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Weekly Gold Price Forecast: Kicking the Can on a US-China Trade War Phase 1 Deal

Weekly Gold Price Forecast: Kicking the Can on a US-China Trade War Phase 1 Deal

2019-11-30 21:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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gold price, gold technical analysis, gold chart, gold price forecast, gold price chart

Weekly Fundamental Gold Price Forecast: Neutral

  • November was the second-worst month of the year, although five of the eight gold pairs turned higher in the last week of the month.
  • Gold price’s next move is largely dependent upon what happens in the US-China trade war: failure to sign a Phase 1 deal before the end of the year could help spark a recovery.
  • The IG Client Sentiment Index shows that gold prices in USD-terms (XAU/USD) may struggle in the days ahead.

See our long-term forecasts for Gold and other major currencies with the DailyFX Trading Guides.

Gold Prices Week & Month in Review

Gold prices had a tough November, their second worst month this year so far. But gold prices started to turn the corner late in the week, with five of the eight XAU-crosses finishing in positive territory. Gold prices in JPY-terms (XAU/JPY) was the best performing gold pair, gaining 0.91% over the past week. Gold prices in AUD-terms (XAU/USD) and gold prices in CHF-terms (XAU/CHF) were the next best performing pairs, adding 0.48% and 0.4%, respectively.

Overall, even after gold prices in USD-terms (XAU/USD) finished the week higher by 0.14%, it still closed the month lower by -3.21% overall. The main factor in gold’s weakness the past month were the dramatic pullback in Federal Reserve interest rate cut odds due to perceived progress towards a US-China trade war Phase 1 deal. To this end, gold prices may start December on stronger footing.

Gold Prices Rally After Trump Signs Hong Kong Bill

Gold prices turned higher at the end of November thanks to news breaking that US President Donald Trump would be signing a bill aimed at showing support for protestors in Hong Kong. With China insisting on its “two systems, one country” style of governance with respect to Hong Kong, the move may be seen as an unnecessary provocation (granted: the bill passed through the US Congress with such overwhelming support, it was veto proof, so US President Trump had no choice to sign the bill).

Moving forward, the best news possible for gold prices on the trade war front would be if the US-China trade war Phase 1 deal falls apart before the end of the year.

Gold’s Relationship with Inflation to be Significant Moving Forward

The environment of uncertainty around the US-China trade war Phase 1 deal has pushed G10 currencies’ central banks into a “race to the bottom” – central banks from all around the world are cutting rates towards zero, and in some cases, into negative territory. As uncertainty persists for global trade, central banks are unlikely to raise rates. This may help gold prices avoid too significant of a downturn.

The fall in global bond yields coupled with signs that inflation is turning higher amid persisting globaltrade concernsunderscores one of the key factors that tends to help gold prices rally: environments that produce falling real yields tend to be the most bullish.

Real yields are inflation-adjusted yields: for example, the US Treasury 10-year yield minus the headline inflation rate. Falling real US yields means that the spread between Treasury yields and inflation rates is decreasing (for example: the US Treasury yield falls and inflation rises). If gold yields nothing (no dividends, coupons, or cash flows), it would logically follow that it would benefit in environments when US real yields fell.

Top FX Events in Week Ahead

The first week of the month presents ample opportunities for gold prices to see heightened volatility, which tends to benefit gold prices (more uncertainty breeds higher gold volatility; higher gold volatility leads to higher gold prices, typically).

Gold prices in AUD-terms (XAU/USD) will be in focus in the first half of the week, with the December Reserve Bank of Australia rate decision on Tuesday and the Q3’19 Australia GDP report on Wednesday. Gold prices in CAD-terms (XAU/CAD) will come into focus on Wednesday and Friday, with the December Bank of Canada rate decision and the November Canada jobs report, respectively.

Over the course of the week, however, gold prices in USD-terms (XAU/USD) will be the focus. On Monday, the November US ISM Manufacturing report will draw attention as will Thursday’s November US ISM Services/Non-Manufacturing report, both as appetizers to the week’s main course, the November US jobs report (nonfarm payrolls and household employment report) on Friday.

GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (NOVEMBER 2018 TO NOVEMBER 2019) (CHART 1)

cftc cot, cftc cot gold, gold futures, xau futures, futures positioning

Looking at positioning, US federal reporting agencies were closed around the US Thanksgiving holiday, so the CFTC’s COT data for the week ended November 26 is still unavailable; at this moment, we only have data through November 19.

For the most recently available week, speculators increased their net-long gold futures positions to 285.9K contracts, up from the 267.1K net-long contracts held in the week prior. The gold futures market is now -8.5% net-long than it was during the week ending September 24, 2019 (which itself was a three-year high at 312.4K contracts).

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (NOVEMBER 29, 2019) (CHART 2)

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Gold: Retail trader data shows 77.33% of traders are net-long with the ratio of traders long to short at 3.41 to 1. The number of traders net-long is 4.42% higher than yesterday and 10.61% higher from last week, while the number of traders net-short is 4.10% higher than yesterday and 1.52% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger gold-bearish contrarian trading bias.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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