Gold to Surge Beyond $3000 As Bullish Trends Point to Long-Term Gains

The labor market in the United States shows signs of cooling, with modest job growth and easing wage pressures, which could influence gold prices as investors weigh the implications of potential Federal Reserve rate cuts. Economic indicators present a mixed picture, with stable retail sales but potential slowdowns in heavy truck sales and services, which may drive demand for gold as a safe-haven asset amid rising uncertainties. On the other hand, China’s significant divestments from U.S. Treasury bonds and increased gold holdings present the global dynamics influencing gold prices.

This article examines US labor market trends, the current state of economic activities, and recent catalysts that may impact the gold market over the next few months. The article provides a technical evaluation of long-term charts to understand price dynamics on quarterly, monthly, and weekly scales, projecting the future direction of gold prices.

Additionally, it discusses historical price analysis to forecast future gold price targets. The article notes that gold prices have broken the key level of $2,075, indicating the potential for higher prices in the coming years. The strong price behavior before and after the breakout suggests that price corrections within this uptrend offer excellent investment opportunities for long-term investors.

US Labor Market Trends and Implications for Gold

The current labor market conditions in the United States are characterized by a weak seasonally adjusted increase of 175K in non-farm payrolls, as shown in the chart below. This modest job growth has been the lowest since October 2023, and the stock market responded strongly due to the Federal Reserve’s increased expectations of potential rate cuts. This reaction presents the market’s focus on short-term policy shifts while ignoring long-term economic implications.

On the other hand, the average hourly earnings growth in April 2024 remained low at 0.20%, translating to an annualized rate of 2.4%. This indicates that inflationary pressures are easing, which is further supported by the fact that the unemployment rate is staying at a relatively low 3.9%.

The current inflationary conditions can also be examined by the chart below, which shows the relationship between average hourly earnings growth and inflation, focusing on the period from the past 12 months to April 2024 for production and non-supervisory employees. It is observed that the average hourly earnings growth has slowed down to 4.0% over the past 12 months.

When average hourly earnings grow slower, it indicates that inflationary pressures are decreasing. Inflationary pressures arise when wages increase rapidly, leading to higher business costs, which may pass these costs onto consumers through higher prices. Based on historical data, the growth of average hourly earnings exceeding the unemployment rate has been linked to high inflation, such as in the 1970s, as marked by the red circle in the chart below.

The Sahm Recession Indicator currently lies at 0.37, which suggests that the economy is not yet in recession territory. However, it is showing signs of slowing down. This indicator signals the onset of a recession when the three-month moving average of the unemployment rate rises by 0.50 percentage points or more relative to its previous 12-month low. It has historically been a reliable but lagging indicator. This indicator suggests an economic slowdown, but gold prices may rise as investors seek safe-haven assets to hedge against uncertainty and possible future economic downturns.

Moreover, the slowdown in job growth and moderate wage increases reflect a cooling labor market, which has significant implications for gold prices. Gold is seen as a safe-haven asset during economic uncertainty or when inflation expectations increase. With inflationary pressures easing and the possibility of rate cuts, the appeal of gold diminishes in the short term as investors might favor equities due to lower borrowing costs and improved stock market conditions. However, the long-term consequences of the current monetary and fiscal policies remain a significant concern.

Fiscal spending on infrastructure and efforts to onshore key industries, such as semiconductors, have kept non-residential construction jobs at elevated levels. While this has provided a buffer against a sharper economic slowdown, it also indicates a shift in the job market landscape with inflationary implications. If inflationary pressures resurface due to persistent fiscal spending, gold prices could see renewed interest as a hedge against inflation.

Overall, the labor market’s current state, with the mixed signals of slowing job growth and easing wage pressures, and the potential of Fed rate cuts suggests a complex outlook for gold prices. In the short term, reduced inflation expectations and bullish stock markets might harm gold demand. However, the long-term fiscal policy implications and potential for future inflationary pressures could sustain gold’s appeal as a safe-haven asset.

The Current State of Economic Activity and Consumer Confidence

Recent economic indicators reveal a mixed picture of activity and sentiment in the market. Real retail sales are gradually declining but remain aligned with their pre-pandemic trend, supported by factors such as full employment, lower inflation, and government initiatives to secure critical supply chains.

