Is Gold’s Rally Due for a Breather?

• Gold just broke records, but signs of overheating are emerging.

• A pullback could be ahead if tensions ease or US stocks rebound.

• Bulls still lead, but overbought signals suggest caution is wise.

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Gold has been on a tear, smashing records and surging past the $3,000 mark last week, fuelled by strong safe-haven demand and persistent central bank buying. After easing slightly at the end of last week, gold rebounded early Monday as the US dollar weakened against other major currencies. But can the momentum continue, or is a pullback on the cards?

Is Gold Overheating?

Gold’s rally may be losing steam. Technically, it looks stretched, and a correction might be overdue. Fundamentally, there are several potential headwinds. If geopolitical tensions ease—think Trump’s promises to resolve conflicts in Ukraine and Gaza—the safe-haven demand for gold could fade. Additionally, high prices might motivate miners to ramp up supply, while elevated levels could also temper central bank appetite for further purchases.

Another factor to watch: US equities. If stock markets stabilize or rally, some investors may rotate out of gold and back into risk assets.

While my bias leans bullish, it’s worth keeping in mind that even the strongest rallies need to cool off at times.

Key Us Data This Week: Core PCE Price Index

In the short term, gold’s path will likely hinge on the US dollar and upcoming economic data. While today’s S&P flash PMIs probably won’t move the needle much, Friday’s release of the Fed’s preferred inflation gauge—the core PCE Price Index—could.

Recent inflation data have been mixed. Softer-than-expected CPI and RPI prints earlier this month clashed with the University of Michigan survey, which flagged rising inflation expectations. Jerome Powell has tried to soothe markets by pointing out that long-term expectations remain anchored, but uncertainty lingers. Markets are bracing for a potential +0.3% month-on-month increase in core PCE. The actual reading could be different, which could influence gold’s next move through its impact on the dollar and rate expectations.

Technical Picture: Bulls Still in Control (For Now)

Gold’s trend remains firmly bullish, and I still prefer a dip-buying strategy. That said, warning signs are flashing. The daily RSI has been in negative divergence—gold prices have made new highs, but the momentum indicator hasn’t followed suit. This hints at waning strength.

Gold encountered resistance last week at the $3,032-$3,043 Fibonacci extension zone, where the 161.8% and 200% extensions of two prices swings converge (see chart). While prices did briefly hit a new high of $3,057, the metal closed the week below that Fibonacci pocket, suggesting short-term momentum has softened.

Key Support Levels to Watch

• $3,000: This psychologically significant level held firm on Friday’s retest, confirming bullish control. A break below could trigger long liquidations.
• $2,930-$2,956: This zone, the former breakout area, also aligns with the 21-day exponential moving average and trendline support.

Long-Term Overbought Signals

Gold’s longer-term charts are flashing overbought warnings. The monthly RSI, for example, has stayed above 70 since April 2024 and recently touched 80, a level that has historically led to pullbacks. Similar patterns were seen at major peaks during 2011 and the pandemic era. The weekly RSI near 75 adds to the cautionary tone.

While this doesn’t guarantee an imminent reversal, the conditions are ripe for some consolidation or a healthy correction before the next leg higher.

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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.

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