Gold Price Forecast: Fundamentals, Technicals Still Bearish - Levels for XAU/USD

Gold Price Outlook:

• Gold prices have traded below the rising trendline from the August 2021, December 2021, and January 2022 swing lows.
• The ongoing rise in US real rates suggests further headwinds for gold prices, with both the 10-year and 30-year real rates holding in positive territory on a sustained basis since prior to the COVID-19 pandemic.
• According to the IG Client Sentiment Index, gold prices hold a mixed bias in the near-term.

Scuffed Up

Gold prices are starting the week on positive footing but challenges remain. Fundamentally, the arrival of positive real interest rates in the US portend weakness in gold prices. A strong US Dollar coupled with an aggressive Federal Reserve rate hike cycle stands to exacerbate this trend. Technically, gold prices have now lost the uptrend from the August 2021, December 2021, and January 2022 swing lows, suggesting an important inflection point has been breached to the downside. Accordingly, there’s little reason to believe that the movement at this start of this week suggests that the downtrend in gold prices is finished in the short-term.

Elevated Gold Volatility Not Helping 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. A concerning turn of events, the recent rise in gold volatility has done little to help support gold prices, suggesting that the near-term outlook remains weak.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (May 2021 to May 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 20.95 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.79 while the 20-day correlation is -0.88. One week ago, on May 9, the 5-day correlation was -0.80 and the 20-day correlation was -0.60.

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

Gold prices have dropped below two important levels in recent days: the rising trendline from the August 2021, December 2021, and January 2022 swing lows; and the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48. Bearish momentum remains strong. Gold prices are below their daily 5-, 8-, 13-, and 21-EMAs, and the daily EMA envelope is in bearish sequential order. Daily MACD continues to trend lower below its signal line, while daily Slow Stochastics are holding in oversold territory. A deeper setback below 1800 appears to be a matter of ‘if’ rather than ‘when.’

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

The weekly timeframe continues to suggest that a double top is forming for gold prices, with the two peaks carved out by the August 2020 and March 2022 highs. Ever since the bearish outside engulfing bar on the weekly timeframe in late-April, gold prices have not been able to sustain a meaningful bid. It remains the case that “a deeper setback appears increasingly likely henceforth,” particularly as weekly momentum indicators take a deeper turn south.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (May 16, 2022) (Chart 4)

Gold: Retail trader data shows 84.10% of traders are net-long with the ratio of traders long to short at 5.29 to 1. The number of traders net-long is 1.04% higher than yesterday and 2.19% higher from last week, while the number of traders net-short is 22.00% higher than yesterday and 8.37% 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.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Gold trading bias.

--- Written by Christopher Vecchio, CFA, Senior Strategist