Gold Price Forecast: What to Make of Recent Rebound? Levels for XAU/USD
Gold Price Forecast Overview:
- Gold prices have proven extremely sensitive to US Treasury yields and the US Dollar, in both directions.
- Failure to climb back above the August-November 2020 downtrend warns that bull aren’t yet back in control.
- According to the IG Client Sentiment Index, gold prices may soon trade higher.
Gold Prices Struggling to Regain Narrative
Gold prices have had a tough start to the New Year, with price action proving haphazard. Volatility hasn’t exploded or collapsed, leaving gold prices adrift, easily succumbing to the cross-currents presented by other asset classes, politics, fiscal stimulus speculation, and monetary policy. Gold is lacking a compelling narrative right now, and while a ‘blue wave’ presents a fundamentally bullish rationale long-term, the short-term picture is much less clear.
US Dollar, US Yields Leading the Way
As nominal US Treasury yields rise but inflation expectations stagnate, US real yields increase, undercutting the appeal of precious metals like gold. While the longer-term fiscal stimulus impulse in the context of a low interest rate environment should be beneficial for gold prices (akin to the 2009-2011 period), it may prove to be tough sledding for gold prices the next few weeks if US Treasury yields sustain their advance.
Gold Price Rate Technical Analysis: Daily Chart (January 2020 to January 2021) (Chart 1)
In the prior gold price forecast it was noted that “it may well be the case that we’ve witnessed a failed bullish breakout attempt in gold prices.” Failure to climb back above the August-November 2020 downtrend warns that bull aren’t yet back in control. Indeed, if today’s price action holds, then it would be the case that an evening star candle cluster has formed on the daily timeframe for gold prices.
Gold prices are once more aiming towards a familiar support area, the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48, as well as the 38.2% Fibonacci retracement of the 2020 low/high range at 1836.97. Failure below these levels opens up a quick drop back to the yearly low towards 1802.96.
Gold Price Technical Analysis: Weekly Chart (October 2015 to January 2021) (Chart 2)
In prior outlooks it has been noted that “breaking the downtrend from the August and November 2020 highs as well as the 38.2% Fibonacci retracement from the 2020 high/low range suggests that the next leg higher is beginning. A move higher through 1965.57 would suggest that the series of weekly ‘lower highs and lower lows’ has ended.” The bullish breakout never materialized, and instead, the first week of 2021 yielded a bearish outside engulfing bar, which occurring at a relative high, marks a weekly key reversal.
Technically speaking, further downside from here would warrant a reconsideration the 1Q’21 forecast, which suggests that gold prices could hit new highs this quarter.
Gold Prices and Gold Volatility Out of Step
Historically, 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.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (January 2020 to January 2021) (Chart 3)
Gold volatility has fallen in recent days, dragging down gold prices. 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 18.85. The 5-day correlation between GVZ and gold prices is -0.39 while the 20-day correlation is +0.63; one week ago, on January 15, the 5-day correlation was +0.37 and the 20-day correlation was +0.62.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (January 22, 2021) (CHART 4)
Gold: Retail trader data shows 80.84% of traders are net-long with the ratio of traders long to short at 4.22 to 1. The number of traders net-long is 3.31% lower than yesterday and 10.36% lower from last week, while the number of traders net-short is 5.30% lower than yesterday and 11.67% 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.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.