- Gold traders eye potential pullbacks as overbought conditions hint at a possible correction.
- Geopolitical tensions continue to provide support, despite recent strength in the US dollar.
- Key technical levels could guide the next move, with inflation data looming later this week.
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Gold was little changed in the first half of Monday’s session, after closing last week flat as it struggled for direction all week.
With no obvious catalysts in sight for a US dollar drop, with the greenback having just had one of its strongest weeks in months, and this week’s inflation data unlikely to impact rate cut expectations much, and not to mention the fact that the yellow metal remains severely overbought on all sorts of time frames, a correction of some sort is long overdue.
But while geopolitical tensions remain high, gold is likely to remain largely supported on the dips, providing a counterbalance to the aforementioned bearish factors.
Gold’s three-week winning run ended
On Friday, a strong US jobs report initially sent the metal lower, before dip buyers stepped in and later took profit ahead of the weekend.
The flat close on Friday mirrored price action from the previous several days, which ensured gold would end its three-week winning run.
Friday’s release of a strong US nonfarm payrolls report threw a bit of a curveball at the Fed after the data easily beat expectations with a print of 254,000 jobs and an upward revision to the prior month’s numbers.
The stronger employment data puts the Fed in a tough spot, as the narrative of a cooling economy got a lot more complicated.
With the labor market still running strong, it’s no wonder Fed Chair Powell had already dismissed the idea of another 50-basis-point rate cut even days before the data came out.
Now, it’s all but certain: don’t expect any further aggressive rate cuts this year.
The dollar surged on the back of this report, although after an initial dip, gold found its footing again and recovered on Friday, riding the momentum alongside stock indices.
Silver also saw a big move on Friday as it nearly took out the $33 barrier before easing off with gold by the close of play as traders were wary of the weekend risk.
What’s next for the Fed?
The Fed is in a tricky spot right now, balancing inflation concerns with a still-resilient economy.
With crude oil prices rising sharply in the last couple of weeks due to elevated geopolitical tensions in the Middle East and China rolling out major stimulus programs, inflation isn't something they can ignore.
But at the same time, they can’t afford to slam on the brakes too hard, or they risk derailing the economic momentum that’s still there.
The idea of a 50-basis-point rate cut? That's out of the picture for now. Even if October's jobs report shows a bit of cooling, it would take a big slowdown to warrant such an aggressive cut.
So, what does this mean for gold? If the Fed now turns more cautious instead of maintaining a steady course on rates, gold could come under some pressure in the weeks ahead.
But with geopolitical risks adding uncertainty to the broader market, the potential downside could be limited.
US CPI is this week’s data highlight
This week has some key data on the economic calendar that could shake things up. On Thursday, we’ve got the US CPI report, which is expected to show inflation cooling to 2.3% year-over-year, down from 2.5% in August.
If inflation comes in softer than expected, it might stir up some dovish vibes, potentially giving gold another push upwards.
Then on Friday, we’ve got the University of Michigan Consumer Sentiment report. This will shed some light on how people are feeling about the economy.
Since the Fed's juggling act involves both maximizing employment and keeping prices stable, these sentiment indicators matter more than ever.
For example, a noticeable dip in consumer confidence could hit future economic activity, possibly swaying Fed policy—and that could also play into gold’s performance.
Technical analysis and trade ideas
Gold's technical outlook remains bullish, as things stand. With prices hovering at extreme overbought levels on higher time frames, though, we could soon be witnessing the early stages of a bearish reversal, especially if the dollar continues to gain strength.
Still, before we jump to conclusions and call the top, we need some solid confirmation that this phase of the rally has run its course. 
Indeed, there are plenty of key technical levels that could act as support if gold dips. Right now, $2600 is the short-term level to keep an eye on, especially if last week’s support around $2635 breaks.
The 2024 bullish trend line sits near $2530, and then there’s the psychologically significant $2500 level, which could also offer support if the market pulls back further. Eyes will be on these levels to see if they’ll hold up, should gold ease back a little.
But looking at the long-term charts, gold appears poised for some level of profit-taking. Historically, whenever the Relative Strength Index (RSI) surpasses the 70 mark on the higher time frames, as it has now, we often see a period of consolidation or selling pressure to ease those overbought conditions.
Right now, the monthly RSI stands at over 80.00 – in other words, at extreme overbought levels. Gold has not been this overbought since the height of the pandemic in 2020. And we saw what happened to gold in the months and years that followed.
While the RSI suggests a correction could be on the way, it’s not an automatic sell signal. We need to see that reversal stick on the daily or lower time frames. For now, gold is still in a strong uptrend, and it’s tough to predict how high it could go before any significant pullback.
That said, a brief dip or consolidation wouldn’t be surprising before gold picks up its upward momentum again. So, when it comes to trading gold on the long side, don’t hesitate to take profit upon the first sign of weakness. My long-term target remains $3000 but would prefer to see a nice dip to shake out the weaker hands before it starts pushing higher again.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.