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After new record, how high can gold go?

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By Naeem Aslam  

Gold prices surged to a historic high of $2,100, marking a significant milestone before undergoing a notable correction.

Traders are now scrutinising the recent price action, contemplating whether this trend will persist or if a more substantial correction is imminent, given the intensive sell-off.

Over the past two consecutive months, gold prices exhibited gains, culminating in a record-high of $2,137 in December. However, the intense sell-off post this peak has pushed the gold price into negative territory for the month when viewed from a monthly perspective.

Several factors are believed to contribute to the current price surge. Foremost is a growing apprehension among central banks regarding the declining stature of the US dollar as the preeminent reserve currency.

The perceived loss of the dollar’s allure stems from policy missteps, including the US involvement in conflicts such as the Middle East turmoil sparked by Israel’s actions in Gaza. The ongoing indirect support for Ukraine against Russia, in addition to strained relations with China, has further diminished confidence in the dollar.

Moreover, the alarming increase in US debt, attributed to ill-advised policies and military involvements, has sparked concerns about the nation’s ability to meet its financial obligations.

Recent attention to US Treasury auctions, fuelled by worries about demand, has prompted speculation that entities like the Qatari Sovereign Fund are considering Bitcoin investments as a hedge against a weakening dollar.

Countries grappling with US-imposed sanctions are exploring alternative mechanisms to circumvent difficulties, signalling a shift away from dependency on the US-dominated financial system.

Why did gold move higher?

The recent rally in gold prices leading to a record level wasn’t driven by a specific catalyst, but rather by a culmination of momentum. Technical traders observed a pattern of higher highs and higher lows, signalling an upward trajectory.

Additionally, the weakening dollar index, influenced by favourable US Consumer Price Index (CPI) data, contributed to the gold price surge.

Despite Federal Reserve Chairman Powell’s comments asserting an unfinished job, smart money anticipated a new record high for gold. Market reactions, such as the stock market rally post the Chairman’s comments, suggest skepticism among market players regarding the Fed’s outlook.

What now?

Data this week holds significance for gold prices and the Fed, with US employment, JOLTS figures, and consumer sentiment and inflation expectation readings.

Traders will closely analyse these indicators. If the job market remains robust, consumer sentiment stays strong, and inflation expectations decline further, the likelihood of continued upward movement in gold prices is evident.

Despite potential short-term sell-offs, perceiving them as opportunities to acquire bargains may be prudent. The overall trajectory for 2024 appears skewed towards the upside, with expectations of more record highs and the possibility of gold flirting with the $2,500 mark next year.

In terms of technical analysis, the price action continues to look strong and the immediate support zone is shown on the chart, while the next resistance would be at the psychological level of $2,200. It is important to keep an eye on the uptrend line as the price may retest this to find new buyers.

Chart provided by online brokerage XTB

 

Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.