Gold: Momentum Stays Strong Despite Signs of Near-Term Exhaustion
LONDON (October 20) The price of gold hit repeated all-time highs last week, before peaking, for the time being, at $4380 on Friday. From there, the metal took a $195 intraday drop to momentarily move back below $4200, before bouncing back slightly, leading to a more cautious start to this week’s trading. With the metal hitting new record highs almost on a daily basis, it felt like there was no real selling pressure last week until it finally succumbed to profit-taking pressure on Friday. Hardly a surprise to be fair, with the market being so severely overbought. But was that the end of the bull trend? It is far too early to say, although a large bearish looking candle at the peak does point to at least a temporary top, which wouldn’t be a bad thing. So, I certainly wouldn’t be surprised if gold were to ease back a little more from here, and potentially even head back down to $4K, before bouncing back or consolidating. That said, it is worth pointing out that gold has formed lots of false top signals during this bull run, and Friday’s price action could be yet another example of that. This calls for caution if you are trading it on the short side.
What to Watch for This Week?
The week ahead is set to be a busy one for the earnings calendar, while the macro calendar is again set to be quieter with the ongoing US government shutdown delaying the release of data there. That being said, the BLS is expected to release the delayed CPI on Friday, October 24. Expectations point to a month-over-month reading of 0.4% for the headline and 0.3% for the core CPI. If this is the case, a rate cut at next week’s FOMC meeting would be further cemented, potentially keeping gold prices supported. All told however, inflation is unlikely to have major implications for the FX markets, and by extension gold, given that the Fed’s focus is now on employment. That said, a massive beat or miss should still cause significant volatility. Elsewhere, UK CPI on Wednesday and Global PMIs on Friday should bring about a bit of volatility for the dollar which could impact gold prices.
What’s Driving Gold Prices?
The metal has been on a tear this year, and until Friday, it didn’t look like it wanted to stop. Supporting the rally has been expectations of continued central bank buying, which means traders have been trying to front-run them by bidding up prices. Expectations that the Fed will cut rates two more times this year and possibly by an additional 75 basis points in 2026, means investors are expecting bond yields to fall and the dollar to remain weak. Then there is haven demand, which seems to be only benefitting gold right now. With US–China trade tensions being reignited in the last couple of weeks, investors have had even more reasons to hedge their long equity bets by diversifying into gold.
Can Gold Head to $5K?
While the correction risks are there, the fact that the momentum has been so strong and pullbacks shallow, it appears like market participants don’t expect a sudden plunge in gold prices when it eventually does top out. The trend has to weaken first before it can reverse. That is also encouraging the bulls to keep hold of their positions for as long as possible. With the $5K handle now just $700 or so away, I wouldn’t bet against gold getting there eventually. But I feel a long-overdue correction is first needed to shake out the weaker hands and encourage fresh dip buyers to jump on the bandwagon. Was Friday the turning point? Only time will tell. But we have to get more downside follow though if Friday did mark the top. So far in today’s session, we haven seen any downside follow through yet.
Investing.com
