It seems like there is no stopping gold’s current rally. 

Gold prices on COMEX breached the $4,200-per-ounce mark on Wednesday for the first time on rising expectations of further interest rate cuts by the US Federal Reserve. 

Analysts have repeatedly pointed out the overbought conditions in gold.

However, the bulls have shrugged off any such notion as prices continue to hit record highs almost every trading day. 

At the time of writing, the December gold contract on COMEX was at $4,228.60 per ounce, up 1.6% from the previous close.

The contract had hit a record high of $4,235.69 per ounce earlier in the session. 

“With monetary tailwinds still blowing strongly, further gains are expected in the fourth quarter and beyond, prompting experts to revise their forecasts upward repeatedly throughout the year,” Nick Cawley, contributing analyst for Solomon Global, told Invezz. 

Wednesday’s gains in gold prices come amid geopolitical tensions and worsening trade relations between the US and China.

Additionally, dovish statements from US Fed Chair Jerome Powell contributed to the surge. 

Dovish Fed helps gold prices

Despite not offering explicit guidance on interest rates, Fed Chair Jerome Powell’s remarks on Tuesday hinted at the strong possibility of further easing, citing weaknesses in the labour market.

Additionally, other Fed officials have indicated the probability of further rate cuts in the future.

Traders are fully anticipating a 25-basis-point rate cut later in October, with a 90% probability of an additional reduction in borrowing costs by the US central bank in December, according to the CME Group’s FedWatch Tool.

“This exerts pressure on the US Dollar for the second straight day and benefits the non-yielding yellow metal,” Haresh Menghani, editor at FXstreet, said in a report. 

With key US macro releases postponed due to the government shutdown, the market’s attention will be fixed on the speeches of influential FOMC members.

This would play a key role in driving the USD demand, which, along with trade developments, should provide some impetus to the commodity. 

The dollar’s role

According to Cawley, the enduring and persuasive forces behind this multi-month rally continue to be a weakening US dollar, which has seen a 10% decline this year, substantial gold acquisitions by central banks, a volatile geopolitical climate, and a more accommodating Fed policy.

Cawley added:

Added to these familiar factors, there is now a growing sentiment that the US dollar is starting to lose its pre-eminence as the world’s dominant reserve currency, with a number of other asset classes, including precious metals and Bitcoin, seeing heavy buying and record highs.

The US dollar is moving away from last week’s early August high due to the current outlook for rate cuts by the Fed, which is providing support to gold.

Gold, a traditional safe haven, has seen a significant 59% year-to-date increase. 

One of the major factors contributing to the rally is the de-dollarisation trend and robust exchange-traded fund inflows. 

Gold price outlook

On Tuesday, the gold/US dollar pair demonstrated resilience, holding above the $4,100 level. 

Gold prices have been trending upwards for the past three weeks, supported by an upward-sloping trendline, indicating a continued bullish bias, according to FXstreet’s Menghani. 

However, the daily Relative Strength Index (RSI) is currently in overbought territory, suggesting that caution is advisable before anticipating further appreciation, he said.

A corrective pullback to around $4,100 could present a buying opportunity, likely finding support near the $4,060-$4,055 range, Menghani added.

However, should the price decisively fall below the level of $4,060-$4,055, it could trigger technical selling, pushing gold down to the $4,000 psychological mark.

A convincing break below could be seen as the first sign of a possible bullish exhaustion and pave the way for deeper losses.

According to Brett Elliott, director of marketing at American Precious Metals Exchange, the upward trend in gold prices lacks a definitive limit, making it impossible to predict when the rally will conclude.

We’ve heard this question when gold crossed $2,000, $2,500, $3,000 and every level in between. The rally could peak at $4,000 or it could peak at $5,000. We’ll never know for sure.

Historically, gold experienced a remarkable surge, escalating from approximately $300 per ounce in the year 2000 to nearly $2,000 per ounce by 2011, Elliott told Invezz. 

This represented over a 600% increase within a decade. Even during subsequent bear markets, its value never reverted to the $300 per ounce mark, he noted.

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