Gold Prepares for Next Surge Following Seasonal Corrections

The latest Nonfarm Payrolls (NFP) data indicates a rise in US employment exceeding expectations while also showing an increase in the unemployment rate and a decline in wage inflation. This mixed data led to a modest decline in the US Dollar, boosting gold prices as investors anticipated a potential rate cut by the Federal Reserve. Additionally, the People’s Bank of China’s (PBoC) decision to halt gold purchases for the second consecutive month may add some pressure on gold prices in the short term but the long-term market remains bullish.

The political uncertainty in France, Fed Chair Jerome Powell’s testimony and upcoming US inflation data are expected to influence gold’s move. This article provides an update to the previous discussion on recent price developments and identifies buying opportunities for investors. It appears that the price is nearing the end of its consolidation phase and is poised to initiate a strong surge in the gold market.

Market Recap

As per discussion in the previous article, gold prices have broken from the strong bullish price patterns, driven by significant economic and geopolitical events. Historically, the first notable breakout occurred from 1974 to 1978, where geopolitical tensions, including the 1973 oil embargo and the 1979 Iranian Revolution, and inflation drove gold prices from around $200 per ounce to over $800 per ounce by early 1980.

This period marked a +743% price surge, highlighting gold’s role as a safe-haven asset during economic instability. Following this peak, gold prices corrected over the next two decades before forming another cup pattern. After forming the cup pattern, prices broke out in late 2007 and hit record highs by 2011. This rally was fueled by economic uncertainties post the dot-com bubble, the 9/11 attacks, and the 2008 financial crisis, coupled with increased demand from China and India and declining gold production. These events resulted in a price gain of +659%, measured from the cup lows.

This decade has seen a new cup formation from 2011 to 2020, with the handle pattern indicating a strong bottom before another significant rally. The breakout above the critical $2,075 level in March 2024 signals the initiation of a long-term price surge projected to continue for several years. Historical data suggests gold prices could rise by approximately 700% from the August 2018 low, potentially reaching $8,364 in the coming years. Current geopolitical uncertainties, including the Middle East and Russia-Ukraine wars, have further supported this bullish outlook.

Despite expected short-term corrections in May/June, the long-term trend remains strongly bullish, with initial targets around $3,000, driven by solid buying interest and the broader economic context. Based on the previous analysis, a correction was expected in May and June 2024, with a likelihood of a strong rally in July and August.

Examining the Technical Price Development

The weekly chart below shows the formation of an ascending broadening wedge measured from the lows of $1,124.30 to the record highs. This pattern has also emerged as an inverted head and shoulders, with the head at $1,622.20 and shoulders at $1,673.30 and $1,810.80, respectively. The neckline of these patterns lies around $2,075, the pivotal level we have been watching for many years. As discussed in the previous analysis, this pivotal level was broken, and the price has initiated a strong surge to higher levels.

The important thing to consider is the price correction which started in May 2024 and led to the end of June 2024. The square area marked in the chart below was discussed and expected to be the bottom of the next strong surge targeting $3,000. The upper level of this square lies around the $2,285 region, where the recent bottom also developed. Last week’s rally after the NFP release has formed a strong weekly candle, indicating that the bottom is trying to form. However, this will be further confirmed when gold prices break the record highs of around $2,450.

Gold’s Next Move and Key Actions for Investors

The chart below shows the percentage of months in which gold closed higher than it opened for the past decade. It is found that June has closed positively only for 30% of the months. Therefore, the gold market typically corrects lower in June and rallies in July. However, so far, there has been no strong correction in June, and instead of these strong corrections, the market remains within a strong price consolidation between the $2,450 and $2,285 regions.

This strong consolidation further strengthens the bullish case in the gold market because consolidation after a strong breakout and long-term bullish formation indicates a healthy market and an upcoming rally.

Since the seasonal correction is about to end and gold has rebounded within the buying interest area, prices are likely to attract attention and start forming a bottom soon. However, traders may expect a few more consolidation periods before the next strong move. The chart below shows the rebound from the strong support region of $2,285 and $2,300, highlighted by blue circles. This indicates that there is strong support around this region and the market is attempting to initiate a strong move higher.

Moreover, the inside day candle on Thursday, just one day before the NFP announcement on Friday, followed by the breakout of this inside candle on Friday after the NFP release, indicates that prices are ready to surge higher. Investors can consider buying the dips in the gold market if the price corrects lower to the $2,370 area on Monday. The $2,285 level remains the pivotal point to negate the short-term bullish move.

Key Drivers Behind Gold’s Upcoming Movement

The chart below shows the NFP data for the past twelve months. Based on the data, employment in the US rose by 206,000 in June 2024, surpassing the market expectation of 190,000, despite a revision down from 272,000 to 218,000 in May. Moreover, the unemployment rate increased to 4.1% from 4%, while the Labor Force Participation Rate ticked up to 62.6% from 62.5%.

However, wage inflation declined to 3.9% in June from 4.1% in May. This wage inflation decline is observed by the yearly change in Average Hourly Earnings which is aligned with market expectations. This mixed employment data suggests a slightly cooling job market, which impacts broader economic sentiments.

The immediate reaction to the NFP data was observed in the US Dollar which was under modest selling pressure, with the USD Index dropping to 104.90 initially. This decline in the dollar boosted gold prices, leading to a strong close on Friday. Gold surged as investors anticipated a potential rate cut by the Federal Reserve in September, with market odds rising to 77% from 70% before the report. This expectation of lower interest rates typically benefits gold, as it reduces the opportunity cost of holding the non-yielding asset, thereby enhancing its appeal as a hedge against economic uncertainty.

On the other hand, the PBoC’s recent decision to halt its gold purchases for the second consecutive month in June has added pressure on gold prices. This pause in gold buying, especially by the world’s largest bullion consumer, has led to a decrease in gold reserves from $170.96 billion to $169.70 billion. The absence of additional Chinese gold purchases might weigh on gold prices as it signals reduced demand from a major market player.

However, if prices start to become cheaper, China may once again participate in the gold market to benefit from the lower prices. These actions for gold purchases may result in price consolidation in the gold chart, which are bullish factor for the gold market. These consolidations in the gold market further strengthen the bullish case.

The speculation about a potential rate cut by the US Federal Reserve in the third quarter could support gold prices. Additionally, political uncertainty in France, following exit polls suggesting a hung parliament after the final round of parliamentary elections, could further drive investors towards safe-haven assets. Traders will be closely monitoring Fed Chair Jerome Powell’s testimony on Tuesday and the US June Consumer Price Index (CPI) inflation data on Thursday for further cues on the economic outlook and monetary policy. These events are crucial to determine the next path for gold prices.

Bottom Line

In conclusion, the gold market has experienced significant bullish trends, breaking above the critical $2,075 level in March 2024. This breakout indicates that prices will continue to rise in 2024. The price corrections in May and June 2024 were expected and are positive signs, presenting a bullish outlook. As the seasonal correction comes to an end, the market is poised for the next surge, potentially reaching the $3,000 mark, supported by strong buying interest and broader economic trends. Investors can consider buying gold on dips.