Gold: Overbought Conditions May Spark Profit-Taking With Fed on the Horizon
2025.01.27 05:27
- Gold’s recent pullback signals reduced safe-haven demand, though inflation fears persist.
- Central bank meetings ahead may influence gold’s trajectory, with support levels at $2750 and $2710.
- The bullish trend faces overbought conditions, but dip-buyers could capitalize on potential retracements.
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fell in Asia trade as the rebounded on the back of concerns about US technology stocks as DeepSeek’s budget model raised questions about the need for huge AI investment. The weakness comes after the precious metal closed higher for the fourth week in a row but came just shy of reaching the October 2024 record high of $2790 on Friday.
Last week’s price action across financial markets suggests there was perhaps a reduction in safe-haven demand. This was offset however by increased fears of risks, while a weaker also helped to support precious metals. In the week ahead, we will have major central bank meetings to take into account.
Perhaps gold may end up reaching a new record high, but with long-term charts still signally overbought technical conditions, we could see a bit of a reversal. Still, bearish speculators must witness a proper reversal signal before entertaining the idea of shorting gold.
Reduced Haven Demand?
In recent weeks, gold has been able to benefit from various factors, and was able to ignore the prior gains in the dollar and bond yields. It has been supported by inflation hedging, as well as safe-haven demand amid trade war tensions and other geopolitical risks.
Last week, though, Trump refused to introduce tariffs on US trade partners immediately. This triggered a sharp relief rally for financial markets outside the US. But with easing market fears, you would think, there should be less demand for haven assets – as we found out for example with the yen pairs on Friday. Any further easing of tension could potentially pave the way for a retracement and consolidation in gold prices.
But Inflation Risks Linger
Gold’s historic negative correlation with the dollar has weakened in recent times, but a sharp drop in the , owing to Trump’s softer tone towards tariffs, has allowed the likes of the to stage a sharp recovery. But with yields bouncing back a little, it looks like investors are not convinced that Trump will be able to bring down inflation meaningfully.
His protectionist policies are seen boosting prices, which would argue against a rate cut any time soon from the Federal Reserve. At next week’s , it will therefore be all about how the views the economy, and the focus will be on any hints they may provide for future cuts.
We will also hear from a couple of other central banks in the week ahead, including the . If these central banks are more hawkish than expected, gold may fall back from these overbought levels. But the trend is bullish, and dip-buyers will be lurking should we see a meaningful retracement
Technical Levels to Watch on Gold
With the gold forecast and trend still positive, dip-buyers will be looking to fade into any short-term dips. Key short-term support is now seen around $2750 area. Below this zone, you have the more significant support resting around the $2710-$2725 area.
Previously a strong resistance, could we see an equally strong bounce from this zone on any short-term dips? If we don’t see a bounce there, then that could mark a turning point in the gold trend.
On the upside, a retest of the all-time high at $2790 is now the immediate target for the bulls, with the psychological $2800 barrier also likely to draw in some profit-taking activity. If we see any potential reversal signals around these levels, treat them with some respect as both the monthly and weekly charts remain at overbought technical levels.
Monthly Gold Chart Still Points to Overbought Conditions
The monthly chart of gold shows its first green candle after a two-month consolidation phase where the metal edged lower to close the year in 2024. However, that was not nearly enough to unwind the overbought technical conditions, with the monthly RSI is still above 75.00. This will eventually need to be addressed either through price action or time.
Meanwhile, the RSI on the weekly chart of gold (chart not included) shows a potential negative divergence with price – that is, the RSI is making a lower low while gold is potentially on the verge of making a higher high above October’s peak. Such negative divergences typically point to waning momentum.
But these RSI signals on their own are just warning signs and not necessarily a reason to sell. Bearish traders on gold must also observe a reversal in the trend before entertaining the idea of shorting the metal.
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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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