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Gold Price Forecast: Double Bottom Breakout Fading? Levels for XAU/USD

Gold Price Forecast: Double Bottom Breakout Fading? Levels for XAU/USD

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Gold Price Outlook:

  • Gold prices haven’t made much progress since clearing consolidation resistance in mid-April.
  • It remains the case that “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 bullish bias in the near-term.

Gold Prices Not Shining

Gold prices may have enjoyed bullish seasonal tailwinds in April, but price action over the past week-plus has proven tame, if not downright boring. While its true that gold prices haven’t made much progress since clearing consolidation resistance in mid-April, that doesn’t mean the market isn’t persisting near a critical threshold.

Now that we’re seeing the US Dollar decline even as US Treasury yields rise – a condition that has set in over the past year when real US yields were falling – traders may want to keep an eye on gold prices to see if the market begins to wake up with May around the corner.

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Gold Prices, Gold Volatility Relationship Offers Clues

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 (April 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 14.93, quickly approaching the closing low of the past year set in mid-April at 14.26. Gold prices and gold volatility have seen their relationship strengthen in recent days, and a further drop in gold volatility may prove to become a burden for gold prices. The 5-day correlation between GVZ and gold prices is +0.76 while the 20-day correlation is -0.50. One week ago, on April 20, the 5-day correlation was +0.74 and the 20-day correlation was -0.61.

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

In recent weeks it has been suggested that “gold prices may have established a short-term double bottom.” So far, this perspective remains valid, insofar as gold prices have not returned 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.

If the double bottom perspective is valid, then “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.” Accordingly, it also remains the case that “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.

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IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (April 27, 2021) (CHART 4)

Gold: Retail trader data shows 81.80% of traders are net-long with the ratio of traders long to short at 4.49 to 1. The number of traders net-long is 0.69% higher than yesterday and 3.80% lower from last week, while the number of traders net-short is 2.19% higher than yesterday and 1.20% 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

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

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