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Weekly Fundamental Gold Price Forecast: Lacking Luster, a Turning Point Arrives

Weekly Fundamental Gold Price Forecast: Lacking Luster, a Turning Point Arrives

Christopher Vecchio, CFA, Senior Strategist
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Weekly Fundamental Gold Price Forecast: Lacking Luster, a Turning Point Arrives

Weekly Fundamental Gold Price Forecast: Neutral

  • Between investors seeking higher yielding and more growth-sensitive assets and a sense of disappointment over the Biden stimulus package, gold prices are struggling.
  • As discussed in the early-December weekly fundamental gold price forecast, “there has been a material regime change in the fundamental narrative for gold prices.” We’re now at a turning point in the regime change.
  • The IG Client Sentiment Indexsuggests that gold prices in USD-terms (XAU/USD) may continue their brief rebound.

Gold Prices Week in Review

Gold is supposed to benefit from rising fiscal deficits and debts, as well as political uncertainty, right? Well, the past week has certainly dealt dual blows to those perspectives, as the Biden fiscal stimulus plan and a siege on the US Capitol building did little to inspire traders to take the bull by the horns. Gold prices fell almost entirely across the board, and on the back of a resurgent DXY Index, gold in USD-terms (XAU/USD) dropped by -1.12%, compounding the prior week’s loss of -2.59% (notably, which produced a bearish outside engulfing candle on the weekly timeframe).

But it’s not just gold in USD-terms. Gold in GBP-terms (XAU/GBP) fell by -1.29% and is now down by -3.14% on the year. The only gold pair that produced a positive result on the week (+0.35%), gold in NZD-terms (XAU/NZD), is still down by -2.89% through the first two weeks of the year. It’s been rough sledding for gold prices, no matter how you measure.

Shifting Fundamentals Hurting Gold in Short-term

As discussed in the early-December weekly fundamental gold price forecast, “there has been a material regime change in the fundamental narrative for gold prices.” 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.

Now that the US Dollar (via the DXY Index) is rising on the back of higher US real yields, it seems that the disappointment around the Biden stimulus plan is dwarfing the overtly dovish tone set forth by Fed Chair Jerome Powell (among others) over the course of last week regarding a potential tapering. Until US real yields start to pullback anew, gold prices may continue to find their footing in the short-term.

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Top FX Events in Week Ahead

The third week of January offers another heavy economic calendar, but this time with a more global focus (and less so on the United States, politically or economically). Several ‘high’ rated events on the DailyFX Economic Calendar are likely to provoke shifts in gold prices in different currency terms over the course of the week.

- On Monday, the initial Q4’20 Chinese growth rate (gold in CNH-terms, XAU/CNH) will be released.

- On Tuesday, the final December German inflation rate (gold in EUR-terms, XAU/EUR) is due.

- On Wednesday, the December UK inflation rate (gold in GBP-terms, XAU/GBP) and the final December Euroarea inflation rate (gold in EUR-terms, XAU/EUR) will be released, while the December Canada inflation rate and the results of the January Bank of Canada rate decision will be announced (gold in CAD-terms, XAU/CAD).

- On Thursday, the December Australia jobs report (gold in AUD-terms, XAU/AUD) and the Q4’20 New Zealand inflation rate (gold in NZD-terms, XAU/NZD) will be released, and the results of both the Bank of Japan rate decision (gold in JPY-terms, XAU/JPY) and the European Central Bank rate decision (gold in EUR-terms, XAU/EUR) will be announced.

- On Friday, the December Japan inflation rate (gold in JPY-terms, XAU/JPY) is due.

GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (January 2020 to January 2021) (CHART 1)

Weekly Fundamental Gold Price Forecast: Lacking Luster, a Turning Point Arrives

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended January 12, speculators decreased their net-long gold futures positions to 246.2K contracts, down from the 279.3K net-long contracts held in the week ended January 5. Further liquidation of net-long contracts would likely continue to drive down the price of gold, though it remains to be seen if traders are willing to hold fewer long gold contracts in 2021 than they did at their lowest point in 2020 (208.8K contracts for the week ended June 9).

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (JANUARY 15, 2021) (CHART 2)

Weekly Fundamental Gold Price Forecast: Lacking Luster, a Turning Point Arrives

Gold: Retail trader data shows 86.49% of traders are net-long with the ratio of traders long to short at 6.40 to 1. The number of traders net-long is 2.34% higher than yesterday and 12.12% higher from last week, while the number of traders net-short is 10.47% lower than yesterday and 0.57% 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.

--- 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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