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Gold Price Forecast: Progressing Towards Multi-Month Resistance - Levels for XAU/USD

Gold Price Forecast: Progressing Towards Multi-Month Resistance - Levels for XAU/USD

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Gold Price Outlook:

  • Despite inflation fears rearing their head with rippling effects across global financial markets, gold prices have enjoyed a strong run since early-April, and have weathered ‘the storm’ around US inflation data this week.
  • Seasonality, May has been one of the worst, if not the worst, months of the year for gold prices, which may prove to be a headwind in an environment that has proved bullish otherwise.
  • According to the IG Client Sentiment Index, gold prices have a bearish bias in the near-term.

Two Steps Forward, One Step Back, Two Steps Forward…

Gold prices have slowly but surely climbed their wall of worry, briefly touching a fresh monthly high earlier this week, incidentally their highest level since early-February. In a sense, as inflation fears have reared their ugly head over the past few weeks, gold prices have been fulfilling their mythical role as an inflation hedge. A steady erosion in real US yields due to the combination of loose monetary policy and expansionary fiscal policy is proving to be a strong fundamental tailwind for gold prices, long-anticipated but perhaps finally being realized.

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Gold Volatility Eases Off – Not Bad for Gold Prices?

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 (May 2020 to May 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 17.03, having jumped to their highest level since the end of March. But with gold volatility taking a step backwards today while gold prices rally – an inverse of yesterday when prices fell and volatility gained – it may be the case that gold prices and gold volatility are behaving in a manner that suggest price action, on balance, remains bullish . The 5-day correlation between GVZ and gold prices is -0.25 while the 20-day correlation is +0.86. One week ago, on May 6, the 5-day correlation was +0.84 and the 20-day correlation was +0.69.

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

In the prior gold price forecast, it was noted that “in holding above the ‘confluence of former resistance turned support,’ gold prices have carved out a short-term sideways consolidation, which in the context of the potential double bottom, could be considered a bull flag.” Furthermore, “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.”

Gold prices reached a high of 1845.54, briefly breaching the cluster of Fibonacci retracements, before taking a step backwards this week. But momentum remains bullish: daily Slow Stochastics are still in overbought territory; and daily MACD is still trending higher above its signal line. As long as gold prices continue to treat their daily EMA envelope as support (which has been the case since mid-April), their technical posture remains bullish.

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

It’s been previously noted that “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.” If gold prices are above1837 by June 15, then it would appear that gold prices would be on track to pace towards new highs by the end of the year.

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Gold: Retail trader data shows 78.85% of traders are net-long with the ratio of traders long to short at 3.73 to 1. The number of traders net-long is 1.29% higher than yesterday and 2.97% lower from last week, while the number of traders net-short is 5.78% lower than yesterday and 7.51% 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian 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.