Since October, gold has risen to over $2400 from near $1800 in a massive surge. Initially, attention was focused on incoming rate cuts, followed by increased geopolitical risks and high demand from central banks and China. With the possibility of an Israel–Iran conflict, gold traders saw prices soaring even above $2400. While this surge continues, recession risks for the US are rapidly diminishing, and the slowdown in inflation’s fall has tempered the market’s aggressive rate cut expectations. As the possibility of an Israel–Iran conflict diminishes significantly, gold now has ample room for a correction. The first sign of this came with a rejection from above $2400. 

(XAUUSD Daily Chart) 

Since October, an extended ABCD formation has developed. According to this formation, traders can anticipate a sell-off from point “D,” which represents the 123.6% Fibonacci extension level. With this week’s decline, the formation appears to be working well for now. If the current outlook persists, there is significant downside potential. 

While the risks of conflict between Israel and Iran have diminished for now, the situation in the Middle East remains volatile. Additionally, Russia – Ukraine risks are also a concern, but the newly approved aid from the US Congress and plans from Germany and the UK may provide Ukraine with enough leverage to impede Russian progress. Both fronts should be carefully monitored by gold traders, as any escalation could hinder downward progress. 

(XAUUSD 4H Chart) 

Looking at a closer timeframe, the trend from the end of February appears to be breaking. Gold bulls tested the trend multiple times yesterday, but all attempts were rejected both from the trend and the 2335 resistance level. If this pattern persists, gold might once again move below 2300. The 50% and 61.8% retracement levels of the recent upward move are converging with key local support levels and could serve as viable targets for potential downward moves. However, before that, gold bears must breach the 2300 mark. 

(XAUUSD Daily Chart) 

Gold’s recent surge closely mirrors the November 2022 to February 2023 rally. Over a 63-day period, gold climbed over 21%, relative momentum index (RMI) surpassing and running above 70 while remaining over its signal moving average. Following a clear sell signal from the RMI, it subsequently dropped by nearly 6.40%. In the recent 47-day rally, gold surged nearly 22%, echoing the pattern of the 2022-2023 period but only much sharper, with the sell signal now confirmed as of yesterday. If history repeats itself, gold could potentially decline to as low as 2180, which coincides with the 61.8% level on the 4-hour chart. However, traders should approach cautiously considering geopolitical tensions, US inflation data, and numerous support levels between the current price and 2180, some of which could offer significant reinforcement. 

Despite the robust downside signals, a reclaim of 2350 by gold could alleviate the selling pressure observed earlier this week.