Gold Rallies to Just Below $2500, Sparking Traders to Take Profits

Gold futures experienced a dramatic rally which concluded on Wednesday, July 17. The most active August contract reached an unprecedented new record intraday high of $2488.40, just $12 shy of the symbolic $2500 mark. This surge, coupled with Tuesday's record close of $2467.80, underscores a week of remarkable achievements in the precious metals market.

The latest upswing in gold prices can be attributed to Federal Reserve Chairman Jerome Powell's comments at the Economic Club of Washington on Monday. Powell indicated that the Fed's restrictive monetary policy was yielding desired results, with inflation showing a sustained trajectory towards the 2% target. This sentiment bolstered confidence in the gold market, as lower interest rates typically increase the appeal of non-yielding assets like gold.

"Our test for quite some time has been that we wanted to have greater confidence that inflation was moving sustainably down towards our 2% target. And what increases that confidence in that, is more good inflation data. And lately, here we have been getting some of that."

The rally resulted in gold futures gaining over $185 in just 17 trading days, prompting an expected price correction. By the weekly settlement, gold had retraced 50% of its recent gains, falling within acceptable levels for a bull market correction. Analysts suggest that a correction between 50% and 78% would still be considered normal before signaling a potential pivot or key reversal.

Looking ahead, if downward pressure persists, the next major support level is anticipated at $2376.50, representing a 61.8% Fibonacci retracement. This level coincides with the 50-day simple moving average, strengthening its significance as a potential floor for gold prices.

Market attention now shifts to next week's Personal Consumption Expenditures (PCE) price index report, the Federal Reserve's preferred inflation gauge. Recent consumer and wholesale price indexes suggest a continuing decline in inflation, which could influence the Fed's decision-making at the upcoming Federal Open Market Committee (FOMC) meeting.

While an immediate rate cut at the next FOMC meeting is unlikely, there's a high probability of a rate cut in September. The CME's FedWatch tool indicates a 97.1% chance of the Fed initiating its first rate cut since March 2022, with a 92.6% likelihood of a quarter-point reduction and a 4.5% chance of a half-point cut.

This potential shift in monetary policy could have significant implications for gold prices. Historically, lower interest rates tend to support gold prices by reducing the opportunity cost of holding the non-yielding asset.  While the recent profit-taking has tempered the rally, the underlying factors supporting gold's ascent remain in place, suggesting that the precious metal may continue to attract investor interest in the medium term.

Wishing you as always good trading,