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