(Kitco News) - After hitting record highs for the last six days, the gold market is taking a breather as it experiences some technical selling pressure heading into the weekend.
Solid buying momentum briefly pushed gold above $2,700 an ounce on Thursday. However, some analysts express growing concerns that the precious metal’s rally may be a bit overdone. December gold futures last traded at $2,669 an ounce, down nearly 1% on the day; however, prices are up nearly 1% from last Friday.
“After hitting a series of fresh record highs following a surprisingly large US rate cut, prices are showing signs of stabilizing. Some degree of buying fatigue is beginning to emerge, raising the question of whether we are close to a long-overdue consolidation or perhaps even a correction. Based on my estimates, the price could fall by 4–6% without damaging the overall bullish sentiment,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank, in a note on Friday.
Hansen added that he sees initial support at $2,670 an ounce, and if that breaks, the next level to watch is $2,547. In the worst-case scenario, gold could fall to support at $2,500.
Alex Kuptsikevich, Senior Market Analyst at FxPro, said he also sees gold running out of room on the upside, which increases the risk of a correction.
“Technically, gold has already crossed above the 161.8% level of the two-year rally since August 2018—a typical rally extension pattern along Fibonacci levels. When the price has moved so far into the area of historical highs, it becomes more difficult to find new upside targets,” he explained.
Looking ahead, Kuptsikevich noted that next week’s employment data could present some risks for gold.
“Gold's strong rally over the past three weeks is the most dangerous part of the trend for short-term sell-side traders who engage in selling without reliable signals. On a weekly timeframe, such a signal would be a negative weekly close,” he said. “We may get this signal as early as next Friday. The publication of monthly data on the US labor market will reinforce its importance for the markets.”
However, some analysts believe gold still has momentum. Bart Melek, Head of Commodity Strategy at TD Securities, said he expects gold prices to push back above $2,700, which is his year-end target. Last week, TDS exited a tactical short position with a more than 4% loss as the bank was positioning itself for market disappointment following the Fed meeting.
After cutting rates by 50 basis points and signaling that rates could fall to 3% by 2026, Melek said that the Fed is clearly in easing mode, which bodes well for gold.
Melek added that gold remains in a favorable position as the Federal Reserve lowers interest rates to support a weakening labor market, even as inflation remains elevated.
On Friday, the U.S. core Personal Consumption Expenditures (PCE) Index, which excludes volatile food and energy costs and is the U.S. central bank’s preferred inflation gauge, showed that consumer prices remain high. The data revealed U.S. PCE rising 2.7% in the last 12 months, up from 2.6% in July.
However, headline inflation rose only 2.2% due to falling energy prices.
Economists note that stubbornly elevated core PCE indicates inflation is becoming embedded in the broader economy.
“The Federal Reserve is clearly focused on the second half of its dual mandate, which is full employment, and this creates a perfect environment for gold,” Melek said. “There are risks that inflation will remain high, and with nominal rates going lower, real rates are declining even faster.”
James Stanley, Senior Market Strategist at Forex.com, also sees gold moving much higher.
“Gold is overbought on the monthly chart, weekly chart, and daily chart, but that doesn’t matter because it can push further into overbought territory,” he noted.
However, while Stanley expects gold prices to rise, he does not recommend chasing the market. Instead, he suggests that investors consider buying gold on pullbacks. He sees initial support at $2,650, followed by $2,635 and $2,600.
Despite potential short-term volatility, Stanley said that central bank easing, with the Federal Reserve cutting rates by 50 basis points and China announcing significant stimulus measures this week, supports the bullish case for gold.
Stanley emphasized that gold remains the only hedge against global currency depreciation as central banks around the world begin to ease interest rates.
“The world’s two largest economies are now actively applying pressure to boost growth through equity markets. If equity markets rise, consumers will feel more confident spending money. Gold reflects the acceptance of this global easing trend, and there are very few reasons why this trend would reverse,” he explained. “Gold is the only protection investors have against the dilution of global currencies.”
Friday’s nonfarm payrolls report will be next week’s main event. However, other reports, including job opening numbers and manufacturing activity data, are expected to create some volatility. Markets will also be listening closely to what Fed Chair Jerome Powell has to say next week when he speaks at the National Association for Business Economics (NABE) Annual Meeting. This will be Powell’s first live event since the central bank’s monetary policy meeting last week.
“So far, Fedspeak has coalesced around the idea that policymakers needed to start reducing restrictions. However, while the direction is clear, the pace remains uncertain. Fedspeak next week could add clarity, with Powell’s outlook at NABE garnering the most attention,” said fixed-income analysts at TDS in a note on Friday.
Economic data to watch next week:
Monday: Federal Reserve Chair Jerome Powell, speaks at NABE meeting
Tuesday: European CPI, ISM Manufacturing PMI, JOLTS Job Openings
Wednesday: ADP Employment report
Thursday: Weekly jobless claims, ISM Services PMI
Friday: Nonfarm payrolls report
