Gold Price Forecast: Searching for Support After Fed Meeting - Levels for XAU/USD

Gold Price Outlook:

• Gold prices proved to be the ‘canary in the coal mine’ around the Federal Reserve meeting. Golds weakness hinted at a more hawkish Fed, which yielded a stronger US Dollar.

• Gold prices have found initial support around the 50% Fibonacci retracement of the 2020 high/low move.

• According to theIG Client Sentiment Index, gold prices have a mixed bias in the near-term.

Canary in the Coal Mine Indeed

Gold prices are searching for support in the wake of the June Federal Reserve policy meeting. Ahead of time, we suggested that “gold is the ‘canary in the coal mine’ for the June Federal Reserve policy meeting this Wednesday. Gold prices have been a beneficiary of the combination of loose fiscal and monetary policy. But if the FOMC signals that taper talk is on the menu (ultimately with a formal announcement regarding a desire to taper in September, followed by technical details in December, and then the start of actual tapering in January 2022), gold prices will lose a potential catalyst that has gilded the path higher over the past year.”

Indeed, with the Fed signaling that rate hikes may arrive as soon as 2023, the narrative around gold prices has been harmed; the tides have turned.

Gold prices have since entered a window of time where US real yields have begun to rise. Shifts in the US Treasury yield curve, on balance, suggesting a period with stronger short- and intermediate-term rates, has been consistent with a stronger US Dollar. As things stand now, its once again an uphill climb for gold prices as investors seeking higher yielding and more growth-sensitive assets.

Gold Volatility and Gold Prices Out of Sync

Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks dont 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 (June 2020 to June 2021) (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) is trading at 16.79. Last week it was noted that “concerningly, despite expanding gold volatility (typically a bullish development for gold prices), spot bullion is falling.” With the relationship between gold prices and gold volatility still out of sync, questions remain about gold price’s ability to sustain a significant rebound. The 5-day correlation between GVZ and gold prices is -0.90 while the 20-day correlation is -0.70. One week ago, on June 14, the 5-day correlation was -0.58 and the 20-day correlation was -0.40.

Gold Price Rate Technical Analysis: Daily Chart (March 2020 to June 2021) (Chart 2)

In the prior gold price forecast, it was noted that “by losing the uptrend from the March and April swing lows, gold price‘s near- and longer-term bullish postures may be imperiled. Bearish momentum has started to accelerate, with gold prices fully below their daily EMA envelope (which is not yet in bearish sequential lower). Daily MACD’s contraction in bullish territory has accelerated, and daily Slow Stochastics have quickly fallen towards oversold territory…if gold prices are the canary in the coal mine for the Federal Reserve meeting this Wednesday, it may be the case that the purported taper timeline being discounted by markets may be too dovish.”

The drop in gold prices has seen a return to the descending channel measured against the August 2020 and January 2021 swing highs. Initial support has been found at the 50% Fibonacci retracement of the 2020 high/low move at 1763.57; the low last week was found at 1761.04. Failure below this confluence of support would suggest a deeper pullback towards 1730 by the end of the month (where time meets the rising trendline from the May 2019 and March 2020 swing lows).

Gold Price Technical Analysis: Weekly Chart (October 2015 to June 2021) (Chart 3)

It‘s been previously noted that “as long as the technical studies remain supportive, the modus operandi is to ’buy the dip, insofar as a bullish breakout from a multi-month bull flag necessitates a bullish trading posture on a longer-term basis.” However, ahead of the FOMC meeting, we stated that “this thesis is being tested in real-time around the FOMC meeting; a change in outlook may soon be necessitated.” Consistent with this perspective, it is now no longer applicable to apply a longer-term bullish view on gold prices; the outlook is decidedly neutral at present time.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (June 21, 2021) (CHART 4)

Gold: Retail trader data shows 86.04% of traders are net-long with the ratio of traders long to short at 6.16 to 1. The number of traders net-long is 6.70% higher than yesterday and 16.60% higher from last week, while the number of traders net-short is 9.93% higher than yesterday and 39.81% 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.