Weekly Technical Gold Price Forecast: Neutral
- Gold prices have sustained significant technical damage in recent days, with six of eight major gold pairs losing more than -5% over the past week.
- There’s no denying it: there’s been a material regime change in the fundamental narrative for gold prices, helping provoke the dramatic technical collapse.
- The IG Client Sentiment Index suggests that gold prices in USD-terms (XAU/USD) may rebound briefly in the near-term.
Gold Prices Week in Review
It was a terrible week for gold prices, and there are few good reasons to think that the worst is over. Gold in USD-terms (XAU/USD) was the best performing gold pair, which still fell by -4.49%. Elsewhere, losses were more significant and consistent across the board: five of the remaining six major gold pairs lost at least -5% over the past week. With the Australian and New Zealand Dollars the top performers in FX markets, the -5.60% and -5.84% losses experiencing by gold in AUD-terms (XAU/AUD) and gold in NZD-terms (XAU/NZD), respectively, are of little surprise.
Gold Has Experienced a Seismic Shift in Fundamentals
Technical damage wrought in recent days has been significant, spurred by a sea change in the fundamental narrative undergirding gold prices during the coronavirus pandemic. Amid news that that several coronavirus vaccines are quickly advancing towards mass distribution, risk appetite has surged, lifting equity markets to fresh all-time highs.
What’s the exact opposite case of a ‘goldilocks’ scenario? Because nothing is ‘just right’ for gold prices at present time. The US economy is regaining its long-term economic potential thanks to COVID-19 vaccine developments, but no ‘blue wave’ means no significant fiscal stimulus nor changes to the tax code.
We’re looking at higher inflation, but not due to higher fiscal deficits. Even as the Federal Reserve signals its desire to keep interest rates low through 2023, US real yields are no longer falling, back to the same place they were in mid-October. With US corporate profits growing at record rates, safe havens have fallen out of favor for growth-sensitive assets; gold fits the bill as a prime candidate to have been suffering in recent weeks.
Top FX Events in Week Ahead
The first week of December offers a heavy economic calendar, with multiple ‘high’ rated events on the DailyFX Economic Calendar from various corners of the globe.
- On Monday, November Chinese NBS Manufacturing PMI and November German inflation data will be released.
- On Tuesday, the final Reserve Bank of Australia rate decision of 2020 will adjourn. Later in the day, November German labor market data, Q3’20 Italian GDP, and November Euroarea inflation will be released. Finally, Q3’20 Canadian GDP and both November US ISM and Markit Manufacturing PMIs will be released.
- On Wednesday, the Q3’20 Australian GDP report will be released.
- On Friday, the October Canadian trade balance report will be released, as well as both the November Canadian labor market report and November US nonfarm payrolls report.
Gold Price(XAU/USD) Rate Technical Analysis: Daily Chart (November 2019 to November 2020) (Chart 1)
After the US Thanksgiving holiday, gold prices have held below significant technical support levels established in recent months. The conclusion that gold prices are in the process of carving out a near-term top remains valid.
Despite the stabilization seen at the end of the week, gold prices have barely rebounded from their lowest level since mid-July, having previously broken through the August swing low near 1818.09. By breaching the cluster of Fibonacci retracements above 1800 and plunging thereafter, gold price action suggests that the recent weakness is not just transient. Gold price momentum remains bearish, with gold prices below their daily 5-, 8-, 13-, and 21-EMA envelope, which is still in bearish sequential order. Daily MACD continues to trend lower below its signal line, while Slow Stochastics are still sitting in oversold territory.
Gold Price (XAU/USD) Technical Analysis: Weekly Chart (October 2015 to November 2020) (Chart 2)
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. The path of least resistance is lower.
Gold Volatility Not Influencing Gold Prices Like Usual…
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, 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. Reduced political tensions tend to decrease the safe haven appeal of gold.
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.”
GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (NOVEMBER 2019 TO NOVEMBER2020) (CHART 3)
Next, looking at positioning, it’s worth noting that the CFTC did not release an update for the week ended November 24 due to the US Thanksgiving holiday. As such, we only have available the data through November 17. According to the CFTC’s COT data, for the week ended November 17, speculators increased their net-long gold futures positions to 251.3K contracts, up from the 240K net-long contracts held in the week prior.
The gold futures market is still not near its high watermark for participation: the all-time high for net-long contracts came during the week of February 18, 2020, when 353.6K were held. There’s still significant room for speculators to drive significant gold price swings through the end of the year.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (NOVEMBER 27, 2020) (CHART 4)
Gold: Retail trader data shows 83.19% of traders are net-long with the ratio of traders long to short at 4.95 to 1. The number of traders net-long is 13.25% lower than yesterday and 1.76% higher from last week, while the number of traders net-short is 3.90% higher than yesterday and 8.33% 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.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
