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Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

Christopher Vecchio, CFA, Senior Strategist
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Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

Weekly Fundamental Gold Price Forecast: Neutral

  • Gold prices in USD-terms have rallied sharply this week, but gold’s gains lagged elsewhere. Thanks in part to US stimulus talks, US Dollar weakness is masking gold’s own bearish underlying fundamentals.
  • Rally this week or not, there has been a material regime change in the fundamental narrative for gold prices (regardless of which currency you’re trading against gold).
  • The IG Client Sentiment Indexsuggests that gold prices in USD-terms (XAU/USD) may continue their brief rebound.

Gold Prices Week in Review

Following weeks of onslaught, gold prices were able to climb their way out of the proverbial cellar. Once again, gold in USD-terms (XAU/USD) was the bestperforming gold pair, which added +2.88% (a stark contrast to last week, when it was the best performing pair, falling by -4.49%). Gains were consistent across the board, with all gold pairs rising. But let’s be clear: the gains this week pale in comparison to the losses seen in the final week of November, when five of the seven major gold pairs lost at least -5%.

To suggest that the rebound in gold prices is one that can be trusted requires an active imagination at this point in time. That’s not to say that gold prices can’t or haven’t bottomed – but the fundamental narrative has not reversed in a material way to think that the worst is over for bullion. If anything, choppy conditions may be emerging.

Gold’s Seismic Shift in Fundamentals

‘Not too hot, not too cold – just right.’ That’s the exact opposite is the case for gold prices at present time. With COVID-19 vaccine development and distribution beginning to get started, the US economy is regaining its long-term economic potential. Fiscal stimulus may arise, but not to the extent had there been a ‘blue wave’ (though, the Georgia Senate runoffs on January 5, 2021 may change that assessment).

Gold prices have been afforded a small window where US real yields have pulled back, thanks in part to inflation expectations rising on the back of higher expected fiscal deficits (even if marginally). Even as the Federal Reserve signaling its desire to keep interest rates low through 2023, US real yields are still just back to back to the same place they were in mid-October.

The runaway nature of the pandemic, at least in the short-term, is helping keep open this small window of opportunity for gold prices. But as the US economy regains its potential thanks to the COVID-19 vaccine development and distribution efforts, it increasingly becomes an uphill slog for gold prices as investors seeking higher yielding and more growth-sensitive assets.

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Top FX Events in Week Ahead

The second week of December – and the second-to-last full week of the year – offers another heavy economic calendar. Several ‘high’ rated events on the DailyFX Economic Calendar will move gold prices in different currency terms over the course of the week.

- On Monday, the final Q3’20 Japanese GDP report will be released (gold in JPY-terms, XAU/JPY).

- On Tuesday, the final Q3’20 Euroarea GDP report is due (gold in EUR-terms, XAU/EUR)

- On Wednesday, the November Chinese inflation report (gold in CNH-terms, XAU/CNH) will be released and the results of the December Bank of Canada rate decision will be announced (gold in CAD-terms, XAU/CAD).

- On Thursday, the final October UK GDP report will be released (gold in GBP-terms, XAU/GBP), the results of the December European Central Bank rate decision will be announced (gold in EUR-terms, XAU/EUR), and the November US inflation report (gold in USD-terms, XAU/USD) will be released.

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Gold Price Rate Technical Analysis: Daily Chart (December 2019 to December 2020) (Chart 1)

Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

After the US Thanksgiving holiday, gold prices have held below significant technical support levels established in recent months. The conclusion that gold prices are in the process of carving out a near-term top remains valid.

Despite the stabilization seen at the end of the week, gold prices have barely rebounded from their lowest level since mid-July, having previously broken through the August swing low near 1818.09. By breaching the cluster of Fibonacci retracements above 1800 and plunging thereafter, gold price action suggests that the recent weakness is not just transient.

Gold price momentum remains bearish, with gold prices below their daily 5-, 8-, 13-, and 21-EMA envelope, which is still in bearish sequential order. Daily MACD continues to trend lower below its signal line, while Slow Stochastics are still sitting in oversold territory.

Gold Price Technical Analysis: Weekly Chart (October 2015 to December 2020) (Chart 2)

Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

With the 38.2% Fibonacci retracement of the 2020 low/high range at 1836.97 breaking as well, the weekly charts are suggesting that a near-term top has been established. Further losses towards the 50% Fibonacci retracement of the 2020 low/high range at 1763.36 can’t be ruled out. The path of least resistance is lower.

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GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (December 2019 TO December 2020) (CHART 3)

Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended December 1, speculators decreased their net-long gold futures positions to 240.5K contracts, down from the 251K net-long contracts held in the week ended November 17 (no update for the week ended November 24 given the US Thanksgiving holiday).

The gold futures market is still nowhere near its high watermark for participation: the all-time high for net-long contracts came during the week of February 18, 2020, when 353.6K were held. It still holds that there’s significant room for speculators to drive significant gold price swings through the end of the year.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (December 4, 2020) (CHART 4)

Weekly Fundamental Gold Price Forecast: Can You Trust The Rebound in XAU/USD?

Gold: Retail trader data shows 80.66% of traders are net-long with the ratio of traders long to short at 4.17 to 1. The number of traders net-long is 1.33% lower than yesterday and 2.30% lower from last week, while the number of traders net-short is 4.76% higher than yesterday and 16.91% 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.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Gold price trend may soon reverse higher despite the fact traders remain net-long.

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

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

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