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Gold Price Forecast: Losing Luster, Bears Take Control - Key Levels for XAU/USD

Gold Price Forecast: Losing Luster, Bears Take Control - Key Levels for XAU/USD

Christopher Vecchio, CFA, Senior Strategist

Gold Price Forecast Overview:

  • Gold prices have broken down through key technical support, amidst a shift in the fundamental narrative.
  • Deeper losses in gold prices towards 1763.36 can’t be ruled out in the near-term.
  • According to the IG Client Sentiment Index, gold prices have a bearish outlook.

Gold Prices Lose Fundamental Narrative

Gold prices have had a rough go of sorts since the US presidential election. The news that that multiple coronavirus vaccines are progressing towards mass distribution, financial markets have proved as optimistic as they have been all year: equity markets are hitting fresh highs while the safe havens are hitting fresh lows.

In a sense, this is the worst case scenario for gold prices. The lack of a ‘blue wave’ means no significant fiscal stimulus nor changes to the tax code. The US economy is regaining its long-term economic potential thanks to the vaccine news (even if the short-term outlook is increasingly dark, with a likely contraction in Q1’21).

And while the Federal Reserve is on the low rate path through 2023, US real yields are at the same place they were at the end of October. Against a backdrop where US corporate profits are growing at record rates, gold has lost its luster in favor of other growth-linked assets, which have roundly flourished in November.

Gold Prices Not Following Gold Volatility Closely

Gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks don’t like increased volatility signaling greater uncertainty around cash flows, dividends, coupon payments, 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. Reduced political tensions tend to decrease the safe haven appeal of gold.

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

Gold Price Forecast: Losing Luster, Bears Take Control - Key Levels for XAU/USD

Gold volatility has ebbed higher, but has proven inconsequential to gold prices through November. 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 19.02. The 5-day correlation between GVZ and gold prices is -0.94 while the 20-day correlation is +0.31; one week ago, on November 18, the 5-day correlation was -0.04 and the 20-day correlation was +0.26.

It seems that our longstanding axiom is being challenged as market dynamics shift. To this end, it may no longer be the case that “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.”

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

Gold Price Forecast: Losing Luster, Bears Take Control - Key Levels for XAU/USD

Heading into the US Thanksgiving holiday, gold prices have broken down through through significant technical support levels established over the course of recent months, necessarily leading to the conclusion that gold prices are in the process of carving out a near-term top. To this end, the prior falling wedge interpretation has been invalidated as a sign of confirmation that a top has been established.

Despite their rebound today thus far, gold prices have recently fallen to their lowest level since mid-July, clearing out the August swing low near 1818.09 in the process. Breaking the slew of Fibonacci retracements above 1800 further suggests that gold prices are due for more weakness in the near-term.Gold price momentum is bearish, with gold prices below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD continues to trend lower below its signal line, while Slow Stochastics are still sitting in oversold territory. The path of least resistance is lower.

Gold Price Technical Analysis: Weekly Chart (October 2015 to November 2020) (Chart 3)

Gold Price Forecast: Losing Luster, Bears Take Control - Key Levels for XAU/USD

With the 38.2% Fibonacci retracement of the 2020 low/high range at 1836.97 breaking as well, the weekly charts are suggesting that a near-term top has been established. Further losses towards the 50% Fibonacci retracement of the 2020 low/high range at 1763.36 can’t be ruled out.

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Gold: Retail trader data shows 84.12% of traders are net-long with the ratio of traders long to short at 5.30 to 1. The number of traders net-long is 22.10% higher than yesterday and 17.51% higher from last week, while the number of traders net-short is 14.91% lower than yesterday and 2.28% 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.