On Whit Monday, May 20th, the price of gold reached a new all-time high of USD 2,450. However, this milestone was immediately followed by a sharp pullback to USD 2,287, from which the gold market has so far been unable to recover sustainably.
Moreover, gold prices have been getting stuck above USD 2,400 since mid-April. Unlike previous gold rallies, which were often characterized by an exaggerated and vertical finish, the current situation may indicate a tough and longer-lasting top formation.
The bulls, on the other hand, can rightly argue that the gold price is currently only going through a well-deserved consolidation phase after an impressive eight-month rally with a gain of over +35% from peak to trough. The two-month sideways movement, which is erratic but primarily at a high level between USD 2,300 and USD 2,400, could therefore be interpreted as a healthy breathing space before the uptrend may possibly continue.
Seasonal and geopolitical factors in focus
However, critical observers of financial markets are focusing on the decreasing momentum of gold´s uptrend that started in early October 2023. Given the normally significantly reduced trading volumes in the summer months and the ever-escalating geopolitical tensions combined with the waning monetary and fiscal stimulus measures in a still very restrictive interest rate environment, a healthy pullback in stocks should also lead to a pullback in the gold price. A realistic scenario would be a correction back to the breakout level of around USD 2,100 over the coming months.
Crucial Support at around USD 2,280
However, as long as gold does not fall below its May 3rd low of USD 2,277, the interpretation of current market developments remains a question of individual perspective and expectations and is therefore truly in the eye of the beholder. Both optimistic and pessimistic views can be justified by the current price movement of gold. Ultimately, this is exactly what leads to this tough and tricky sideways phase.
Gold in US-Dollar – Stochastic Oscillator with new buy signal
Gold in US-Dollar, daily chart as of June 16th, 2024. Source: Midas Touch Consulting
While the gold market experienced six heavy sell-off days since mid-April, our initial assumption that gold prices were topping out and a larger pullback was imminent proved overly pessimistic. Despite these downward pressures, the gold market has demonstrated resilience. Instead of setting new lows straight away, gold prices staged a respectable recovery starting from USD 2,277. This led to a trend reversal, at least temporarily, and culminated on Whit Monday with a new all-time high of USD 2,450.
At this high, however, the bears returned to the market with force and have been pushing gold prices purposefully south over the past four weeks. With a low of USD 2,287 eight days ago and USD 2,296 as of last Thursday, the USD 2,300 mark came under heavy pressure again. Nevertheless, the bulls managed to break free again this Friday, just before the weekend, as gold was able to recover a good bit with prices closing at USD 2,332.
Potential head-and-shoulder topping formation
Hence, the current situation remains undecided, as trading is still taking place in the sideways zone between USD 2,300 and USD 2,400. However, the oversold daily stochastics has activated a new buy signal and now has plenty of room to move upwards. A renewed attack on the USD 2,400 mark is therefore quite conceivable. The upper Bollinger Band on the daily chart would currently allow prices up to around USD 2,412.
It is therefore possible that gold will form the right shoulder of a potential head-and-shoulder topping formation in the coming weeks. However, for this to happen, gold would have to recapture both the resistance zone around USD 2,340 as well as the 50-day line (USD 2,345) in the next step.
Overall, the picture remains somewhat disjointed due to the wild up and down movements in the last two months. Obviously, gold is consolidating at a high level. A break below USD 2,280 is needed to give the bears a boost and intensify the correction. On the upside, only prices above USD 2,430 to 2,450 would undoubtedly confirm the continuation of the uptrend.
Summary: Gold – Breather or Top Formation
Gold vs. Gold ETF-Holdings, as of June 13th, 2024. Source: Bloomberg Intelligence
While around 13 million ounces of gold have entered the market in the West since the end of 2022 through outflows from exchange-traded gold funds (ETFs), strong purchases by numerous central banks and physical demand from China have nevertheless caused gold prices to rise significantly. Starting from the triple bottom of around USD 1,615 in autumn 2022, the price of gold has risen by around USD 835, or over 51%, in the last one and a half years.
China’s official gold reserves rose 18 months in a row. This is the slowest rise since the PBoC resumed announcing gold purchases in November 2022. China’s official gold holdings now stand at 2,264t, accounting for 4.9% of total foreign exchange reserves, the highest ever. – World Gold Council
Recently, however, China has significantly slowed its gold purchases in view of the increased price level. In fact, gold imports into China totalled 77t in April, 8t lower m/m and a 24t fall y/y.
Temporary Decline in Demand from China
This means that an important pillar of demand is no longer there, at least temporarily. It is conceivable that Chinese buyers will only become more prominent on the buying side again when gold prices fall and possibly only after their “Golden Week” in China at the beginning of October.
In the current environment, however, western gold purchases are unlikely to be able to compensate for this drop in demand. The “normal” mainstream investor is too focused on the hype surrounding Nvidia and artificial intelligence. And if the correction in the DAX as well as the French CAC 40 and possibly also in the American stock markets expands, liquidity in the thin summer trading could very quickly become scarce. Then the entire financial system will rumble. A geopolitical escalation, on the other hand, is likely to cause much larger shock waves.
From a technical point of view, however, there could still be another attempt at recovery on the gold market. This could possibly bring the right shoulder of the top formation with prices around or slightly above USD 2,400. Overall, however, the sideways movement will continue above USD 2,280 and below USD 2,430.
The Bigger Picture: Gold’s Bullish Trajectory
While the potential for gold to test its former resistance and breakout level around USD 2,100 is a notable milestone, it pales in significance compared to the broader bullish outlook for precious metals. Our long-term analysis suggests that this bull market has far more room to run, with gold prices poised to reach unprecedented heights. In fact, we hold the strong conviction that gold prices are highly likely to surpass the USD 3,000 mark within the next 6 to 24 months. This projection is underpinned by a confluence of factors driving sustained demand and supporting gold’s status as a premier safe-haven asset.
Driving Forces Behind Gold’s Bullish Trajectory
- Global Economic Uncertainty: Persistent concerns over economic growth, geopolitical tensions, and potential market turbulence continue to fuel demand for gold as a reliable store of value and portfolio diversifier.
- Inflationary Pressures: With inflation rates remaining elevated across major economies, gold’s traditional role as an inflation hedge is likely to sustain its attractiveness among investors seeking to preserve purchasing power.
- Central Bank Policies: Accommodative monetary policies, lowering interest rates, and quantitative easing measures by central banks globally tend to favor non-yielding assets like gold, as the opportunity cost of holding it decreases.
- Weakening Fiat Currencies: Concerns over currency debasement and the erosion of purchasing power due to excessive money printing could further bolster gold’s appeal as a tangible asset with intrinsic value.
Conclusion
While short-term fluctuations and technical levels are noteworthy, the overarching narrative for gold is one of sustained bullishness. Our analysis suggests that the current bull market in precious metals has significant upside potential. In fact, gold prices are poised to shatter previous records and establish many new all-time highs in the coming years.
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