Gold forecast: Metals drop on China, dollar strength and profit-taking

Chinese markets took a sharp dive overnight, dragging China-linked currencies down with them, and today commodities have followed suit. At the time of writing, gold was 1.2% worst off, while silver fell by 4.5%, and crude oil was down by around 5%. The major disappointment stemmed from China’s refusal to announce new stimulus measures after their week-long holiday, which rattled markets. Interestingly, some pairs like GBP/USD and EUR/USD didn’t initially budge, although the outlook remains bearish on both. In Europe, major indices also felt the pressure early on, but the DAX managed to find its footing along with the US indices. With not much happening on the economic calendar today, the dollar is expected to stay steady, but there’s a slight hawkish edge due to ongoing tensions in the Middle East and Friday’s strong US jobs report, which have ramped up expectations for a slower pace of monetary policy easing by the Fed. So, in the short term, it’s hard to see a major dollar sell-off unless we see some kind of peace breakthrough in the Middle East. While the gold forecast remains modestly bullish in the long-term, the short-term outlook is now somewhat bearish given recent events and the potential for profit-taking after its spectacular rise this year sent prices on long-term charts to severally ‘overbought’ technical levels.

Gold’s dilemma: Strengthening US dollar vs. global central bank easing

Another reason why gold has weakened in the last week or so is because of the US dollar, which regained its poise last week following the Fed Chair Jerome Powell’s not-so-dovish remarks and in response to the release of the latest US nonfarm payrolls report, which smashed expectations with 254,000 jobs added, catching the market off guard. Yet, other central banks are seen continuing to ease policy at the expected pace, with the ECB for example likely to trim its rates by 25 basis points next week. Gold investors’ dilemma is whether to keep invested and hope prices will continue to rise as they have done all year or use this dollar recovery as a perfect excuse to book some healthy profits. Judging by gold’s recent pause, it looks like some investors are clearly happy to book profit around current levels.

US inflation data could impact gold forecast

The next batch of key US data release is towards the end of the week, with the latest CPI estimate coming in on Thursday followed by the PPI measure of inflation on Friday. Together, these inflation figures aren’t expected to significantly alter the Fed’s stance or the dollar’s strength, unless there’s a major surprise. September’s core CPI is projected to drop to 0.2% month-on-month, down from August’s 0.3% increase, and even if the reading comes in at 0.1%, it’s unlikely to shift focus from the strong labour market data we saw on Friday. With the Fed now prioritising its employment mandate, any unexpected inflation data should create only minor dollar volatility, unless CPI turns out to be hot. Assuming the inflation data does not cause any major volatility, the near-term gold forecast is likely to remain modestly bearish although there are no questions over the metal’s longer-term prospects.

Gold technical analysis

Source: TradingView.com

I have been banging on about gold prices moving to severely overbought levels on the long-term charts recently. The Relative Strength Index (RSI) has already crossed the 80.00 mark on the monthly time frame, pointing to overstretched prices and suggesting that a correction may be on the cards. The motion may have already started this week, with gold prices easing back to near $2600 support from the all-time high of $2685. Historically, such RSI levels have often preceded a period of consolidation or selling pressure. If short-term support at $2600 breaks, then the $2530-$2500 range will be in focus next. This is where the 2024 bullish trend and prior resistance converge with the psychologically important $2500 level, making it a key support area. If gold wants to quickly resume its bullish path towards $3,000 then this is the area that will need to hold. Now that gold has fallen back a tad, broken support levels such as $2655 and now $2635 represent key resistance levels to watch in order to gauge the strength of the bearish move on any short-term rallies.

Video: Technical gold forecast and insights on FX and indices

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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