Donald Trump has called off all trade talks with Canada.

“The safe-haven uncertainty trade is still alive and well,” he said.

U.S. economic data will once again be limited next week as Congress remains unable to pass new funding legislation; however, the main event remains the Federal Reserve’s monetary policy decision.

Although inflation remains relatively elevated above the central bank’s 2% target, many analysts and economists do not expect it to inhibit the current easing cycle. According to the CME FedWatch Tool, markets fully expect the Federal Reserve to cut interest rates by 25 basis points next week. Markets are also pricing in another rate cut in December.

Some analysts have said that with gold holding support above $4,000 an ounce, the market has already priced in the Federal Reserve’s easing path.

“I think a lot of optimism is already priced in, and there is a possibility that we have already seen the highs for this year for the shining metal,” said Naeem Aslam, Chief Investment Officer at Zaye Capital Markets. “The price of gold could retest support at $3,800 in the coming days as we think the FOMC meeting is going to create pressure on the price of gold.”

Ahead of the FOMC meeting, the Bank of Canada will announce its monetary policy decision on Wednesday morning, while the Bank of Japan will release its decision around midnight. On Thursday morning, the ECB will hold its monetary policy meeting.

Economic data to watch next week: 
Tuesday: U.S. Consumer Confidence
Wednesday: Bank of Canada monetary policy decision, US Pending Home Sales, Federal Reserve monetary policy decision, Bank of Japan monetary policy decision
Thursday: ECB monetary policy decision

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