October 30, 2020

Weekly Fundamental Gold Price Forecast: Tailwinds Remains Strong

Weekly Fundamental Gold Price Forecast: Tailwinds Remains Strong

Weekly Fundamental Gold Price Forecast: Bullish

  • Gold prices may be entering a favorable period, with volatility studies pointing to increasing uncertainty in financial markets through the end of the year.
  • The last full week of September yields a lighter economic calendar, with only six ‘high’ rated events on the DailyFX Economic Calendar. Gold price’s primary driver will likely remain developments surrounding real yields.
  • The IG Client Sentiment Indexsuggests that gold prices in USD-terms (XAU/USD) may gain in the coming days.

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Gold Prices Week in Review

Gold prices had a mixed week, splitting gains and losses among the major developed currencies covered by DailyFX Research. Gold prices in USD-terms (XAU/USD) added +0.54% while gold in EUR-terms (XAU/EUR) gained +0.57%. Similarly, gold in CAD-terms (XAU/CAD) rallied by +0.73%. Elsewhere, gold prices dropped: gold in GBP-terms (XAU/GBP, -0.43%); gold in NZD-terms (XAU/NZD, -0.35%); and gold in JPY-terms (XAU/JPY, -0.99%).

Top FX Events in Week Ahead

The last full week of September yields a lighter economic calendar, with only six ‘high’ rated events on the DailyFX Economic Calendar.

– On Monday and Tuesday, there are no ‘high’ rated events on the calendar.

– On Wednesday, gold in NZD-terms (XAU/NZD) comes into focus with the Reserve Bank of New Zealand’s September policy meeting; gold in EUR-terms (XAU/EUR) will likewise be of interest, with the October German GfK Confidence index; and gold in USD-terms (XAU/USD) will likely see volatility, with the release of the September Markit Manufacturing US PMI Flash estimate.

– On Thursday, gold in EUR-terms (XAU/EUR) will come into focus, with the September German Ifo Business Climate index.

– On Friday, gold in USD-terms (XAU/USD) will be of interest, with the release of the August US Durable Goods Orders report.

Real Yields Remain Gold’s Motivating Factor

Even as the gold price rally has paused, it remains the case that gold prices still have both fundamental and technical tailwinds at their back. Thanks to expansionary monetary policy and thus far underwhelming fiscal policy responses, mixed with the global economic uncertainty brought about by the coronavirus pandemic, real yields continue to fall and remain depressed. An environment defined by depressed and/or negative real yields has historically proven bullish for precious metals.

Gold Volatility Pulls Back, Gold Prices Shrug

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. Heightened uncertainty in financial markets due to increasing macroeconomic tensions increases the safe haven appeal of gold.

Our longstanding axiom holds: “given the current environment, falling gold volatility is not necessarily a negative development for gold prices, whereas rising gold volatility has almost always proved bullish; in the same vein, gold volatility simply trending sideways is more positive than negative for gold prices.”

Gold Price (XAU/USD) Technical Analysis: Daily Chart (September 2019 to September 2020) (Chart 1)

Weekly Fundamental Gold Price Forecast: Tailwinds Remains Strong

The sideways move in gold prices over the past several weeks – since the first week of August – has seen the uptrend from the March and June 2020 lows (the coronavirus pandemic trendline) break. But the triangles remain in place, which in context of the prevailing trend – to the upside – necessitates an open mind for further continuation higher. Below 1901.65, bears may gain control; above 2015.73, bulls may gain control; in between, traders may want to exercise patience and wait for a clearer directional move.

GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (SEPTEMBER 2019 TO SEPTEMBER 2020) (CHART 2)

Weekly Fundamental Gold Price Forecast: Tailwinds Remains Strong

Next, looking at positioning, according to the CFTC’s COT data for the week ended September 15, speculators increased their net-long gold futures positions to 240K contracts, up from the 236.5K net-long contracts held in the week prior. This marks the third weekly gain in a row in net-long positioning. The gold futures market is far from saturated: the all-time high for net-long contracts came during the week of February 18, 2020, when 353.6K were held. The lack of significant long positioning in the futures market may prove to be a tailwind for bulls.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (SEPTEMBER 18, 2020) (CHART 3)

Weekly Fundamental Gold Price Forecast: Tailwinds Remains Strong

Gold: Retail trader data shows 78.25% of traders are net-long with the ratio of traders long to short at 3.60 to 1. The number of traders net-long is 3.77% lower than yesterday and 1.45% lower from last week, while the number of traders net-short is 8.20% higher than yesterday and 1.77% 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.

Traits of Successful Traders

Traits of Successful Traders

Recommended by Christopher Vecchio, CFA

Traits of Successful Traders

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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