Gold's recent rally has pushed it into a technical territory that history suggests could signal short-term weakness. Bespoke Investment Group notes that after more than 100 trading days without an overbought reading, gold has re-entered that zone, historically implying increased risk of a near-term correction.
Gold futures have risen nearly 9% since August. Last week, amid weaker-than-expected U.S. nonfarm payrolls data and market hopes for a deal to reopen the Strait of Hormuz, the price surged to its highest level since June, posting a weekly gain of over 7%—the largest since January. This rally also lifted the metal back above its 50-day moving average.
Bespoke data shows that on Friday, gold's closing price was a full standard deviation above its 50-day moving average. More notably, this marks the first time gold has entered overbought territory since March 10. The 103 consecutive trading days without such a reading is "one of the longest streaks on record," Bespoke said in a Monday report.
The firm's historical analysis reveals that when gold experiences a streak of over 100 trading days without entering overbought territory and then returns to an overbought close, future returns tend to be negative. In such cases, the average return after one week is -0.22%, after one month is -0.34%, and after three months is -0.53%. The average decline widens to -0.62% at 12 months, the point where the largest average loss occurs in these historical examples.
Bespoke also found that only 37% of these historical cases produced positive returns after one year. This doesn't guarantee a downturn, but it suggests that after such a sustained rally, the odds of continued rapid gains diminish, while the risk of a short-term consolidation increases.
The short-term fate of gold may hinge on the upcoming U.S. CPI inflation report.
The relationship between gold and inflation data has become particularly critical ahead of the U.S. July CPI release on Wednesday evening. The metal's recent price gains have pushed it near a decadelong trendline and into overbought territory, making the CPI report a potential catalyst for the next major move.
In recent weeks, gold has risen above the support level of $4,000 per ounce, underpinned by increased global demand, particularly from China. This has rekindled investor interest in the precious metal. On Wednesday, spot gold edged higher in Asian trading, again breaking above the 100-day moving average, a milestone reached earlier this week. Currently, traders are hesitant to place large bets ahead of the CPI inflation report.
If U.S. CPI comes in significantly above expectations, strong inflation could act as a trigger for a technical correction, putting the recent short-term gains into a consolidation phase. "The macro backdrop has become more favorable but remains fragile," said Ole Hansen, head of commodity strategy at Saxo Bank, in a report.
"A weaker dollar and reduced expectations for further Fed tightening have helped precious metals, but a renewed rise in inflationary pressures, another spike in oil prices, or stronger U.S. data could quickly revive rate hike expectations," Hansen noted. He added that "gold has halted its downtrend but has not yet confirmed a new bull market. The $4,200 level is becoming increasingly important, while the main upside test remains around the 200-day moving average, which is currently just below $4,500."
TD Securities said "precious metals maintain a buying tone," with gold "holding its gains despite rising oil prices and interest rates, as CTAs maintain long positions above $4,400." The firm noted that "recent price action continues to suggest an increasingly pronounced stagflation theme in the gold market," adding that "while inflation data and Fed pricing will remain closely watched, it may take a stronger-than-expected inflation report to shake the current market narrative."
Analyst Razan Hilal said that in the current context, how traders interpret CPI and adjust their expectations for Fed policy will have a more direct impact on gold's price movement than the data itself. Given that gold is already in a notably hot state, any change in interest rate expectations could quickly shift short-term momentum. However, he believes that even a single inflation report is unlikely to disrupt gold's larger upward structure. "Therefore, the gold market is showing a clear divergence: there is a risk of a correction after the recent overheating in the short term, but the medium-term uptrend has not yet turned bearish," he concluded.
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