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Gold Price Forecast: Consolidation Takes Shape - Levels for XAU/USD

Gold Price Forecast: Consolidation Takes Shape - Levels for XAU/USD

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Gold Price Outlook:

  • Despite some volatility, gold prices have been fairly stable throughout June, having traded near 1848 for 12 of the 14 days this month.
  • Weakness in the US Dollar may be helping prop up gold prices, but rapidly rising US real yields present an ongoing headwind.
  • According to the IG Client Sentiment Index, gold prices hold a mixed bias in the near-term.
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Lots of Churn, But Little Progress

Gold prices have rebounded sharply from monthly lows established two days ago near 1805, returning to the area around 1850 – a familiar area where gold prices have levitated since mid-May. In fact, during 12 of the 14 trading session in June thus far, gold prices have touched 1848 at some point during those days.

A sell-off by the US Dollar may be propping up gold prices, but with US real yields – nominal Treasury yields less inflation expectations – ratcheting higher, questions remain over gold’s ability to sustain a significant move to the topside.

Accordingly, the aforementioned perspective has not changed, insofar as “fundamentally speaking, nothing has changed materially…the main rationale for not having a longer-term bullish perspective – rising US real yields – remains valid. Any short-term rallies by gold prices retain a ‘sell the rally’ mindset, particularly as gold prices don’t have a bullish seasonality tendency in June.”

Gold Volatility Ebbs and Flows

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. Gold volatility’s jump over the past week hasn’t necessarily helped or hurt gold prices, but correlations remain weak.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (June 2021 to June 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 20.25 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.78 while the 20-day correlation is -0.60. One week ago, on June 9, the 5-day correlation was -0.88 and the 20-day correlation was -0.74.

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

Last week it was noted that “momentum is lacking…there is not enough technical evidence to think that the worst is over for gold prices.” Gold prices hit a fresh monthly low two days ago before rebounding back above the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48. Momentum is correcting from its bearish tilt, but is not outright bullish yet. Gold prices are above their daily EMA envelope, which is still aligned in bearish sequential order. Daily MACD is climbing, but remains below its signal line. Daily Slow Stochastics have started to climb out of oversold territory, but remain below their median line.

Significant resistance is nearby around 1880, but a breakout through there would require a shift in the direction of US real yields, which doesn’t seem likely in the near-term. The symmetrical triangle carved out since the end of April appears likely to remain in place until gold prices make a meaningful attempt at a downside breakout.

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

Nothing has changed. “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.”

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Gold: Retail trader data shows 82.82% of traders are net-long with the ratio of traders long to short at 4.82 to 1. The number of traders net-long is 2.45% lower than yesterday and 2.27% lower from last week, while the number of traders net-short is 1.02% lower than yesterday and 12.65% 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.

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

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