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Gold Prices Forecast: Was a Bull Trap Set on Friday?

By:
James Hyerczyk
Published: Apr 6, 2024, 15:42 GMT+00:00

Key Points:

  • Last week's gold rally hints at market instability, despite high closing.
  • Central banks' short-term influence on gold's rise questioned.
  • Speculative trading may lead to rapid reversal in gold prices.
Gold Prices Forecast

In this article:

Gold Market Analysis: A Cautious Perspective

Gold prices achieved new heights last week, closing at record levels, with central banks’ interest and geopolitical tensions as key factors. Yet, we’re advising traders to be cautious, as the current rally might not be as robust as it seems.

Last week, XAU/USD settled at $2330.160, up $97.04 or +4.35%.

Weekly Gold (XAU/USD)

Gold’s Recent Performance

Last week saw a sharp increase in gold prices. However, the majority of these gains occurred on Friday, suggesting instability rather than a steady upward trend. This surge is partly attributed to central bank activities and speculative trading, rather than solid fundamentals.

Central Bank Influence

In recent years, central banks have shown strong demand for gold, with 2023’s total demand reaching 1,037.4 metric tons. However, the impact of central bank buying may not be as transparent as it appears. Historically, central banks have operated in secrecy, potentially influencing market movements indirectly. This obscurity in their buying patterns raises questions about the current drivers of gold’s price rise.

Speculative Risks

There’s growing concern that gold’s current price levels are inflated due to speculative trading. Traders might be overextending in anticipation of future central bank purchases, a strategy that could backfire if market conditions shift. The sudden volatility seen on Friday serves as a cautionary tale against overconfidence in the gold market.

Silver’s Rally and Comparisons

Parallel to gold, silver also experienced a rally last week. This could be attributed to its lower price compared to gold, making it a more accessible option for some investors. However, this doesn’t necessarily indicate a fundamental strength in silver’s market.

Commodities Market Overview

Interestingly, other commodities like cocoa have seen significant price increases. This is due to tangible supply constraints, unlike gold and silver, where large reserves exist. Therefore, a dramatic rise in gold and silver prices akin to cocoa’s doubling is unlikely.

Short-term Forecast: Cautiously Bearish

Given the speculative nature of the recent rally and the potential for rapid reversals, traders should proceed with caution. Placing well-thought-out stop losses could protect gains. The market appears ripe for a downturn, and those holding positions near the peak might face significant losses. Therefore, the short-term forecast leans towards a cautious bearish outlook for gold.

Technically speaking, make sure you have an exit strategy in place before the market makes one for you, which is never a good thing. Friday’s price action in particular was a little unsettling because the bulls let in new buyers on the intraday break.

If a market is going to move higher, professionals tend to let new traders in by nearly forcing them to buy strength. On Friday, they let them buy weakness. This tells me that a lot of new buyers came in about $64 from a record high and that if the market should suddenly turn lower, a lot of new buyers will be trapped. Yes, Friday’s action looked more like a bull trap rather than a launching pad to a new high.

A bull trap occurs in the financial markets when a declining trend (Friday’s Intraday Move) appears to reverse and head upwards, convincing investors that a rally or a bullish trend is beginning. As a result, these investors buy the asset, expecting further increases in value. However, the apparent upward trend is misleading. After the brief rally, the market resumes its downward trend. This sudden reversal leaves the investors who bought during the rally with losses, as the expected price increase fails to materialize, and they are “trapped” in their positions at higher prices. Essentially, a bull trap is a false signal that deceives investors into thinking the market is shifting from bearish to bullish.

Stay tuned. Keep your powder dry, the fun in gold is just beginning.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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