Gold Price Forecast: Downtrend Intact - What's Next For XAU/USD?

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Gold Price Forecast Overview:

  • Gold prices continue to trade within the descending channel from the September 4 and November 1 highs.
  • Precious metals tend to underperform during periods of lower volatility as decreased uncertainty reduces the safe haven appeal of gold and silver. Gold volatility is now at its lowest level since mid-June.
  • However, changes in retail trader positioningsuggest that gold prices may not fall much further in the near-term.

Looking for longer-term forecasts on Gold and Silver prices? Check out the DailyFX Trading Guides.

Gold prices have struggled to shine in November, and halfway through the month, the outlook hasn’t improved meaningfully. Federal Reserve interest rate cut expectations remain depressed, even as other G10 currencies’ central banks have started to see markets price-in more easing on an accelerated timeline. US Treasury yields have pulled back, giving gold prices room to recover; but it is still too soon to say that the weakness experienced through the ides of November has run its course.

Gold Prices Decouple from Gold Volatility

Trading and investing, at the end of the day, boil down to a simple concept: risk-adjusted returns. All things being held equal, if two assets have the same expected returns but dramatically different expected volatilities, market participants are likely to invest in the less-volatile asset.

The basic notion here is that traders typically prefer to avoid volatility in their portfolios. In general, most asset classes don’t like increased volatility, which for bonds or stocks, tends to signal increased uncertainty around cash flows, dividends, coupon payments, etc. In turn, precious metals tend to benefit during periods of greater uncertainty, which produces higher volatility. On the other hand, when uncertainty decreases, volatility tends to fall, reducing the demand for safety assets.

Accordingly, Gold prices find themselves at a fork in the road. On one hand, US Treasury yields have fallen back considerably in recent days, down by nearly 15-bps across the curve (parallel shift) since peaking in the first week of November. While this should be a positive development for gold, it has come at the same time as gold volatility has fallen off a cliff.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2016 to November 2019) (Chart 1)

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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) has fallen to its lowest level since mid-June, currently trading at 11.42. While gold prices were initially following lower, having traded to their weakest point since the first week of August, there has been a noticeable decoupling this week.

Recent price action remains messy at best, as a result, the typical relationship between gold prices and gold volatility is weaker than usual: the 5-day correlation between GVZ and gold prices is -0.63 while the 20-day correlation is 0.57. In the past year, episodes where gold volatility has fallen but gold prices have not has been a ‘canary in the coal mine’ for a potential turn in price action.

Gold Price Technical Analysis: Daily Chart - Descending Channel (November 2018 to November 2019) (Chart 2)

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In our last gold price forecast technical analysis update, it was noted that there “the bear case for the gold price outlook has bore out, with gold prices trading below the October 1 low at 1458.97.” While there may be early signs of gold prices attempting to bottom out, the fact of the matter is that the downtrend from the September 4 and November 1 highs remains intact.

Gold prices have traded back above the daily 5-EMA, but remains below the daily 8-, 13-, and 21-EMA envelope (the entirety of which is in bearish sequential order). Daily MACD is trending lower in bearish territory, while Slow Stochastics have just started to rebound from oversold territory.

Until the descending channel from the September and November highs breaks, it still holds that the path of least resistance is to the downside. Support in the descending channel does not come into play until closer to 1400 through the end of November – a key area for the weekly timeframe and the longer-term inverted head and shoulders pattern (more on that below).

Accordingly, it still holds that “only a move above 1483 this week would provoke a reconsideration of the short-term bearish bias for gold prices.”

Gold Price Technical Analysis: Weekly Chart – Inverse Head and Shoulders Pattern (June 2011 to November 2019) (Chart 3)

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The recent run of weakness in gold prices has started to weaken the longer-term bullish technical perspective for gold prices now that the weekly 21-EMA is under pressure. Still, the gold price pullback since the October Fed meeting must be viewed in context of the longer-term technical picture: the gold price inverse head and shoulders pattern that originated earlier this year is still valid. Only a break below the August 1 bullish outside engulfing bar low at 1400.38 would draw into question the longer-term bullish potential.

Depending upon the placement of the neckline, the final upside targets in a potential long-term gold price rally vary: conservatively, drawing the neckline breakout against the January 2018 high at 1365.95 calls for a final target at 1685.67; aggressively, drawing the neckline breakout against the August 2013 high at 1433.61 calls for a final target at 1820.99.

IG Client Sentiment Index: Gold Price Forecast (November 15, 2019) (Chart 4)

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Gold: Retail trader data shows 75.92% of traders are net-long with the ratio of traders long to short at 3.15 to 1. The number of traders net-long is 6.65% lower than yesterday and 4.87% lower from last week, while the number of traders net-short is 7.84% higher than yesterday and 8.60% 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.

Read more: GBP/USD Advances in Bull Flag; EUR/GBP Drops from Range - Brexit Latest

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

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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