Gold’s Brief Peak: Goldmine or Overreaction?

Following a remarkable surge last Friday that seamlessly flowed into the beginning of the new week, the gold spot price (XAUUSD) achieved unprecedented heights, reaching a pinnacle at $2,143.31 per ounce. However, a subsequent adjustment, likely driven by technical factors, tempered some of these gains. Over the past three weeks, gold has experienced a consistent upward trajectory, and if the prevailing bullish momentum persists into December, the precious metal could mark three consecutive months of ascent—a trend historically favourable during this period.

In the backdrop of escalating geopolitical tensions between Israel and Palestine, gold’s intrinsic safe-haven allure became particularly appealing. This appeal persisted until dovish developments in the US economy further fueled optimism. Presently, the market reflects an increased expectation of imminent rate cuts in the US in the first quarter of the coming year. The CME FedWatch Tool currently indicates an 86.3% probability of lower interest rates by May 2024, with a 38% chance of two 25 basis points rate cuts concluding in the May meeting.

A recent survey conducted by the World Gold Council revealed that 24% of central banks are contemplating augmenting their gold reserves over the next 12 months, potentially injecting additional demand into the gold market. However, it is crucial to note that despite these positive indicators, the spot price faces some risk, as evidenced by a partial retraction of gains in Monday’s session.

Adding to the complexity, the impending Non-Farm Payrolls (NFP) report on Friday has the potential to reshape sentiment around the state of the US economy. This report could either validate or challenge Jerome Powell’s cautionary stance that it is premature to confidently assert that the existing level of monetary policy is sufficiently restrictive to bring inflation back to its target durably.

This prompts the lingering question: Can gold maintain its ongoing bullish trend, or is there a possibility of market overreaction, presenting opportunities for traders to capitalize on potential profit-taking behaviour that may trigger a pullback in the sessions ahead?

Sources: CNBC, CME Group, Reuters

Piece written by Tiaan van Aswegen, Trive Financial Market Analyst

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