Gold Market Consolidates Amidst Shifting Economic Landscape

The gold market has recently entered a phase of consolidation, exhibiting a slight downward bias. This comes after an impressive rally that saw gold futures surge by approximately $300 since late July, climbing from just under $2400 per ounce to record-breaking highs. The absence of a significant correction during this period underscores the prevailing bullish sentiment in the gold market.

Gold's historic ascent to multiple record highs was largely fueled by signs of cooling inflation, which appeared to be moving towards the Federal Reserve's 2% target. This development led market participants to become overly optimistic about the timing of potential rate cuts by the Fed. As inflation began to tick down, anticipation for the Fed's monetary policy recalibration grew, effectively driving gold prices up by $300 from late March to late September.

Despite the Federal Reserve's initial reluctance to implement rate cuts, the bullish market sentiment continued to support gold prices, resulting in sustained gains without significant corrections. The Fed finally began its recalibration on September 18, implementing a substantial 50-basis point rate cut. This move triggered a final surge in gold prices, with December gold climbing from $2585 to an all-time record high of $2708 on September 26.

However, gold prices began to soften last week as the strength of the US dollar and higher treasury yields exerted downward pressure. Over the past seven trading days, gold has declined five times, though current prices have not yet reached levels that could be considered even a shallow correction. The most recent decline, as of September 30, represents the deepest drop since the record high was achieved.

As of 6 PM EDT, gold futures for the most active December contract were fixed at $2661.90, reflecting a daily decline of $11.30. This consolidation phase comes amid shifting expectations for future Fed actions. Recent statements by Fed Chairman Powell have significantly reduced the likelihood of another substantial rate cut at the November meeting. The CME's FedWatch tool now indicates an 84% probability of a 25-basis point rate cut, with a 16% chance that the Fed will pause rate cuts next month.

This dramatic shift in market expectations can be attributed to the recent jobs report, which significantly exceeded economists' forecasts. The report revealed that 254,000 jobs were added, far surpassing the expected 140,000 new jobs. Additionally, the unemployment rate dropped to 4.1%, further complicating the economic picture.

Gold’s historical rally has for the most part recently been devoid of any meaningful or substantial price correction. All things being equal, gold is due for a correction. This could change if Israel retaliates against Iran for its attack last Tuesday. The probability that Israel will retaliate is more probable due to the fact that the US President Joe Biden said last Wednesday that Jerusalem has a right to respond but that it should do so “proportionally.”

Wishing you as always good trading,