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Gold Price Forecast: Descending Channel Prevails - Key Levels for XAU/USD

Gold Price Forecast: Descending Channel Prevails - Key Levels for XAU/USD

Christopher Vecchio, CFA, Senior Strategist

Gold Price Forecast Overview:

  • Gold prices continue to trade lower within the downtrend from the September and November highs, and now gold prices are fully below their EMA envelope.
  • 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 continue to struggle to gain traction.

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

US-China Trade War Phase 1 Deal Hope Springs Eternal

In the run-up to the Thanksgiving holiday this week, which typically produces reduced rates of participation and lower trading volumes, global financial markets continue to climb the ‘wall of worry.’ A US-China trade war Phase1 deal appears to be within reach, even if a potential US bill condemning China’s actions in Hong Kong have added a wrinkle to the efforts.

Comments by US President Donald Trump coupled with signals from Chinese officials suggest that both sides are trying desperately to find common ground before the year is out. As hope springs eternal for a Phase 1 deal – and measures of volatility across asset classes drop to multi-month lows – market participants continue to eschew safe haven assets like US Treasuries, the Japanese Yen, and precious metals like gold.

Gold Prices Stay Depressed Alongside 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) was holding at 11.34, near 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 0.96 while the 20-day correlation is 0.63; in the most recent update, the 5-day correlation was 0.89 and the 20-day correlation was 0.63.

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

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Gold prices remain under pressure on a technical basis as well. 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.”

To this end, the daily outlook for gold prices has not changed: the path of least resistance remains to the downside. Gold prices are below the daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is trending lower in bearish territory, and Slow Stochastics are trending lower towards oversold territory.

It still holds that “a move down below 1458.97 increases the odds of a return to the November low at 1445.51.” Gold prices last traded at 1457.04 at the time this report was written.

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 25, 2019) (Chart 4)

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Gold: Retail trader data shows 76.07% of traders are net-long with the ratio of traders long to short at 3.18 to 1. The number of traders net-long is 2.50% higher than yesterday and 1.78% higher from last week, while the number of traders net-short is 14.21% higher than yesterday and 6.36% 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. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Gold trading bias.

Read more: Weekly US Dollar Forecast: Front-Loaded Week Due to Thanksgiving

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

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

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