Gold Price Forecast: Double Bottom Breakout Faces First Test - Levels for XAU/USD
What's on this page
- Gold Price Outlook:
- Gold Prices Stumble to Start Week
- Gold Prices, Gold Volatility Relationship Turns Manic
- GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (February 2020 to April 2021) (Chart 1)
- Gold Price Rate Technical Analysis: Daily Chart (March 2020 to April 2021) (Chart 2)
- Gold Price Technical Analysis: Weekly Chart (October 2015 to April 2021) (Chart 3)
- IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (April 19, 2021) (CHART 4)
Gold Price Outlook:
- Gold prices have turned lower after running into the early-February swing low, setting up a potential pullback to a key threshold in the recent bullish double bottom breakout attempt.
- Failure below the trifecta of key technical levels would suggest a false bullish breakout has developed, setting up a potential return to the yearly lows.
- According to the IG Client Sentiment Index, gold prices have a mixed bias in the near-term.
Gold Prices Stumble to Start Week
Gold prices entered the week near their monthly highs, but price action through Monday thus far has been less kind to bullion. Following last week’s bullish breakout attempt in establishing a short-term double bottom, gold prices have turned lower in spite of what has been an otherwise soft day of trading for the US Dollar.
It may be the case that the recent turn lower is merely setback before the march higher continues. After all, for at least this month, gold prices are still enjoying bullish seasonal tailwinds that are hampering the US Dollar (with gains averaging +2.39% over the past 5-years and +1.4% over the past 10-years). It’s too early to suggest that the double bottom attempt has failed.
Gold Prices, Gold Volatility Relationship Turns Manic
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 (February 2020 to April 2021) (Chart 1)
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 15.32, far below the yearly high set during the first week of February at 24.03.
As the month has moved forward, the relationship between gold prices and gold volatility has seemingly become manic: the 5-day correlation has moved to its strongest positive reading while the 20-day correlation has moved to its strongest negative reading. The 5-day correlation between GVZ and gold prices is +0.79 while the 20-day correlation is -0.62. One week ago, on April 12, the 5-day correlation was +0.27 and the 20-day correlation was -0.55.
Gold Price Rate Technical Analysis: Daily Chart (March 2020 to April 2021) (Chart 2)
Last week it was suggested that “a bullish breakout above a trifecta of technical levels…in breaking through this area, gold prices may have established a short-term double bottom” had developed. This tenet still holds; gold price action has not reverted below the confluence of former resistance turned support: the 50% Fibonacci retracement of the 2020 low/high range at 1763.36; the November 2020 low; and the March to mid-April 2021 sideways consolidation resistance.
Accordingly, it remains the case that “a simple doubling of the recent consolidation (1759.95-1677.36) above resistance suggests that gold prices may heading towards 1842.54 in the near-term – which would see bullion back to another cluster of Fibonacci retracements that proved consequential in early-2021.” But failure below the trifecta of key technical levels around 1763.36 would suggest a false bullish breakout has developed, setting up a potential return to the yearly lows below 1700.
Gold Price Technical Analysis: Weekly Chart (October 2015 to April 2021) (Chart 3)
It’s been previously noted that “reconsideration was trigged with the drop below 1763.36. Gold prices are currently viewed with a neutral bias on the weekly timeframe, but the technical outlook could soon erode from neutral to bearish below 1682.27, the 38.2% Fibonacci retracement of the 2015 low/2020 high range.” While the broader confines of the descending parallel channel that’s been forming relative to the August 2020 (all-time) high remain in place, now back above 1763.36, the rebound gives long-term bulls hope that by holding the pandemic uptrend, gold prices are defining their nine-month downturn as a bull flag.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (April 19, 2021) (CHART 4)
Gold: Retail trader data shows 81.53% of traders are net-long with the ratio of traders long to short at 4.41 to 1. The number of traders net-long is unchanged than yesterday and 1.72% lower from last week, while the number of traders net-short is unchanged than yesterday and 3.44% 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.