Gold Price Forecast Overview:
- Gold prices are following US yields. Unlike in 2020, when falling US yields typically meant gains for gold prices, rising US yields present a fresh challenge in 2021.
- Significant technical damage and a return back to the August-November 2020 downtrend makes for difficult sledding in the near-term for gold prices.
- According to theIG Client Sentiment Index, gold prices may soon trade higher.
Gold Acting More Like Pyrite
It hasn’t been a fortuitous start for the year for gold prices, which just endured a loss in excess of -2.5% during the first week of the year, and have staged an unimpressive bid higher thus far in the second week of 2021. The dominant factor remains US Treasury yields, but this time, instead of leading to an erosion of US real yields propping up gold prices, the script has been flipped. Rising US real yields have been weighing on gold prices, as several short-term risks coincide.
What Changed for Gold Prices? Yields
Question around US President-elect Joe Biden’s first stimulus package in office, now that Democrats have secured control of both chambers of Congress, may be part of the reason why US real yields are running higher. While the last tranche of fiscal stimulus under the Trump administration has lifted inflation expectations, what appears to be a dark winter for the coronavirus pandemic and the onset of new lockdowns has jilted the rise in inflation expectations.
As nominal US Treasury yields rise but inflation expectations stagnate, US real yields increase, undercutting the appeal of precious metals like gold. While the longer-term fiscal stimulus impulse in the context of a low interest rate environment should be beneficial for gold prices (akin to the 2009-2011 period), it may prove to be tough sledding for gold prices the next few weeks if US Treasury yields sustain their advance.
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Gold Price Rate Technical Analysis: Daily Chart (January 2020 to January 2021) (Chart 1)
We were previously looking for gold prices to make one more significant bullish achievement before declaring the downtrend done, but were patient insofar as gold prices had “have not yet cleared the November swing high at 1965.57.” Instead, gold prices were slammed lower last week, falling short of the November 2020 swing high but dropping back into the downtrend from the August and November 2020 highs. It may well be the case that we’ve witnessed a failed bullish breakout attempt in gold prices.
Support has been found at a confluence of technical levels. Including the rising trendline from the March and December 2020 lows, which already proved itself once again during the decline at the start of this week. Gold prices are also finding support in the form of the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48, as well as the 38.2% Fibonacci retracement of the 2020 low/high range at 1836.97. Failure below these levels by the end of the month would warrant a more serious consideration of a bearish breakdown developing in gold prices.
Gold Price Technical Analysis: Weekly Chart (January 2011 to January 2021) (Chart 2)
In the prior outlook it was noted that “breaking the downtrend from the August and November 2020 highs as well as the 38.2% Fibonacci retracement from the 2020 high/low range suggests that the next leg higher is beginning. A move higher through 1965.57 would suggest that the series of weekly ‘lower highs and lower lows’ has ended.” The bullish breakout never materialized, and instead, the weekly timeframe yielded a bearish outside engulfing bar, which occurring at a relative high, marks a weekly key reversal. Further downside from here would warrant a reconsideration the 1Q’21 forecast, which suggests that gold prices could hit new highs this quarter.
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Gold Prices and Gold Volatility Back in Sync
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.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2008 to January 2021) (Chart 3)
Gold volatility has fallen in recent days, dragging down gold prices. 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) is trading at 20.09. The 5-day correlation between GVZ and gold prices is +0.16 while the 20-day correlation is +0.55; one week ago, on January 5, the 5-day correlation was +0.98 and the 20-day correlation was +0.77.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (January 12, 2021) (CHART 4)
Gold: Retail trader data shows 85.34% of traders are net-long with the ratio of traders long to short at 5.82 to 1. The number of traders net-long is 2.99% higher than yesterday and 14.16% higher from last week, while the number of traders net-short is 3.06% higher than yesterday and 35.74% 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 Currency Strategist