Gold Set for Strong Surge After Breaking Record Highs

The recent economic uncertainty and speculations about interest rate adjustments by the Federal Reserve have significantly impacted the gold market. The plunge in temporary jobs and a slight rise in unemployment further suggest a slowing economy, prompting expectations of monetary easing measures. The technical pressure on the US dollar index and the breakout of gold prices to record highs highlight the ongoing strength of the gold market.

This article continues the discussion from the previous article and presents the technical outlook of the gold market to determine the next direction after the recent technical breakout. It is found that gold has completed the seasonal correction and initiated the next strong surge in the market.

Economic Uncertainty and Interest Rate Speculations

Recent economic events have had a notable positive impact on the gold market. Although the economy saw an increase of 206,000 jobs in June 2024, revisions to the previous months’ job figures suggest a higher likelihood of an early interest rate cut by the Federal Reserve. This anticipation has caused long-term Treasury yields to drop, which in turn has boosted gold prices. During periods of economic uncertainty or when lower interest rates make yield-bearing assets less attractive, investors often turn to gold as a more favourable investment option.

Additionally, a plunge in temporary jobs in June heightens labour market uncertainty, leading to further speculation that the Federal Reserve might cut interest rates to support the economy. This scenario supports the gold market because lower interest rates reduce the opportunity cost of holding non-yielding assets. Therefore, investors are more likely to buy gold to protect against economic instability driving its price higher.

On the other hand, the slight increase in unemployment to 4.1% adds to the perception of a slowing economy. As the labour market shows signs of weakening, the Federal Reserve is expected to adopt a more cautious approach and consider monetary easing measures to sustain economic growth. This potential policy shift benefits gold, as lower interest rates historically lead to higher gold prices due to the reduced cost of holding gold and increased demand for safe-haven assets.

Moreover, statements from Federal Reserve officials have bolstered expectations of interest rate cuts, further supporting the gold market. Fed Chair Jerome Powell’s comments on progress in controlling inflation and San Francisco Fed President Mary Daly’s confidence in achieving the central bank’s inflation target suggest that a policy adjustment is on the horizon.

These developments have caused a drop in 10-Year Treasury Yields below the 4.20% support level and created a favourable environment for gold. Investors seeking stability amidst economic fluctuations and lower returns on other investments find gold appealing as a secure store of value. From technical perspective, 10-Year Treasury Yield is breaking from the triangle and looking to drop further.

Similarly, the US dollar index is constrained within a triangle formation and has formed a double top at the resistance level of this triangle. The blue neckline is now breaking, keeping the index under pressure. A weaker dollar further supports the gold market. The pressure in the US dollar index from the past week has resulted in a breakout of the gold market from the record highs.

Future Trends in the Gold Market

As discussed in the previous article, a price correction to at least $2,285 was expected during the May and June timeframe, marking a strong bottom for the next rally toward $3,000. This correction has now been completed, and gold has initiated its next move towards this target. Additionally, a breakout from the record highs was anticipated in July, following the seasonal correction in May and June. This breakout has set the stage for much higher prices.

The updated weekly chart below highlights the primary target of the breakout at $2,075, which is around the $3,000 region in the spot gold market. This target is supported by the emergence of an ascending broadening wedge formation since 2016, indicating that prices will remain highly volatile. The ongoing crisis in the Middle East further adds to this volatility, enhancing the appeal of safe haven assets like gold. The emergence of an inverted head and shoulders pattern within this ascending broadening wedge fuels the market and maintains the bullish momentum.

The chart above highlights the red rectangle, which indicates the buying interest in gold, with $2,285 as the upper boundary of this support. The gold market rally in July falls within this rectangle, showing that the price correction was within expectations. To delve deeper into this analysis, the inverted head and shoulders pattern is zoomed in to observe the technical developments in the gold market.

It was found that once the inverted head and shoulders pattern broke, the price formed a pennant in the last quarter of 2023, indicating price compression, and initiated a strong surge in the first quarter of 2024. This pennant is marked by the black triangle in the chart below. The breakout from this price compression led to a strong market surge, further validated by the breakout of the long-term pivotal area of $2,075, as previously discussed.

Interestingly, the price has now formed another compression through strong consolidation in the $2,285 to $2,450 region. Yesterday, the price broke out of this consolidation as the seasonal correction in the market concluded. Typically, the seasonal correction in May and June involves a deeper downturn, but 2024 is different. Instead of a deeper correction, the price has consolidated within ranges, initiating another strong surge in the gold market. This surge is expected to produce a market top, aligning with the target of the ascending broadening wedge.

Investors can continue to buy gold as the rally from $2,075 has begun and accumulate more positions if the price corrects lower.

Bottom Line

In conclusion, the gold market is currently benefiting from a confluence of economic factors, including job growth revisions, rising unemployment, and speculations about interest rate cuts by the Federal Reserve. These elements have led to a drop in long-term Treasury yields and increased demand for gold as a safe-haven asset. Technical pressures on the US dollar and recent breakout patterns further support this bullish outlook.

With the Federal Reserve officials hinting at monetary easing and the US dollar index showing signs of weakness, gold prices are poised to rise. The technical breakout in the gold market indicates that the seasonal correction is complete, and prices are now aiming for the primary target of $3,000. Investors may consider continuing to buy gold and look to accumulate positions during any price corrections as the market trends towards its target.