Gold holds just above $2,500 after Friday’s late surge

• Gold takes a breather after a strong rally that saw it break to new all-time highs at the end of last week. 
• Talk of the US economy giving “warning signals” drove safe-haven flows into the precious metal, pushing it to new highs. 
• From a technical point of view, Gold has broken out of a range and is tipped to rally higher. 

Gold (XAU/USD) trades just above $2,500 on Monday as it consolidates the gains made after it broke above resistance to new all-time highs on Friday. The precious metal is supported by lingering doubts about the resilience of the US economy, simmering geopolitical tensions – particularly in the Middle East – and a weaker US Dollar, in which Gold is mostly priced. 

Gold surged to new highs after comments from Chicago Fed President 

Gold surged to a new all-time high of $2,509 on Friday after comments from the President of the Federal Reserve Bank of Chicago, Austan Goolsbee, reawakened US recession fears. Goolsbee said that the US labor market and some other leading economic indicators were “flashing warning signs”. One such sign was rising levels of credit card delinquencies. His words reawakened recession concerns leading to a rise in safe-haven flows to Gold. 

Investors had grown complacent after the release of US Retail Sales data on Thursday showed a 1.0% rise MoM in July, reversing the 0.3% decline in June. The data, along with lower-than-expected Initial Jobless Claims had helped calm fears the US economy was heading for a hard landing. The Chicago Fed President’s remarks, however, suggested a part of the growth in retail sales might be due to consumers borrowing beyond their limits, reviving concerns and increasing haven demand for the yellow Metal. 

Changing Fed expectations

The move higher in Gold came as something of a surprise given the recent change in the outlook for interest rates in the US. Gold tends to appreciate when investors expect   interest rates to fall because it is a non-interest paying asset. 

Market-based estimates of the future course of interest rates altered considerably last week. At the start of the week investors were pricing in at least a 50% chance the Federal Reserve (Fed) would cut interest rates by 0.50% at their September meeting, and a 100% chance of at least a 0.25% cut. 

As the week progressed, the probabilities of a “big” 0.50% cut fell to only around 30% whilst the chances of at least a 0.25% cut remained fully priced in, according to the CME Fedwatch tool. The fall in chances of the Fed cutting by 0.50% did weigh marginally on the price of Gold but that did not stop it surging late Friday. Despite the rally in Gold prices and Fed Goolsbee’s comments the probabilities of a 0.50% cut in September remain around 30%.  

The sudden rally at the end of Friday was also surprising because data on investor positioning in the Gold futures market suggests a bearish bias rather than a bullish one. Most large investors are already long Gold with the uneven allocation into Gold longs and Gold option calls actually suggesting a risk of the market rebalancing in a reaction in the opposite direction. 

“Several of the major cohorts in Gold markets are now facing buying exhaustion, whereas the narrative that propelled prices to these all-time highs now appears stale. The risk of a positioning washout is at its highest levels of the year,” says TD Securities senior commodity strategist Daniel Ghali. 

There is the potential for Gold to be buffeted by a host of factors in the week ahead, including the outcome of peace talks in Cairo aimed at ending the war between Israelis and Palestinians, whether Iran’s threat of all out war with Israel finally bears fruit, and commentary around interest rates coming out of the the Jackson Hole central banking summit at the end of the week. 

Technical Analysis: Gold breaks out of range

Gold (XAU/USD) breaks decisively out of the top of a range it has been trapped in since the middle of July and rises to new all-time highs. The breakout will probably hold and then rise to an initial target at $2,550, calculated by taking the 0.618 Fibonacci ratio of the range’s height and extrapolating it higher. 
 

XAU/USD 4-hour Chart

The pair has just exited the overbought region of the Relative Strength Index (RSI), however, which indicates a probable pullback will unfold, dragging Gold price down before it pushes higher. 

Such a pullback might be expected to correct to support in the $2,480s, at around the level of the July 17 high. 

Gold is in a broad uptrend on the short, medium and long-term timeframes, however, and given “the trend is your friend”, this uptrend is more likely than not to continue.