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Gold Price Forecast: All-Time Highs Come into Focus - Key Levels for XAU/USD

Gold Price Forecast: All-Time Highs Come into Focus - Key Levels for XAU/USD

Christopher Vecchio, CFA,
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Gold Price Forecast Overview:

  • Gold prices completed their multi-year inverse head and shoulders pattern, a bottoming effort that validates the long-term bullish technical narrative. But that doesn’t mean that more gains aren’t still ahead: all-time highs are well-within reach.
  • The gold price rally remains bolstered by a bullish short-term technical while the fundamental perspective– that real yields will remain low, if not in negative territory for some years to come– remains solid.
  • According to the IG Client Sentiment Index, the gold price rally may keep going.
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Back to Business: Gold Prices Resume Rally

Gold prices, alongside other precious metals like silver and platinum, are in the midst of their best week since March 23. That was the week that the Federal Reserve announced its extraordinary monetary intervention into financial markets in order to stave off a cataclysmic collapse stemming from the coronavirus pandemic. Gold prices are up over +10% since the close last Friday, while silver prices are up by nearly +30%, and platinum prices have gained nearly +15%.

The gold price rally (as well as the precious metals rally in general) remains bolstered by a bullish short-term technical while the fundamental perspective – that real yields will remain low, if not in negative territory for some years to come– remains solid.

Making Sense of the Gold Breakout – What’s the Catalyst?

While central banks have not been in the news this week, it’s been the other side of the policy equation that has made waves: fiscal authorities in Europe and the United States are pushing forward aggressive stimulus packages to help prop up their ailing economies. European leaders have agreed to a near €900 billion stimulus package that brings the European Union closer to fiscal integration thanks to its jointly-issued debt, while it appears that the White House and Congress will set aside partisan politics to stitch together another safety-net for the US economy.

Even as the COVID-19 outbreak appears to be worsening in the United States, the beginning stages of a nationwide mask mandate (state by state, if not via the federal government) speaks to the potential for the world’s largest economy to wrangle control of the worst outbreak among any country on earth. Coupled with signs in the southern hemisphere that the influenza season has been quelled in part due to the efforts to contain the coronavirus pandemic, there are green shoots emerging: growth will return faster, inflation will recovery quicker.

The Future Shines Bright for Gold and Precious Metals

The longer-term thesis for gold prices and precious metals in general remains intact. It’s necessary to compare The Great Lockdown (one of the colloquialisms used to describe the current economic malaise) to The Great Recession.

Like during The Great Recession, the Federal Reserve has responded with expansionary monetary policy. Unlike during the Great Recession, the federal government’s fiscal policy response has proven extremely robust. Rising federal deficits typically fuel inflation expectations as well as higher interest rates; but with the Federal Reserve keeping its main rate tethered near zero through 2022, we may very well be stuck with a net-result of the enhanced fiscal stimulus being higher inflation, but not higher interest rates.

Accordingly, the fundamental backdrop for gold prices remains strong, and appears to be strengthening. Thanks to expansionary monetary policy and even now enhanced fiscal policy responses real yields continue to fall and remain depressed: short-term rates are stuck near zero while growth and inflation rates are rising. An environment defined by depressed and/or negative real yields has historically proven bullish for precious metals.

It still holds that these factors will continue to enhance the negative real yield argument that has been fueling gold and silver’s rallies in recent months, and moreover, the breakout that has been experienced in recent days.

You can read more about the impact of negative real yields more in a prior gold price forecast.

Gold Volatility Jumps, Gold Prices Join

We’ve been on this beat for a while, so here comes another rap of the drum: “given the current environment, falling gold volatility is not necessarily a negative development for gold prices, whereas rising gold volatility has almost always proved bullish; in the same vein, gold volatility simply trending sideways is more positive than negative for gold prices.” This remains true.

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) is trading at 21.58, a 43% increase from its close on July 17. Following a period where gold prices and gold volatility have risen sharply in tandem, the 5-day correlation between GVZ and gold prices is 0.95 while the 20-day correlation is 0.20; one week ago, on July 16, the 5-day correlation was -0.31 and the 20-day correlation was -0.65.

Read more: How Do Politics and Central Banks Impact FX Markets?

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2008 to July 2020) (Chart 1)

A reminder: gold prices have a relationship with volatility unlike other asset classes, even including precious metals like silver which have more significant economic uses. While other asset classes like bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – gold tends to benefit during periods of higher volatility. Heightened uncertainty in financial markets due to increasing macroeconomic tensions increases the safe haven appeal of gold – which, by the way, are back in the news thanks to the latest US-China trade war headlines.

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Gold Price Technical Analysis: Daily Chart (July 2019 to July 2020) (Chart 2)

Gold prices have achieved each short-term bullish target outlined in these forecasts in recent weeks (1833.22 and 1846.91). The market is in the midst of a strong breakout move, and as such, our attention shifts from pattern-based analysis to more explicitly momentum-based analysis.

During such a breakout, it’s important to keep things simple: the market is geared higher until the daily 5-EMA is lost, which gold prices have not closed below since breaking out on June 24. All-time highs at 1921.07 are otherwise in focus for the time being.

Gold Price Technical Analysis: Weekly Chart – Inverse Head and Shoulders Pattern (June 2011 to July 2020) (Chart 3)

Gold prices have completed the inverse head and shoulders pattern first identified in mid-2019. Depending upon the placement of the neckline, the final upside target was 1820.99. The long-term gold thesis is now evolving, but with the bottoming effort completed, we can now turn our attention to all-time highs at 1921.07 – and well-beyond over the coming months. From this strategist’s perspective, it would be a surprise if gold prices didn’t not see $2000/oz by the end of the year (and even that feels conservative as it is being written).

IG Client Sentiment Index: Gold Price Forecast (July 24, 2020) (Chart 4)

Gold: Retail trader data shows 66.76% of traders are net-long with the ratio of traders long to short at 2.01 to 1. The number of traders net-long is 5.95% higher than yesterday and 4.44% higher from last week, while the number of traders net-short is 10.05% higher than yesterday and 9.19% 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.

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

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