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Gold Price Forecast: Difficult to Trust the Rally - Levels for XAU/USD

Gold Price Forecast: Difficult to Trust the Rally - Levels for XAU/USD

Christopher Vecchio, CFA,
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Gold Price Outlook:

  • Gold prices have clawed back their sharp losses on the first trading day of 2022, and are effectively unchanged on the week; a bullish hammer candle is forming on the weekly timeframe.
  • Sustained strength by the US Dollar and rising US Treasury yields make for a difficult environment for gold prices.
  • According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.
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Risk-Off Lifts Gold Prices

For all intents and purposes, the fundamental headwinds are shifting against gold prices: the US Dollar is maintaining its strength from the final few months of 2021; and US Treasury yields have risen sharply at the start of 2022, pushing up US real yields. It may be the case that the rise in gold prices seen over the past two days, which has erased the losses accumulated on the first trading day of the year, are more of a function of the risk-off attitude prevailing in US equity markets rather than a sign that the fundamental landscape has meaningfully improved for bullion.

Gold Volatility and Gold Prices’ Relationship Remains Inverted

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. With gold volatility rising in recent days alongside gold prices, there does appear to be a near-term tailwind substantiated gains over the past 48-hours.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (January 2021 to January 2022) (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 15.77 at the time this report was written. The relationship between gold prices and gold volatility remains inverted but has started to normalize in recent days: both the 5-day and 20-day correlations are become less negative. The 5-day correlation between GVZ and gold prices is -0.18 while the 20-day correlation is -0.66. One week ago, on December 29, the 5-day correlation was -0.17 and the 20-day correlation was -0.67.

Gold Price Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 2)

Gold prices found support at the start of this week at a confluence of technical support: the daily 21-EMA; the descending trendline from the August 2020 (all-time high) and June 2021 swing highs; and the ascending trendline from the August 2021 and September 2021 swing lows. Daily MACD is trending higher while above its signal line, although daily Slow Stochastics have started to drop from overbought territory. It may be the case that gold prices have a near-term bias higher into the crucial 1835 area, which houses a cluster of Fibonacci retracements as well as the swing highs seen in July, August, and September 2021. Further gains by US Treasury yields brings into question whether or not this rally is sustainable, however.

Gold Price Technical Analysis: Weekly Chart (October 2015 to January 2022) (Chart 3)

The gains seen over the past 48-hours have seen the weekly candle shape into a bullish hammer candle, suggesting that buyers are stepping into the market in a meaningful way. Of course, January is the best month of the year for gold prices according to seasonality studies, so there is a quantitative tailwind helping provide support. It’s worth noting that the weekly 4-, 8-, and 13-EMA envelope is taking on a positive slope. Alongside weekly MACD turning higher through its signal line, and weekly Slow Stochastics advancing above their median line, bullish momentum has increased in recent weeks, opening the possibility for more gains henceforth before fundamental headwinds curtail the rally.

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Gold: Retail trader data shows 68.51% of traders are net-long with the ratio of traders long to short at 2.18 to 1. The number of traders net-long is 10.50% lower than yesterday and 7.99% lower from last week, while the number of traders net-short is 27.49% higher than yesterday and 84.47% 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 Strategist

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