Gold shows potential reversal in response to economic and geopolitical uncertainty

The bullish momentum in gold prices is attributed to economic and geopolitical factors. One key driver is the dip in US Treasury bond yields, coupled with a softer Greenback, which has made gold more attractive to investors as a safe-haven asset. As market participants anticipate the Federal Reserve's monetary policy decision, there is a growing expectation that the Fed may hold rates steady while delivering a dovish message. This sentiment is further bolstered by weaker-than-expected economic data from Europe, where Germany has entered a recessionary phase. The potential for the European Central Bank to reduce interest rates in response to this economic downturn adds to the uncertainty, making gold a preferred asset for hedging against financial volatility.

Moreover, the recent escalation in the Middle East, specifically Israel's attack on Beirut's southern suburbs targeting a Hezbollah commander, has increased geopolitical risks. Such developments may lead to a flight to safety among investors, pushing gold prices higher. Additionally, the expectation of upcoming US economic data, including the Institute for Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) report, adds to the uncertainty in financial markets. Investors are closely watching these indicators to gauge the strength of the US economy and the Federal Reserve's potential policy response, which could further influence gold prices.

Bullish technical developments in Gold market

The chart below illustrates a strong bullish technical formation, indicating that gold is poised to move much higher. The development of a bullish pennant was broken, leading to a price rally that reached highs in 2011. Since then, gold has formed a cup and handle pattern, broken at the pivotal level of $2,075, initiating a strong rally. This rally is just the beginning, with significant potential for further gains. The quarterly candles for Q1 and Q2 2024 are strongly bullish, suggesting that gold should continue its upward trend in Q3 2024. Despite the typical seasonal correction in the gold market during May and June, the precious metal sets the stage for the next rally to complete the bullish move in Q3 2024. The ongoing geopolitical crisis in the Middle East also supports this bullish outlook.

The short-term hourly chart below shows that the rebound from the $2,365 support level was a bullish reversal, marking a low at $2,353 before moving higher. This formation suggests the potential for gold prices to stabilize before the next upward move. This stabilization will also depend on the ongoing conditions in the Middle East and the upcoming economic data releases, including the NFP and ISM Manufacturing PMI. On the other hand, the monthly candle for July is likely to be positive again. Still, the sharp shadows at the edges of the monthly candles for May, June, and July increase the risk of further consolidation in August, potentially before the Fed's policy decision in September.

Bottom line

In conclusion, the bullish momentum in gold prices is driven by economic and geopolitical factors, including declining US Treasury bond yields, a weaker dollar, and geopolitical tensions in the Middle East. The anticipation of a dovish stance from the Federal Reserve and weak economic data from Europe, particularly Germany's recession, adds to gold's appeal as a safe-haven asset. Technically, gold has shown strong bullish patterns historically, including a broken bullish pennant and a cup and handle formation, suggesting significant potential for further gains. However, the recent sharp shadows on monthly candles and the upcoming Federal Reserve policy decision in September may lead to some consolidation in the near term. Nonetheless, the ongoing economic and geopolitical uncertainties continue to support a positive outlook for gold in the coming months.

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