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Gold Price Forecast: Bulls Can’t Quite Gain Control - Levels for XAU/USD

Gold Price Forecast: Bulls Can’t Quite Gain Control - Levels for XAU/USD

Christopher Vecchio, CFA, Senior Strategist

Gold Price Outlook:

  • Gold prices haven’t been able to clear significant technical resistance despite an extremely strong fundamental tailwind.
  • We’re still in ‘the technical woods’: gold prices have yet to move through 1835/40, suggesting that the outlook has not yet turned bullish.
  • According to the IG Client Sentiment Index, gold prices have a bearish bias in the near-term.
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Tables Haven’t Turned After All

Gold prices have been trading choppily for several weeks, but proclamations that the consolidation may be coming to an end were premature. Keeping with the theme of prior commentary, it remains the case that gold prices are still in ‘the technical woods,’ and that

‘more wood needs to be chopped.’

While price action last week suggest that gold prices were moving into the clearing, they just haven’t been able to muster a bullish breakout. Despite a strong fundamental tailwind defined by ongoing stimulus efforts by the Federal Reserve, record deficits and debt burdens among developed economies, and all-time lows in negative US real yields, bulls just haven’t gained control of the narrative.

Gold Volatility and Gold Prices Normalizing in the Wrong Way

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. Declining gold volatility and strengthening correlations portends to a weaker environment for gold prices.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (August 2020 to August 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) was trading at 14.86. The relationship between gold prices and gold volatility is eroding as gold prices rally while gold volatility falls (which is atypical). The 5-day correlation between GVZ and gold prices is +0.84 while the 20-day correlation is -0.09. One week ago, on July 29, the 5-day correlation was -0.05 and the 20-day correlation was -0.39.

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

Gold prices are still above the descending channel measured against the August 2020 and January 2021 swing highs, but remains below the cluster of Fibonacci levels in the low-1830s. It has been previously noted that “it would appear that gold prices aren’t out of ‘the technical woods’ until 1835 is achieved,” and that condition has not been met.

After trading for several weeks in a sideways range between 1789 and 1835, momentum is non-existent. Gold prices are below their daily EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is flat at its signal line, while daily Slow Stochastics are above their median line but pointed lower. Until either 1789 (bearish) or 1835 (bullish) are breached, then the near-term gold price outlook is decisively neutral.

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

As noted throughout July, “we may be nearing the point at which it is once more appropriate to take a longer-term bullish perspective.” But taking a step back, price action since the start of 2021 may have been shaping into a symmetrical triangle, which in context of the longer-term trend, still projects further upside: triangle resistance comes into play near 1900 during August, while support comes in closer to 1780. A loss of 1780 would put focus back towards the rising trendline from the May 2019, March 2020, and March 2021 lows.

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Gold: Retail trader data shows 84.02% of traders are net-long with the ratio of traders long to short at 5.26 to 1. The number of traders net-long is 9.48% higher than yesterday and 6.91% higher from last week, while the number of traders net-short is 36.20% lower than yesterday and 30.79% 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.