Gold Sells Off After Hitting All-Time High: Can Bulls Mount New Charge Higher?

LONDON (December 5) Gold rallied on the final trading day of last week, eventually reaching a new record high of $2,148 as the new week commenced. Following this peak, Gold experienced a swift retracement, currently undergoing a retest towards the $2,020 - $2,050 zone, recognized as resistance since 2020.

This zone has consistently proven resilient, with unsuccessful attempts to breach it in August 2020, March 2022, and most recently in May 2023. Recent developments that propelled gold above this resistance zone include:

• Powell's Speech: Friday's movement saw gold responding positively to Federal Reserve Chair Powell's speech. Market interpretation of the Fed President's messages hinted at the potential conclusion of the interest rate hike cycle and discussions about the timing of an interest rate cut.
• Middle East Conflict: The resurgence of conflicts in the Middle East, following the end of a ceasefire, served as a more concrete trigger. The Pentagon's announcement of attacks on US warships and commercial vessels in the Red Sea over the weekend further fueled gold's ascent at the beginning of the week.

Despite these factors, it is important to note that the likelihood of Powell's rhetoric alone driving gold upward appears weak, especially considering that inflation targets have not been met, and existing risks may still exert pressure.

Regarding the Fed's interest rate policy, expectations are forming for earlier rate cuts. However, the current geopolitical risk environment, with the potential for oil prices to create inflationary pressure, makes it less logical for the Fed to adopt a dovish tone. Therefore, a more moderate rise in gold, considering geopolitical risks, is plausible in a high-yield environment.

The cooling in the US economy is also a crucial factor influencing interest rate decisions. Last week's data indicated a slowdown in the US economy, accompanied by easing inflationary pressures. The upcoming release of key data, notably the nonfarm payrolls data on Friday, will provide further insights into the market's interest rate outlook.

In summary, the interplay of geopolitical risks, external factors, and US economic data will likely shape the trajectory of gold in the upcoming periods.

Gold: Technical View

The gold price is undergoing testing within the range of $2,020 - $2,030, which has transformed into a support zone during the retracement from the recent peak.

Gold Price Chart

The significance of maintaining and potentially consolidating within this region throughout December cannot be overstated for gold to embark on the new year on a robust note.

Establishing a foothold above this region, unbroken since 2020, may technically instill confidence among investors that the upward trajectory will persist. Considering the prevailing uncertainty, gold might sustain its ascent towards $2,300 after breaching the next target zone at $2,100.

Conversely, if the existing support is relinquished with the weekly close, a conceivable correction is likely to extend down to $1,950. A resurgence of substantial buying interest at this level would lend stronger support to the rally. Failure to secure this level might lead to a downturn below $1,900.

Investing.com