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Weekly Fundamental Gold Price Forecast: The Tides Have Turned

Weekly Fundamental Gold Price Forecast: The Tides Have Turned

Christopher Vecchio, CFA, Senior Strategist
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Weekly Fundamental Gold Price Forecast: The Tides Have Turned

Weekly Fundamental Gold Price Forecast: Bearish

  • Tough sledding ahead for gold prices as the sea change in fundamentals coincided with a significant technical breakdown.
  • A quieter economic calendar may deprive gold prices of a needed catalyst to shift the burgeoning narrative.
  • The IG Client Sentiment Indexsuggests that gold prices in USD-terms (XAU/USD) may struggle in the days ahead.

Gold Prices Week in Review

Gold prices tend to benefit during periods of loose monetary policy and expansive fiscal policy. However it appears that one of those legs may have been kicked out over the past few days. The Federal Reserve's June policy meeting resulted in an accelerated timeline of withdrawal of monetary stimulus efforts, seemingly dragging forward rate hike expectations and implicitly the taper line. With inflation expectations pulling back across the board, gold's appeal as the mythical inflation hedge has been seemingly hampered.

Even though global bond yields at the long end of the curve have started to pull back, it remains the case that inflation expectations are dropping faster, which has created a churn higher in real yields. Assets that don't generate real returns (for example , cashflows dividends coupon payments ) tend to suffer during periods of rising real yields; gold checks this box.

Gold prices fell across the board last week on the back of a resurgent DXY Index: gold in USD-terms (XAU/USD)plunged by -6.05%.But it wasn’t just gold in USD-terms; gold in EUR-terms (XAU/EUR) dropped by -4.08%; gold inGBP-terms (XAU/GBP)contracted -3.98%; and gold in JPY-terms (XAU/JPY) sank by -5.58%.

Gold’s Shifting Fundamentals

The June Fed meeting helped enshrine the narrative that the US economy is regaining its long-term economic potential – and that recent hot inflation readings are destined too cool off. Gold prices have since entered a window of time where US real yields have begun to rise. Shifts in the US Treasury yield curve, on balance, suggesting a period with stronger short- and intermediate-term rates, has been consistent with a stronger US Dollar. As things stand now, it’s once again an uphill climb for gold prices as investors seeking higher yielding and more growth-sensitive assets.

Economic Calendar Week Ahead

The shift into the second half of June, as is the case for most months during the year, sees a quieter economic calendar. The world’s major economies have seen their labor market and inflation reports released and most central banks have dispersed from their meetings. By lacking meaningful ‘high’ rated event risk on the DailyFX Economic Calendar, gold prices may not be afforded a catalyst to shift the sea change in narrative (and price action).

- On Tuesday, gold in USD-terms (XAU/USD) will be in focus as Fed Chair Jerome Powell testifies in front of the U.S. House of Representatives on the Federal Reserve’s response to the coronavirus pandemic.

- On Wednesday, gold in USD-terms is back in the spotlight with the dueling May US Markit Manufacturing and ISM Manufacturing PMIs.

- On Thursday, gold in EUR-terms (XAU/EUR) could see increased interest with the release of the June German Ifo business climate survey. Additionally, gold in GBP-terms (XAU/GBP) could experience some volatility around the Bank of England rate decision. Finally, gold in USD-terms is back in focus with the release of the May US durable goods orders report.

- On Friday, gold in EUR-terms is in the spotlight again with the July German consumer confidence report. Attention on gold in USD-terms caps the week, with the May US PCE and core PCE readings as well as the June US Michigan consumer sentiment survey.

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

Weekly Fundamental Gold Price Forecast: The Tides Have Turned

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended June 15, speculators decreased their net-long gold futures positions to 209.4K contracts, down from the 213.7K net-long contracts held in the week prior. When gold prices last traded below 1800, gold futures positioning was less significantly net-long at 170.6K contracts. Further liquidation of futures longs could see more losses accumulate in spot gold prices.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (June 18, 2021) (CHART 2)

Weekly Fundamental Gold Price Forecast: The Tides Have Turned

Gold: Retail trader data shows 85.74% of traders are net-long with the ratio of traders long to short at 6.01 to 1. The number of traders net-long is 2.87% lower than yesterday and 9.76% higher from last week, while the number of traders net-short is 21.73% lower than yesterday and 30.32% lower 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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