Gold's Head-and-Shoulders Pattern Threatens Fall Below $4,000

Gold is changing hands around $4,347 on Friday, sitting right on the neckline of a head-and-shoulders formation on the daily chart. If the pattern is confirmed, the next target is $3,950, which is about 9% beneath current levels.

Friday morning will bring the release of the August consumer price index in the US. The technical setup and this macro event are coinciding today.

Macroeconomic Pressures Mount Ahead of CPI Data

On Thursday, the producer price index came in at 5.4% on an annual basis, exceeding the 5.3% estimate. This inflation surprise sent gold under $4,400.

Treasury yields also moved higher. The 10-year note climbed to 4.95%, a level not seen since October 2023.

Markets are currently pricing in a 67.1% probability of a Federal Reserve rate hike at next week's meeting, an increase from 61.2%. According to economists, the headline CPI is forecast at 0.4% month over month and 3.4% year over year.

The source of the inflation matters. Brent crude is trading above $105 following the escalation involving Iran, having gained nearly 19% over the past month. Inflation driven by energy pushes up nominal yields without prompting the Federal Reserve to adopt a dovish stance.

Consequently, gold is bearing the brunt of rising rates and losing its status as a hedge, a trend that is strengthened by a strong dollar.

Gold's Head-and-Shoulders Pattern Sets a $3,950 Target

On August 5, gold broke above the downward-sloping trendline that originated from its January all-time high. The uptrend halted around the $4,750 to $4,800 area, slightly below the 0.236 Fibonacci retracement level at $4,816.

The metal subsequently pulled back to the 0.382 Fibonacci level at $4,333 and constructed a head-and-shoulders formation. The head was formed around $4,720, while the shoulders are located near $4,480 and $4,560.

Two different calculation methods lead to the same target. The measured move calculation deducts $385, the pattern's height, from the neckline at $4,335, resulting in $3,950. The 0.5 Fibonacci retracement level is at $3,942. This area also corresponds to the base seen in June and July.

A confirmed breakdown would mean a 9.4% drop. But the pattern has not yet been confirmed. Gold was up 0.69% on Friday and continues to hold above the neckline. If the price recovers to $4,560, the setup would be invalidated.

Record ETF Inflows Counter the Bearish Outlook

Physical demand tells a different story from the chart. Gold ETFs saw $18 billion in inflows during August, pushing total holdings to an all-time high of 4,189 tonnes.

Central banks added 288.9 tonnes of gold in the second quarter, a 62% increase compared to the same period last year, and these purchases were made while the price was declining.

Gold is on track for its third straight weekly decline, losing almost 2%. The CPI report will determine if the neckline will hold or if the measured move will be triggered.