27.03.202410:48 Forex Analysis & Reviews: It's time for gold to cool down

Gold has surged by 5.1% since the beginning of the year, breaking the significant milestone of $2,200 per ounce for the first time ever. The upward trajectory of XAU/USD appears robust, yet the question remains: do the bulls possess adequate momentum to sustain the rally? It seems the previous advantages of the precious metal have been depleted, with no new ones on the horizon. Perhaps it's time for a correction.

A favorable external background for gold is considered to be the slowdown of the American economy, which pushes the Federal Reserve towards reducing the federal funds rate, the increase in geopolitical tensions, and strong demand for physical assets. In this regard, the conflict in the Middle East, increased purchases of precious metals by central banks and China have become catalysts for the XAU/USD rally. However, the World Gold Council does not forecast that central banks will break records from 2022, and the 48% month-on-month reduction in gold imports by China through Hong Kong to 39.8 tons indicates a waning demand.

Dynamics of Gold Imports by China via Hong Kong

Goldman Sachs and Invesco believe that the widespread loosening of monetary policy by the world's leading central banks will create a tailwind for commodity market assets due to increased consumption by companies and the population. However, the Federal Reserve does not intend to rush with rate cuts. Moreover, at the beginning of 2024, investors expected six acts of monetary expansion per year. Now, only three are expected. This has led to the strengthening of the U.S. dollar against major world currencies and an increase in Treasury bond yields. Both factors are bearish for XAU/USD.

One of the reasons cited is the strength of the American economy. If in September Bloomberg experts forecasted a GDP expansion of 0.9% in 2024, then in March they raised their estimates to 2.2%. Against this background, gold should feel out of place.

Dynamics of the Commodity Market Index

Nevertheless, the precious metal is not in a hurry to leave the area of record highs. It is not deterred by negative capital flows into specialized exchange-traded funds, the leadership of the U.S. dollar in the G10 currency race, and Financial Times experts' forecasts that the Federal Reserve will lower the federal funds rate no more than twice in 2024.

This could happen if American inflation continues to accelerate and ultimately reaches a new peak. In this regard, the increase in the pace of growth in the Personal Consumption Expenditures Index in February is a reason for caution for the Federal Reserve. There is currently a split within the central bank. While Atlanta Fed President Raphael Bostic believes that rates should be lowered once this year, his Chicago colleague Austan Goolsbee advocates for three acts of monetary expansion.

Technically, several reversal patterns can be formed on the daily gold chart—from 1-2-3 to Head and Shoulders. The bears' intention to seize the initiative is confirmed by the emergence of a pin bar with a long upper shadow. To work with it, a breakthrough of the base near $2,168 per ounce is required. A successful assault on this support level could be used to sell the precious metal.