Light vehicle sales remain above 15 million units but still below 2019 levels. This indicates continued strong consumer confidence. Meanwhile, heavy truck sales rebounded to 40.2K units, which highlights the reasonable business activity. However, if the downtrend persists and sales drop below 37.5K, it could indicate a slowing economy, with a fall below 35K suggesting a recession is on the horizon.

The increase in the weekly hours worked at an annual rate of 1.8%, which lags behind the real GDP growth, implies potential productivity gains from advancements in AI and other new technologies, foreshadowing a possible slowdown in real GDP growth. Alternatively, the ISM Services PMI, which measures the economic health of the services sector, declined to 49.4% in April, indicating a contraction.

The ISM Manufacturing PMI also showed slight weakness at 49.2%. The significant observation is the decline in the services employment index to 45.9%, which indicates that job growth in the major services sector could decline rapidly.

These economic conditions have a direct impact on gold prices. As real retail sales stabilize and light vehicle sales reflect consumer confidence, the demand for gold may decrease in the short term. However, the potential slowdown in heavy truck sales and the contraction in the services sector, coupled with the risk of rising unemployment, could heighten economic uncertainty, driving investors towards gold as a protective measure.

Additionally, slower real GDP growth and the impact of AI and technological productivity gains could further influence market sentiment, supporting higher gold prices amid fears of economic instability and recession.

China’s Strategic Shift in Financial Investments and Its Global Impact

China’s significant divestment from U.S. Treasury and agency bonds in the year’s first quarter marks a strategic shift in its financial portfolio. According to Bloomberg, Beijing offloaded $53.3 billion of these assets, with an additional $22 billion sold through Belgium, often seen as a custodian of China’s holdings.

This move indicates China’s efforts to reduce its exposure to U.S. financial assets, possibly driven by geopolitical tensions and a desire for greater economic independence. The substantial sell-off could decrease demand for U.S. Treasuries, potentially driving up yields and impacting the broader financial market.

Simultaneously, China has been increasing its official gold holdings, reflecting a strategic diversification into safer and more stable assets. The premium on China’s domestic gold over the international price underscores the solid domestic demand for gold. This demand is partly fueled by a shift in investor behavior within China, where traditional investments in residential real estate have slowed since 2021. As real estate prices have plateaued, Chinese investors are increasingly turning to gold as a reliable store of wealth, further driving up domestic prices.

The implications of China’s financial strategies on global gold prices are significant. The divestment from U.S. bonds suggests a potential dollar weakening as China reduces its holdings in U.S. financial assets. A weaker dollar makes gold more attractive as an alternative investment, which increases prices.

The robust domestic demand for gold in China also contributes to global price increases. As one of the world’s largest consumers of gold, China’s increased buying activity can exert upward pressure on international gold prices, making gold a more appealing investment globally amidst economic uncertainties and shifting market dynamics.

Technical Evaluation of Gold Market

Historical Gold Breakouts Driven by Economic and Geopolitical Events

Based on the current fundamental and economic outlook, the expectations of rate cuts and a slowing economy may lead to a short-term correction in gold prices. However, the long-term outlook for the gold market remains strongly bullish, as seen in the quarterly chart below. The chart shows that gold moves within defined patterns, with the next upward leg initiated from the recent bottom. The emergence of geopolitical crises could undermine financial conditions and create market uncertainty, potentially driving gold prices much higher.

Interestingly, the quarterly chart presents that gold follows a “cup” formation pattern based on price data from the past five decades. Historically, gold prices form a cup before breaking higher. When gold breaks out from this cup pattern, the market becomes overbought based on the RSI indicator, and prices continue to advance within this overbought state. The actual surge in gold prices tends to occur when the market is overbought.

The first notable cup formation in the past five decades occurred from the first quarter of 1974 to the first quarter of 1978. Gold prices broke out in the third quarter of 1978, initiating a strong price surge in the market. This price surge was due to inflation, geopolitical tensions, and economic instability. During this period, the strong inflation was driven by rising oil prices from the 1973 oil embargo and the 1979 Iranian Revolution, which disrupted oil supplies and increased energy costs.

