Gold Price Forecast: Difficult to Trust the Rally

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Gold Price Outlook:

  • Gold costs have clawed again their sharp losses on the primary buying and selling day of 2022, and are successfully unchanged on the week; a bullish hammer candle is forming on the weekly timeframe.
  • Sustained energy by the US Dollar and rising US Treasury yields make for a troublesome setting for gold costs.
  • According to the IG Client Sentiment Index, gold costs have a bullish bias within the near-term.

Risk-Off Lifts Gold Prices

For all intents and functions, the elemental headwinds are shifting in opposition to gold costs: the US Dollar is sustaining its energy from the ultimate few months of 2021; and US Treasury yields have risen sharply at the beginning of 2022, pushing up US actual yields. It could be the case that the rise in gold costs seen over the previous two days, which has erased the losses gathered on the primary buying and selling day of the 12 months, are extra of a operate of the risk-off angle prevailing in US fairness markets quite than an indication that the elemental panorama has meaningfully improved for bullion.

Gold Volatility and Gold Prices’ Relationship Remains Inverted

Historically, gold costs have a relationship with volatility in contrast to different asset lessons. While different asset lessons like bonds and shares don’t like elevated volatility signaling higher uncertainty round money flows, dividends, coupon funds, and many have a tendencys to profit during times of upper volatility. With gold volatility rising in latest days alongside gold costs, there does look like a near-term tailwind substantiated features over the previous 48-hours.

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 choice chain) was buying and selling at 15.77 on the time this report was written. The relationship between gold costs and gold volatility stays inverted however has began to normalize in latest days: each the 5-day and 20-day correlations are grow to be much less destructive. The 5-day correlation between GVZ and gold costs is -0.18 whereas the 20-day correlation is -0.66. One week in the past, on December 29, the 5-day correlation was -0.17 and the 20-day correlation was -0.67.

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

Gold Price Forecast: Difficult to Trust the Rally - Levels for XAU/USD

Gold costs discovered help at the beginning of this week at a confluence of technical help: the every day 21-EMA; the descending trendline from the August 2020 (all-time excessive) and June 2021 swing highs; and the ascending trendline from the August 2021 and September 2021 swing lows. Daily MACD is trending larger whereas above its sign line, though every day Slow Stochastics have began to drop from overbought territory. It could be the case that gold costs have a near-term bias larger into the essential 1835 space, which homes a cluster of Fibonacci retracements in addition to the swing highs seen in July, August, and September 2021. Further features by US Treasury yields brings into query whether or not or not this rally is sustainable, nevertheless.

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

Gold Price Forecast: Difficult to Trust the Rally - Levels for XAU/USD

The features seen over the previous 48-hours have seen the weekly candle form right into a bullish hammer candle, suggesting that patrons are moving into the market in a significant approach. Of course, January is the most effective month of the 12 months for gold costs in response to seasonality research, so there’s a quantitative tailwind serving to present help. It’s price noting that the weekly 4-, 8-, and 13-EMA envelope is taking up a constructive slope. Alongside weekly MACD turning larger by means of its sign line, and weekly Slow Stochastics advancing above their median line, bullish momentum has elevated in latest weeks, opening the likelihood for extra features henceforth earlier than basic headwinds curtail the rally.


Gold Price Forecast: Difficult to Trust the Rally - Levels for XAU/USD

Gold: Retail dealer knowledge exhibits 68.51% of merchants are net-long with the ratio of merchants lengthy to quick at 2.18 to 1. The variety of merchants net-long is 10.50% decrease than yesterday and seven.99% decrease from final week, whereas the variety of merchants net-short is 27.49% larger than yesterday and 84.47% larger from final week.

We usually take a contrarian view to crowd sentiment, and the very fact merchants are net-long suggests Gold costs might proceed to fall.

Yet merchants are much less net-long than yesterday and in contrast with final week. Recent adjustments in sentiment warn that the present Gold worth pattern might quickly reverse larger regardless of the very fact merchants stay net-long.

— Written by Christopher Vecchio, CFA, Senior Strategist

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