Gold Prices Forecast: Higher Ahead NFP Report, Ripe for Dramatic Reversal Top

Gold Prices Surge

Gold prices are on track for their largest weekly increase in five months, driven by expectations of imminent interest rate cuts by the Federal Reserve. The anticipation grew following remarks by Federal Reserve Chair Jerome Powell, hinting at potential rate cuts in the near future. This has led to gold hovering near historic highs, with traders eagerly awaiting the upcoming U.S. jobs report.

At 11:40 GMT, XAU/USD is trading $2167.23, up $7.11 or +0.33%.

Central Banks’ Influence

The rally in gold prices can be attributed to speculative activities by Commodity Trade Advisors (CTAs) and algorithmic trading. However, a significant factor has been the central banks’ purchasing of gold. They have been buying gold not for speculation but as a hedge against their bond portfolio losses, maintaining the gold market within a specific range. With the easing of rates, speculators might find themselves at a disadvantage, holding gold at peak prices.

Rate Cut Expectations and Gold Appeal

Traders, using LSEG’s interest rate probability app, are forecasting three to four quarter-point rate cuts by the U.S., with a 75% likelihood of the first cut occurring in June. These anticipated lower rates enhance the appeal of non-yielding bullion like gold. Additionally, the recent rally in procyclical assets, especially equities, has bolstered gold’s position as investors seek to diversify and manage risk exposure.

Global Demand and Dollar Impact

The surge in gold prices could potentially reduce consumption in India during the wedding season. In contrast, China is expected to exhibit strong safe-haven demand for gold this year. Concurrently, the dollar is facing its steepest weekly decline this year, making gold more affordable for holders of other currencies. The focus now shifts to the key U.S. jobs data, scheduled for release at 13:30 GMT.

U.S. Labor Market and Fed’s Rate Decision

The U.S. job market likely saw slower growth in February, with nonfarm payrolls expected to increase by 198,000. While this indicates a slowdown from January’s growth, it still points to a robust labor market. A strong jobs market might deter the Fed from cutting interest rates. Nevertheless, companies continue to hire, anticipating rate cuts to boost industries like manufacturing. The market expects rate cuts from June, but the timeline remains uncertain due to fluctuating inflation and monetary policy considerations.

Market Forecast: Cautiously Bullish

Considering the expected interest rate cuts, central banks’ role in the gold market, and a resilient U.S. labor market, a cautiously bullish outlook seems reasonable for the short term. Investors might benefit from closely monitoring central bank actions and the upcoming U.S. jobs data for further market insights.

Technical Analysis

Someone has to be selling gold to feed the bulls and my guess is the central banks are selling some of the gold they’ve accumulated since December. In the meantime, demand is so strong, they just keep raising their offers and frenzied buyers are hitting them.

Without any resistance, we suspect the rally will end with a dramatic closing price reversal top, possibly a “bull trap”.  With smart money lightening up on the rally, speculators will eventually be caught holding the bag. Afterall, someone has to buy the all-time high or there wouldn’t be one.

So focus on the chart pattern and not on the price. The reversal could start on the hourly chart or the daily chart. And report days like today usually serve as great catalysts to start the process. Maybe a good news is bad news day.