Additionally, geopolitical uncertainties emerging from the Iranian hostage crisis and the Soviet invasion of Afghanistan increased investor anxiety. Therefore, investors flocked to gold as a safe-haven asset, driving its price from around $200 per ounce in mid-1978 to a peak of over $800 per ounce in early 1980.

After measuring the price increase from the bottom of the cup, it is seen that the price rose by +743% by the first quarter of 1980. After gold peaked in price in 1980, it underwent a strong correction over the next two decades, during which another cup was formed. This formation was broken in the last quarter of 2007, leading to another strong surge in the market that drove prices to record highs in 2011.

This price rally began in 2001 and continued rising until 2011. This substantial price surge was due to economic uncertainty, spurred by the dot-com bubble burst, the 9/11 terrorist attacks, and subsequent geopolitical tensions. These events drove investors towards gold as a safe-haven asset.

Moreover, central banks’ low interest rates and quantitative easing in response to the 2008 financial crisis contributed to fears of currency devaluation and inflation, further boosting gold’s appeal to mark record highs in 2011. The rising demand from China and India also played a crucial role, as did the declining production of gold from mines, which created supply constraints. When measuring the price increase from the bottom of the cup to the highs in 2011, it was found that the price increased by 659% within this price rally.

After peaking in 2011, gold formed another cup pattern from 2011 to 2020, followed by the formation of the handle. The cup and handle pattern is a strongly bullish indicator, suggesting that prices are establishing a strong bottom before a significant rally. Notably, the bull-bear line was broken in the second quarter of 2019.

Historically, prices tend to surge for the next few years once this line is broken in previous cup formations. The neckline of the current cup and handle pattern, at $2,075, was broken in March 2024. This neckline was a pivotal area that the market had been watching for years, and its breakout has initiated a strong surge in prices projected to continue for several years.

Interestingly, gold prices have historically increased by around 700% from the bottom of previous cup formations, per the last 50 years of chart data. If this 700% increase is applied from the August 2018 low, which was the cup’s low, the price projection suggests that gold could reach approximately $8,364 in the coming years. The Middle East crisis, the Russia-Ukraine war, and the global geopolitical uncertainties since 2023 have broken the critical pivot of $2,075. This breakout indicates that gold prices are ready to surge higher.

Gold Price Projections After Market Breakout

Based on the above discussion, the gold market has initiated a long-term price surge after breaking the $2,075 level, activating long-term price targets above the $8,000 region. However, gold prices are volatile, and recent economic conditions and geopolitical crises may further increase this volatility. These price targets come with short-term corrections. The breakout of $2,075 has set an initial price target in the $3,000 region, as indicated by the ascending broadening wedge formation from 2017. This pattern suggests that while gold may show volatility, the trend remains bullish.

Interestingly, the handle formation of the cup and handle pattern on the quarterly chart appears as an inverted head and shoulders pattern on the weekly chart. This phenomenon highlights that the breakout of $2,075 was significant and that prices are likely to continue higher. The initial target of this upside move is $3,000, based on the ascending broadening wedge rules. Prices typically return to the breakout point after the breakout, which is a healthy sign. The recent correction points to the red rectangle on the above chart, indicating strong buying interest from medium-term and long-term gold investors.

Analyzing 21st Century Gold Prices and Investment Strategies

Based on the fundamental and technical evaluation of the gold market, prices are expected to sustain a strong bullish outlook over the coming years. However, investors often wonder when gold can surge higher and what the duration of this momentum is. The monthly chart below highlights the gold market activity in the 21st century.

Notably, the gold market has completed its first bull phase and initiated a second bull phase in 2018. The first bull phase saw prices rise for ten years, followed by a four-year correction and three years of energy buildup, setting the stage for the next surge in the second bull phase. This correction and buildup have created a strong bullish price structure in the monthly chart.

The start of the second bull phase in 2018 suggests that prices may continue to rise until 2028 to 2030, with the exact timeline determined by price momentum as the trend progresses. The monthly chart shows an ascending broadening pattern similar to the weekly chart, though the monthly chart uses a logarithmic scale while the weekly chart uses a linear scale.

