Gold Has Been Consolidating at High Levels, What’s Next?

Published on: Jun 15, 2024
Author: Amy Liu

In recent months, gold has been consolidating at high levels. This kind of consolidation greatly weakens market sentiment and sparks bearish sentiment. However, this healthy process is precisely what gold needs to rebalance market sentiment. After surging to extreme overbought levels in April, greed sentiment had become overly inflated. The current consolidation at high levels is depleting this greed sentiment, preparing gold for another surge.

From mid-February to mid-April, gold saw a strong 20.0% rally in a notable breakthrough move. During this short period, gold set 19 new nominal closing records, exciting traders. The majority of gold’s rally did not come from its usual main drivers, which are speculators buying gold futures and US stock investors buying gold-ETF shares. Chinese investors and central banks were the main drivers.

However, since hitting a dazzling record of $2388 in mid-April, gold has mostly been consolidating sideways. Towards late April, gold started to pull back, dipping moderately by 4.0%. Subsequently, gold reversed course in mid-May, experiencing a significant rally, pushing prices up by 5.8% to $2424. However, this new momentum quickly stalled, and by early June, gold dropped by 5.7% to $2286. From mid-April until this week, gold has cumulatively declined by 2.7%.

The recent fluctuations have formed a trading range primarily between $2300 and $2400. Technically, the ability of gold prices to sustain this range is impressive, especially after soaring to extremely overbought levels.

Short-term price movements affect market sentiment, including greed and fear. This, in turn, regulates the speed of traders’ buying and selling. If prices surge too quickly, generating excessive greed, traders chasing the strong momentum will quickly exhaust buying pressure. This prematurely depletes the upward momentum, handing control over to sellers. To remain healthy, regular adjustments to sentiment are needed.

Due to the slow and prolonged nature of consolidation, it also helps diminish greed as time passes. Lackluster price trends gradually erode traders’ enthusiasm. Since mid-April, this has been the case for gold, with bullish excitement giving way to indifference. Despite this high-level consolidation, gold has still risen strongly by 12.6% year-to-date.

The widely reported strong upward momentum has attracted many new traders who typically do not pay attention to gold. The more funds they pour in to chase gold’s rally, the larger the rally becomes, reinforcing this virtuous cycle. Therefore, reaching above $2425 in the coming months should attract a significant amount of new capital, especially when the inflated US stock market begins a decisive turnaround. The outlook for gold after consolidation looks quite promising.

What’s most promising is that US stock investors have yet to begin diversifying into gold. Their overall portfolio allocation to gold remains negligible. Once gold has run at high levels for a sufficient length of time and grabs their attention, they will need to buy a substantial amount, even establishing small percentage positions. This rally is a remarkable anomaly, the only time in the era of gold ETFs where such significant growth has been achieved without ETF buying!

Despite US stock investors not participating yet, gold continues to hold at record levels, showcasing its strength. They will eventually return, accelerating gold’s upward trajectory. Meanwhile, Chinese investors and central banks may continue buying, hinting at more record-breaking moments for gold in the coming months. Lagging gold stocks are likely to amplify this uptrend further, bringing substantial profits.

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