Gold Price Forecast: The Bear Market is Finished - Levels for XAU/USD

Gold Price Outlook:

• A weaker US Dollar and falling US real yields are on the horizon, which is a positive development for gold prices.
• The recent rally has gathered strength after the bullish key reversal last Thursday.
• According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.

Dawn of a New Day

The July Fed meeting was a gamechanger for global financial markets. Abandoning its forward guidance, the FOMC has now moved to a data dependent stance. Fed Chair Jerome Powell didn’t do much to push back on market expectations that we’re on the other side of peak Fed hike expectations, and rates markets continue to discount rate cuts in 2023.

So, let’s look at the data. Forward looking measures of inflation suggest that peak inflation is in the rear-view mirror, and the 2Q’22 US GDP report indicated that the economy is slowing (recession or not, there’s no reason to quibble over the technical definition). These facts beget a relatively more dovish Fed moving forward, whereby even if there are more rate hikes, they’re unlikely to be at the same 75-bps pace we’ve seen over the past two meetings.

These are monumental developments for gold prices. They are likely to translate into a weaker US Dollar, or at least a US Dollar that’s less likely to continue its meteoric rise moving forward. But primarily, these developments mean that US real yields are likely to fall back in the near-term. If rising US real yields underpinned the rationale for weaker gold prices coming into 3Q’22, then falling US real yields means that it’s time to look in the other direction for gold prices – and throw away the 3Q’22 gold price forecast in the process now that the August 2021 near 1680 was achieved.

If there was any doubt about how much of a gamechanger this is for precious metals, just look at how silver prices have performed: the gold/silver ratio has collapsed from a high of 93.61 on Monday to as low as 87.93 today (-6.07% this week alone).

Gold Volatility Fades; New Regime Arriving

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. However, it’s difficult to read too much into the shifts in gold volatility now that a new fundamental regime is taking root.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (July 2021 to July 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 17.01 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.71 while the 20-day correlation is +0.23. One week ago, on July 21, the 5-day correlation was -0.60 and the 20-day correlation was -0.37.

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

Last week it was noted that “the measured move out of the triangle calls for a drop towards 1680 over the coming weeks – right to where the 2021 lows were found.” This was achieved, fulfilling the bearish impulse out of the symmetrical triangle and setting the stage for a fresh technical outlook.

The technical picture for gold prices is rapidly improving. The move to the area around 1680 last week was accompanied by a bullish key reversal on Thursday, July 21, a veritable bottoming candlestick. Since then, gold prices have rallied sharply, trading through above their daily 21-EMA (one-month moving average), and are now fully above their daily EMA envelope. Daily MACD is rising albeit below its signal line, while daily Slow Stochastics are racing towards overbought territory.

By no means is this a suggestion that gold prices are likely to return to their 2022 highs, but it appears increasingly likely that the 2022 lows were established last week. A return back to 1800 in the coming sessions is not out of the question – which would bring gold prices back to the descending trendline from the March and April swing highs.

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

In concert with the shifting perspective on the daily timeframe, the weekly timeframe may be offering a different point of view as well. A double top remains in place, but a quadruple bottom around 1680 warrants a reconsideration: a massive sideways range between 1680 and 2075 may have formed. A bounce from 1680 sees 1800 as the first area before resistance is found. The sudden shift in the environment suggests that the daily timeframe (and lower, like the 4-hour timeframe) will be better suited to pay attention to over the coming days/weeks as it will take a long time for technical indicators to evolve on the weekly timeframe.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (July 28, 2022) (Chart 4)

Gold: Retail trader data shows 86.20% of traders are net-long with the ratio of traders long to short at 6.25 to 1. The number of traders net-long is 4.34% lower than yesterday and 0.38% higher from last week, while the number of traders net-short is 10.59% higher than yesterday and 16.86% 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