As discussed, the price has broken through a solid bullish structure at $2,075. A correction to this region, within the rectangle highlighted on the chart, is considered a strong buying opportunity of the decade. The price action on the monthly and weekly charts indicates a robust buying interest and presents a long-term bullish outlook for gold.

Gold Outlook for June 2024

Since the gold market broke the pivotal level of $2,075 in March 2024, prices continued to rally higher in April 2024, reaching record highs. However, May and June are typical months for seasonal correction. The chart below indicates that June historically has only 25% positive candles, meaning that the month ends negatively 75% of the time, based on the last five years of data. In contrast, July has shown 75% positive candles, suggesting a strong likelihood of positive performance within the month. This pattern implies that the gold market may form a bottom in June, setting the stage for a robust rally in July.

The chart below clarifies the seasonal data discussed above, showing gold prices over the past five years. The chart indicates that the gold market tends to be weak in May and June, with a potential surge in July. However, the data from 2020 and 2021 were impacted by the COVID-19 crisis, which led to strong rallies in May and June.

Based on this data and the above technical evaluation, it is evident that the breakout from $2,075 peaked at around $2,450. A price correction in May 2024 will likely bring prices towards the rectangle indicated in the monthly and weekly charts above. This rectangle lies within the broader range of $2,280-$2,075. A price correction to this region in June 2024 is considered a strong buying opportunity, potentially initiating a rally toward the $3,000 region.

Risks Analysis

Gold prices are susceptible to geopolitical risks and changes in trade policies. Tensions between the ongoing U.S.-China trade disputes and conflicts in the Middle East can significantly impact gold prices. These uncertainties drive investors towards gold as a safe-haven asset, leading to price spikes. However, sudden resolutions or de-escalations in these conflicts cause abrupt shifts in investor sentiment, resulting in rapid declines in gold prices. Furthermore, changes in trade policies and sanctions affect global economic stability, influencing the demand for gold as a hedge against financial instability.

On the other hand, gold prices are inversely related to interest rates and monetary policy. When Federal Reserve implements rate hikes to curb inflation, the opportunity cost of holding gold increases, leading to lower prices. Conversely, expectations of rate cuts tend to support higher gold prices as borrowing costs decrease, making gold more attractive.

However, if inflation remains low and the economic recovery gains momentum, central banks might delay rate cuts or reverse their stance, putting downward pressure on gold prices. The uncertainty surrounding future monetary policies adds volatility to the gold market. Based on the current economic indicators, the gold market faces substantial risks, including potential GDP growth slowdown and currency market volatility.

From a technical perspective, the gold market has recently passed two critical inflection points: $1680 and $2,075. The breakout above $2,075 in March 2024 suggests the potential for significantly higher prices on long-term charts.

However, if gold fails to sustain this breakout and closes a quarterly candle below $2,075, it could invalidate the breakout and lead to a consolidation phase between $1,680 and $2,075. Based on the market’s current fundamental and technical evaluation, this scenario is considered unlikely. A quarterly close below $1,680 would negate the bullish outlook for gold.

Final Thoughts

In conclusion, the U.S. labor market’s modest job growth and easing wage pressures suggest a cooling economy, potentially leading to Federal Reserve rate cuts. This could impact gold prices in the short term, as lower inflation expectations and bullish stock markets might reduce the demand for gold. However, persistent fiscal spending and potential future inflationary pressures could sustain gold’s appeal as a safe-haven asset in the long run.

Economic indicators present a mixed outlook, with stable retail sales but potential slowdowns in heavy truck sales and the services sector. This could heighten economic uncertainty and drive investors towards gold. Additionally, China’s strategic financial moves, including divestment from U.S. Treasury bonds and increased gold holdings, underscore significant global influences on gold prices. Technically, gold has breached the long-term pivotal level of $2,075, opening the door for higher prices.

While short-term volatility may persist, the long-term prospects for gold remain strong, supported by fundamental and technical factors. The monthly candle for April 2024 shows a long shadow, and the monthly candle for May 2024 is also expected to show this long shadow based on last week’s drop. These long shadows indicate short-term price weakness. Therefore, a short-term price correction in May 2024 & June 2024 towards $2,280-$2,075 is considered a strong buying opportunity for long-term investors to target $3,000.