Gold’s pullback deepens as Chinese investors jump into soaring stock market

• Gold is retreating after a strong uptrend move took it to new highs of $2,685 last week.
• A rally in Chinese stocks and an improved outlook for the housing market are diverting capital away from the safe haven.
• Technically, XAU/USD is threatening to exit overbought territory, signaling that a deeper pullback could develop.

Gold (XAU/USD) retreated on Monday to trade around $2,650 a troy ounce as traders took profit after last week’s nearly 1.4% rise to new all-time highs. A historic rally in Chinese shares, which saw the benchmark CSI 300 index gain more than 7.50% during the Asian session alone on Monday, as well as a better outlook for the Chinese property market due to falling mortgage rates, divert capital from to gold, as a safe haven.

Gold traders rode a wave that began after a seismic shift in the US, where the Federal Reserve (Fed) opted to cut interest rates by 0.50% at its September meeting, reducing the opportunity cost of holding the precious metal. . However, better-than-expected US data since then has slightly reduced the odds of the Fed making another aggressive rate cut of 50 basis points (bps) in November, although the odds of that scenario still remain above 50 %, according to the CME FedWatch tool.

Gold retreats, but investors have mixed views on its future

Gold is retreating after hitting a new record high of $2,685 last week as the Fed began its easing cycle and central banks globally followed suit by the US Reserve Bank.

Is the correction likely to deepen or will gold resume its uptrend and push to even higher highs? Investors appear to have mixed views on the near-term outlook for gold, according to a Weekly Gold survey compiled by Kitco News.

Darin Newsom, senior market analyst at Barchart.com, believes the uptrend continues: “Applying Newton’s First Law of Motion to the markets: A trending market will remain in that trend until acted upon by an external force. That outside force is usually the activity of investors, and with the potential for global chaos only to increase in the next month, investors will not change their minds about gold as a safe haven market.”

Ole Hansen, however, who is Head of Commodity Strategy at Saxo Bank, believes that the uptrend is fading. “I see it lower because I think the rally is playing out on FOMO fumes and traders chasing momentum using derivatives,” he said, adding that “in the short term, physical demand is likely to dry up until investors they will adapt to these new and higher price levels.”

Adrian Day, president of Adrian Day Asset Management, meanwhile, expected the price of gold to be little changed in the short term.

“A pause in the strong upward move is overdue and could come now that the Federal Reserve’s first interest rate cut is in the rearview mirror,” he said. “Over the next six to 12 months, I couldn’t be more optimistic as Western investors are finally starting to buy gold,” he added. “But markets don’t go straight up forever.”

Technical Analysis: Gold Extends Retreat From New All-Time Highs

Gold extends retreat after hitting record highs. However, the precious metal is still in an uptrend in the short, medium and long term, and since it is a fundamental principle of technical analysis that “the trend is your friend”, the odds further favor the yellow metal’s advantage. .

XAU/USD Daily Chart

Gold remains overbought, according to the Relative Strength Index (RSI) momentum indicator. It has now almost fallen back into neutral territory (below 70) and if it closes (daily) back into neutral, it will be a sign for traders to close their long positions and open shorts. As it is, simply being overbought advises traders not to add to their long positions.

If a deeper correction develops – as seems likely now – firm support lies at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement from the September rally).

However, given the precious metal’s entrenched uptrend, there is a good chance that any correction will fizzle out and the bulls will resume the price rally. If gold makes higher highs, it will further reaffirm the metal’s uptrend. The next upside targets are the round numbers $2,700 and then $2,750.