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Gold Price Forecast: Downtrend Sustained, Recovery Imperiled - Key Levels for XAU/USD

Gold Price Forecast: Downtrend Sustained, Recovery Imperiled - Key Levels for XAU/USD

2019-11-22 09:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Gold Price Forecast Overview:

  • Gold prices have turned lower again in their downtrend from the September high, with the recent recovery proving to be a failed attempt higher.
  • Precious metals tend to underperform during periods of lower volatility as decreased uncertainty reduces the safe haven appeal of gold and silver. Gold volatility remains near its lowest level since mid-June.
  • Per the IG in IG Client Sentiment Index, gold prices may turn higher in the near-term.

Looking for longer-term forecasts on Gold and Silver prices? Check out the DailyFX Trading Guides.

US-China Trade War Phase 1 Deal Uncertainty Doesn’t Matter?

Is the US-China trade war about to fall off the rails? According to the news reports, it doesn’t appear that American and Chinese negotiators are going to sign a deal before the end of the year. In theory, that’s bad news for financial markets; uncertainty is never welcomed.

But taking a step back from the noise, the signal is clear: traders don’t care. Price action in bonds, stocks, and commodities – in particular, the safe havens like gold and silver – doesn’t reflect a reality in which uncertainty is running rampant through markets.

As financial markets climb the ‘wall of worry,’ gold prices have come down.

Gold Prices Drop with Sagging Gold Volatility

While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit during periods of higher volatility. Heightened uncertainty in financial markets due to increasing macroeconomic tensions (like US-China trade war or the prospect of a no-deal, hard Brexit, for example) increases the safe haven appeal of gold and silver. On the other hand, decreased volatility tends to harm gold prices.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2016 to November 2019) (Chart 1)

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Gold volatility (as measured by the Cboe’s gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) has fallen to 11.24, down to its lowest level since mid-June.

Accordingly, the typical relationship between gold prices and gold volatility continues to realign: the 5-day correlation between GVZ and gold prices is 0.89 while the 20-day correlation is 0.63; in the most recent update, the 5-day correlation was -0.22 and the 20-day correlation was 0.62.

Gold Price Technical Analysis: Daily Chart - Descending Channel (November 2018 to November 2019) (Chart 2)

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In our last gold price forecast technical analysis update, it was noted that “until the descending channel from the September and November highs breaks, it still holds that the path of least resistance is to the downside. To this end, the downtrend from the September 4 and November 1 highs remains intact…If gold volatility continues to edge higher, it’s very possible that gold prices move above 1483, which would provoke an upgraded assessment.”

The problem for gold prices at the moment? Gold volatility is trending lower. For now, the descending channel from the September and yearly high holds.

Gold prices are back below the daily 5-, 8-, 13-, and 21-EMA envelope, which is quickly realigning in bearish sequential order. EMA today. Daily MACD is flipping lower while in bearish territory, and Slow Stochastics have issued a sell signal just below the median line.

A move down below 1458.97 increases the odds of a return to the November low at 1445.51.

Gold Price Technical Analysis: Weekly Chart – Inverse Head and Shoulders Pattern (February to October 2019) (Chart 3)

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The weekly timeframe moves at a glacial pace, and thus there is no change since the last gold price forecast update. The gold price pullback since the October Fed meeting must be viewed in context of the longer-term technical picture: the gold price inverse head and shoulders pattern that originated earlier this year is still valid. Only a break below the August 1 bullish outside engulfing bar low at 1400.38 would draw into question the longer-term bullish potential.

Depending upon the placement of the neckline, the final upside targets in a potential long-term gold price rally vary: conservatively, drawing the neckline breakout against the January 2018 high at 1365.95 calls for a final target at 1685.67; aggressively, drawing the neckline breakout against the August 2013 high at 1433.61 calls for a final target at 1820.99.

IG Client Sentiment Index: Gold Price Forecast (November 21, 2019) (Chart 4)

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Gold: Retail trader data shows 76.21% of traders are net-long with the ratio of traders long to short at 3.20 to 1. The number of traders net-long is 2.47% lower than yesterday and 11.55% lower from last week, while the number of traders net-short is 8.42% lower than yesterday and 1.69% 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. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Gold 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 Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides

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