Market Data 
- Gold is pulling back after a strong uptrending move took it to new highs of $2,685 last week.
- A rally in Chinese equities and an improved outlook for the property market are diverting capital away from the safe-haven.
- Technically, XAU/USD threatens to exit overbought territory, signaling a deeper pullback could evolve.
Gold (XAU/USD) pulls back to trade in the $2,630s per troy ounce on Monday, as traders take profit after last week’s almost 1.4% rally to new all time highs. A historic rally in Chinese stocks, which saw the benchmark CSI 300 gain over 7.50% during the Asian session on Monday alone, as well as a brighter outlook for the Chinese property market due to falling mortgage rates diverts capital away from Gold as a safe-haven.
Gold traders have been surfing a wave that started after a seismic shift in the US, where the Federal Reserve (Fed) opted to cut interest rates by a “jumbo” 0.50% at their September meeting, lowering the opportunity cost of holding the precious metal. However, better-than-expected US data since then have slightly lowered the chances of the Fed making another aggressive 50 basis point (bps) rate cut in November, though chances of this scenario occurring still remain above 50%, according to the CME FedWatch tool.
Gold pulls back but investors have mixed views about its future
Gold pulls back after touching a new record high of $2,685 last week on the back of the Fed kicking off its easing cycle and central banks globally following the US reserve bank’s lead.
Is the correction likely to deepen or will Gold resume its uptrend and push to yet higher highs? It appears investors have mixed views about the short-term prospects for Gold, according to a Weekly Gold survey compiled by Kitco News.
Darin Newsom, Senior Market Analyst at Barchart.com, sees the uptrend continuing: “Applying Newton’s First Law of Motion to markets: A trending market will stay in that trend until acted upon by an outside force. That outside force is usually investor activity, and given the potential for global chaos is only going to increase over the next month, investors aren’t likely to change their mind on gold as a safe-haven market.”
Ole Hansen, however, who is Head of Commodity Strategy at Saxo Bank, thinks the uptrend is petering out. “I see it lower as I believe the rally is running on fumes from FOMO and momentum-chasing traders using derivatives,” he said, adding that “in the short term, physical demand is likely to dry up until investors adapt to these new and higher price levels.”
Adrian Day, president of Adrian Day Asset Management, meanwhile, expected the price of Gold to change little in the short term.
“A pause in the strong move up is overdue and could come now that the Federal Reserve’s first rate cut is in the rear mirror,” he said. “Over the next six and 12 months, I could not be more bullish as Western investors finally start to buy Gold,” he added. “But markets do not go straight up forever.”
Technical Analysis: Gold extends pullback from new all-time highs
Gold extends its pullback after hitting record highs. The precious metal is still in an uptrend on a short, medium and long-term basis, however, and since it is a foundational principle of technical analysis that “the trend is your friend,” the odds favor even more upside for the yellow metal.
XAU/USD Daily Chart
Gold remains overbought, according to the Relative Strength Index (RSI) momentum indicator. It has now also almost fallen back down into neutral territory (below 70) and if it closes (on a daily basis) back inside neutral it will be a sign for traders to close their long positions and open shorts. As is it, simply by being overbought it advises traders not to add to their long positions.
If a deeper correction evolves – as now looks likely – firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement of the September rally).
Given the precious metal’s entrenched uptrend, however, there is a good chance any correction will run out of steam and bulls will resume pushing the price higher. If Gold breaks to higher highs, it will further reconfirm the metal’s uptrending bias. The next targets to the upside are the round numbers $2,700 and then $2,750.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
