Gold Price Forecast: No New Highs Despite USD Weakness – Levels for XAU/USD

Gold Price Outlook:

  • Gold prices are lower than where they were last week, even as US Treasury yields have settled and the US Dollar has dropped.
  • Failure to establish fresh monthly highs against this backdrop is a warning sign that gold’s fundamental backdrop remains weak.
  • According to the IG Client Sentiment Index, gold prices still have a bullish bias in the near-term.

Failure to Shine

It’s been an exciting few days in global financial markets. The US Dollar (via the DXY Index) has dropped like a brick, falling to its lowest level since November 10. US equity markets have brushed off the rise in US Treasury yields at the start of the year, rebounding meaningfully this week. And yet, gold prices can’t seem to capitalize on what should be a more welcoming environment. The fact of the matter is that gold’s failure to set new monthly highs in this environment – one in which the greenback has rapidly weakened and long-end US Treasury yields have come down – suggest that the underlying fundamentals of bullion remain shaky at best.

Gold Volatility and Gold Prices’ Relationship Slowly Normalizing

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, tends to benefit during periods of higher volatility. Gold volatility subsiding over the past few days has taken some of the shine off of gold prices, another reason to cast dispersion on recent gains.

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 15.05 at the time this report was written. The relationship between gold prices and gold volatility has been slowly normalizing in recent days, as both the 5-day and 20-day correlations are become less negative. The 5-day correlation between GVZ and gold prices is -0.16 while the 20-day correlation is -0.26. One week ago, on January 6, the 5-day correlation was 0.00 and the 20-day correlation was -0.58.

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

Gold Price Forecast: No New Highs Despite USD Weakness - Levels for XAU/USD

When we checked in on gold prices last week, they were trading at 1824.57, and it was noted that it was difficult to trust the rally. In spite of the sharp decline by the DXY Index since then, gold prices were last seen trading at 1820.13. So, even if gold prices have rallied in recent days, the rally is unimpressive and still warrants a high degree of skepticism.

There is an argument to be made, however, that the technical structure points to slowly-but-surely budding technical momentum that could ultimately prevail. Gold prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Moreover, they remain above the descending trendline from the August 2020 (all-time high) and June 2021 swing highs, as well as the ascending trendline from the August 2021 and September 2021 swing lows. Daily MACD continues to trend higher while above its signal line, and daily Slow Stochastics are on the verge of returning to overbought territory.

It thus 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. That said, a rally into 1835 would likely present a significant selling opportunity, especially as the DXY Index nears a multi-year zone of support/resistance that could stem its sell-off.

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

Gold Price Forecast: No New Highs Despite USD Weakness - Levels for XAU/USD

It’s worth reminding that January is the best month of the year for gold prices according to seasonality studies, so there is a quantitative tailwind helping provide support in the near-term. It also remains the case 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.”


Gold Price Forecast: No New Highs Despite USD Weakness - Levels for XAU/USD

Gold: Retail trader data shows 64.97% of traders are net-long with the ratio of traders long to short at 1.85 to 1. The number of traders net-long is 4.01% lower than yesterday and 15.09% lower from last week, while the number of traders net-short is 5.56% higher than yesterday and 42.62% 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

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