Gold Consolidation After Breakout Points to Continued Bull Run

This article discusses the dynamics of gold prices following the breakout above $2,500 to understand potential future price movements. The upcoming core PCE inflation data may introduce significant volatility, which could influence the direction of gold prices. The price consolidation after the breakout highlights market strength and increases the likelihood of further upside in the gold market.

Gold Market Shows Strength with Continued Rally Above Breakout Level

The gold market has broken out of the red channel, as seen in the daily chart below, and is currently consolidating at higher levels. This consolidation is taking place just above the channel support, where the breakout occurred. The strong rebound from within the channel suggests that this breakout is significant and that prices are likely to continue trading higher. On Thursday, gold prices rebounded with a strong daily candle at the support region, signaling the continuation of the strong rally within the upward trend. The RSI is still consolidating before reaching overbought levels, indicating that there is still potential for gold to rally further.

This bullish price structure is also evident in various daily gold spot charts, which show that prices are consolidating above the breakout region. However, there is still potential for further upside, as indicated by the ascending broadening wedge. As per our previous discussion, the primary target for the gold market after breaking out of the $2,075 inflection region is $3,000, and prices appear to be aiming for this level in the next few months.

The Next Bull Run for Gold

As discussed above, the gold market is in a strong bullish trend, as shown in the monthly chart below. The chart explains the major bullish phases of the 21st century, with the first bull phase starting in 2001 and peaking in 2011. The second bull phase began in 2019, and gold is currently in this phase, likely to remain within a strong bullish trend. The bullish phases on the chart were confirmed when the 10 EMA crossed above the 20 EMA, and the bullish phase peaked when the 10 EMA crossed below the 20 EMA.

It has been observed that the second bullish phase of the 21st century began in 2019, when the 10 EMA crossed above the 20 EMA, sparking a strong surge in the gold market. To kickstart this rally, two inflection levels, $1,680 and $2,075, were previously discussed. It was noted that a break above $2,075 would initiate a strong surge in the gold market. Since this level was broken, gold is now in surge mode, aiming for $3,000 as the primary target of this breakout.

The 10 EMA is currently stretching away from the 20 EMA, indicating that gold prices are in a strong bullish trend and further upside is likely. Moreover, it is interesting to note that the gold market tends to move higher when it is at overbought levels. Since the gold market has entered overbought levels, the upside potential for gold remains high. Therefore, investors can consider buying gold during market dips.

Evaluating the Possible Impact of PCE Inflation Figures on Gold

As discussed earlier, the gold market is currently consolidating after its recent breakout. The upcoming release of the core Personal Consumption Expenditures (PCE) Price Index from the US Bureau of Economic Analysis (BEA) is likely to significantly impact the market. This report is expected to provide crucial insights that could influence gold prices in the near term. As the Federal Reserve’s primary measure for gauging inflation, the core PCE Price Index is highly regarded for its ability to provide a clear picture of underlying inflation trends by excluding more volatile components like food and energy prices. Should the PCE data reveal inflation that exceeds expectations, the Federal Reserve may be inclined to adopt a more aggressive approach, potentially raising interest rates sooner than previously expected. Higher interest rates make non-yielding assets such as gold less attractive, which could put downward pressure on gold prices.

On the other hand, if the PCE inflation figures are lower than expected, this could lead to expectations of a more cautious approach from the Federal Reserve regarding future interest rate hikes. This situation might weaken the US Dollar, thereby increasing the attractiveness of gold as a safe haven for investors. A weaker Dollar reduces the cost of gold for international buyers, which can enhance demand and potentially push gold prices higher. Additionally, if the market perceives that the Fed is less likely to raise rates soon, gold’s role as a hedge against inflation and currency devaluation becomes more appealing, potentially boosting its value.

In the short term, the gold market could see increased volatility as traders and investors react to the anticipation and release of the PCE data. Market participants often reposition themselves ahead of important economic reports, leading to higher trading volumes and potential price fluctuations. The market’s response following the data release will largely depend on how the actual figures align with expectations. A significant deviation from forecasted numbers could cause abrupt changes in gold prices as the market recalibrates its expectations regarding inflation and future monetary policy actions by the Federal Reserve.

The chart below shows the US Core PCE Price Index, both on a year-over-year (YoY) and month-over-month (MoM) basis, with data points spanning from early 2022 to mid-2024. The YoY index shows a declining trend, decreasing from a peak above 4.5% to 2.63%. Meanwhile, the MoM index has remained relatively stable around 0.2%, indicating a steady, though low, monthly inflation rate. This declining trend in the YoY Core PCE suggests that inflation pressures are easing. For the gold market, lower inflation and a potentially less hawkish Federal Reserve might lead to a weaker US Dollar, which could support higher gold prices as gold often benefits when the Dollar is weaker.

Bottom Line

In conclusion, the gold market is currently experiencing a period of consolidation following a significant breakout, suggesting potential for further upward movement. The market’s bullish trend is supported by historical patterns and technical indicators, such as the crossing of the 10 EMA above the 20 EMA, indicating a continuation of the upward momentum. With the upcoming release of the core PCE Price Index, the market could see additional volatility, depending on how inflation data affects Federal Reserve policy expectations. Should inflation come in lower than expected, the prospect of a weaker US Dollar could further boost gold prices, making it an attractive asset for investors seeking a hedge against currency fluctuations and inflation. Gold is on track to reach its primary target of $3,000 and any dips in prices are buying opportunities for investors.