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Gold Price Forecast: Searching for a Bottom - Levels for XAU/USD

Gold Price Forecast: Searching for a Bottom - Levels for XAU/USD

Christopher Vecchio, CFA, Senior Strategist
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Gold Price Outlook:

  • As global bond yields, but US rates in particular, continue to creep higher, gold prices remain beleaguered.
  • Gold prices are nearing a key Fibonacci retracement for the period covering the 2015 low to the 2020 high.
  • According to the IG Client Sentiment Index, gold prices have a mixed bias.

Gold Prices Dig to New Lows

Gold prices are mired in a slump that has seen its year-to-date performance dip into double-digit negative territory coming into this week. As global bond yields, but US rates in particular, continue to creep higher, gold prices remain beleaguered. The simple reality is, gold doesn’t offer a coupon, dividend, or cash flow, leaving the shiny rock at a relative disadvantage in an environment defined by appealing growth prospects and rising real yields (returns in excess of inflation).

The prospect for more gains in real US yields (and thus, the US Dollar (via the DXY Index)) in the near-term poses for a difficult environment for gold prices. Gold prices’ best bet is that the technical narrative helps provide some stability as key technical support nears.

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LONG-TERM FUNDAMENTALS MATTER, BUT…

It’s important to view recent price action across asset classes through the lens of asset allocation and risk-adjusted returns. Gold, like other precious metals, does not have a dividend, yield, or coupon (as noted earlier), thus a jump in both US nominal and real yields presents a problem. Moreover, rising US Treasury yields, narrowing the gap with key metrics like US S&P 500 dividend yield (and above that, the earnings yield), are provoking reallocation not just in commodities, but equities and FX as well.

Bond markets are the ‘tail that wags the dog,’ and while longer-term fundamentals matter, a rapid advance in yields can provoke short-term havoc that runs counter to longer-term expectations (in this case, which is a steady erosion in real yields due to the combination of loose monetary policy and expansionary fiscal policy).

Gold Prices, Gold Volatility Out of Sync

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 (March 2020 to March 2021) (Chart 1)

Gold volatility has fallen back in recent days, yet still has more or less been rangebound for the better part of the last five months. 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 20.21, far below the yearly high set during the first week of February at 24.03. The 5-day correlation between GVZ and gold prices is -0.43 while the 20-day correlation is -0.87. One week ago, on March 1, the 5-day correlation was -0.89 and the 20-day correlation was -0.51.

Gold Price Rate Technical Analysis: Daily Chart (March 2020 to March 2021) (Chart 2)

Gold prices slouched through the 50% Fibonacci retracement of the 2020 low/high range, quickly dropping to what may be considered longer-term bull flag support as measured from the August 2020 and January 2021 highs measured against the November 2020 low. Bull flag (or descending channel) support also coincides with two key Fibonacci retracements: the 38.2% Fibonacci retracement of the 2015 low/2020 high range at 1682.27, as well as the 61.8% Fibonacci retracement of the 2020 low/high range at 1689.74.

If gold prices are going to find a bottom, this may be an ideal place from a technical perspective. Implicitly, falling below this zone would be akin to a death knell for gold prices in the near-term.

Gold Price Technical Analysis: Weekly Chart (October 2015 to March 2021) (Chart 3)

It’s been previously noted that “further downside from here (below the 50% Fibonacci retracement of the 2020 low/high range) would warrant a reconsideration the 1Q’21 forecast, which suggests that gold prices could hit new highs this quarter.” Such reconsideration was trigged with the drop below 1763.36. With gold prices making a technical ‘last stand’ of sorts, the technical outlook may soon erode from neutral to bearish below 1682.27, the 38.2% Fibonacci retracement of the 2015 low/2020 high range.

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IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (March 8, 2021) (CHART 4)

Gold: Retail trader data shows 86.95% of traders are net-long with the ratio of traders long to short at 6.66 to 1. The number of traders net-long is 6.50% higher than yesterday and 11.39% higher from last week, while the number of traders net-short is 18.52% higher than yesterday and 13.83% 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.

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

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

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