Golden Opportunity? XAU triggers multi-year-old H&S pattern

Gold prices have been trading sideways for roughly 1,302 days. However, the winds shifted last week with buyers quickly lifting the price as US Core PCE dropped to the lowest level since April 2021 and both Durable goods orders and the ISM index failed to meet expectations. 

Consequently, the price had its highest weekly closing price since August 2020, triggering a major inverse head and shoulders pattern with a target of $2520. The pattern will remain in play if the price does not fall firmly into the pattern by trading below $2045.   

 

Gold price weekly chart 

 

Why are gold prices up?  

 

Current futures markets have reached a consensus, anticipating a 25-basis point reduction in the Federal Funds Rate at the upcoming June 12 meeting. The probability of maintaining the rate at its current level of 525-550 basis points stands at just 30.3%. In response to these developments, gold prices have surged, reflecting increasing confidence that inflation is being reined in and that the Federal Reserve is preparing to lower interest rates, making it cheaper to hold gold. 

Gold prices, as well as stock indices, could also be adjusting upwards for past inflation. Let’s take the Nasdaq 100 as an example. The index is 9% above its 2021 peak, yet if we consider US inflation, the index is 2% below its 2021 high. We have seen the same pattern repeat itself in other stock indices.   

As for gold prices, they are trading at 2011 levels when adjusted for inflation, and they would need to gain 18% to reach the nearest high, the August 2020 high.