Can you trust the rebound in XAU / USD?

Weekly Fundamental Gold Price Forecast: Neutral

• Gold prices in USD terms have risen sharply this week, but gold gains lagged elsewhere. Thanks in part to the US stimulus talks, the weakness of the US dollar is masking gold’s bearish underlying fundamentals.
• Rally this week or not, there has been a material regime change in the fundamental story for gold prices (regardless of what currency you trade against gold in).
• The IG Client Sentiment Indexstates gold prices in USD terms (XAU/USD) can continued their brief recovery.

Gold price week in overview

After weeks of attacks, gold prices were able to leave the proverbial basement. Again, gold in USD terms (XAU / USD) was the bestperforming gold pair, adding + 2.88% (a stark contrast to last week when it added the best performing pair, down -4.49%). Gains were consistent across the board with all gold pairs rising. But let’s be clear: this week’s gains have paled compared to losses in the last week of November, when five of the seven major gold pairs lost at least -5%.

To suggest that gold price recovery is one that can be trusted requires active imagination at this time. That’s not to say the gold price can’t or hasn’t dropped – but the fundamental story hasn’t been reversed in a material way to think the worst is over for precious metal. If anything, choppy conditions can occur.

Gold’s Seismic Shift in Fundamentals

“Not too hot, not too cold – just right.” That is exactly the opposite for gold prices at the moment. With the development and distribution of COVID-19 vaccines underway, tThe US economy is regaining its long-term economic life potential. Tax incentives can arise, but not to the extent if there had been a “ blue wave ” (although Georgia’s Senate layoffs on Jan. 5, 2021 may change that assessment).

The gold price has entered a small period where real interest rates in the US have declined, in part due to rising inflation expectations due to higher projected budget deficits (albeit marginally). Even as the Federal Reserve announced its desire to keep interest rates low until 2023, real US yields are still just consecutively in the same place as in mid-October.

The runaway nature of the pandemic, at least in the short term, helps keep this small opportunity open for gold prices. But as the US economy regains its potential thanks to the efforts to develop and distribute COVID-19 vaccines, it is becoming more of a chore for the price of gold as investors look for higher yielding assets with more growth sensitive assets.

Top FX events in the coming week

The second week of December – and the penultimate full week of the year – offers another tough economic calendar. Multiple ‘highly’ rated events on the DailyFX Economic Calendar the gold price will change in different currencies during the week.

– Japan’s final Q320 GDP report will be released Monday (gold in JPY terms, XAU / JPY).

– On Tuesday, the final Q3’20 Euroarea GDP report is due (gold in EUR terms, XAU / EUR)

– On Wednesday, the November Chinese inflation report (gold in CNH terms, XAU / CNH) will be released and the results of the December Bank of Canada interest rate decision will be announced (gold in CAD terms, XAU / CAD).

– On Thursday, the latest UK GDP report of October will be published (gold in GBP terms, XAU / GBP), the results of the European Central Bank’s December interest rate decision will be announced (gold in EUR terms, XAU / EUR ), and the November US inflation report (gold in USD, XAU / USD) will be released.

Gold price technical analysis: daily chart (December 2019 to December 2020) (chart 1)

After the Thanksgiving holiday in the US, gold prices remained below the significant technical support levels set in recent months. The conclusion that the gold price is about to peak in the short term remains valid.

Despite stabilization at the end of the week, gold prices have barely recovered from their lows since mid-July, having previously broken the August swing low around 1818.09. Breaking the cluster of Fibonacci retracements above 1800 and plunging afterward, gold price action suggests that the recent weakness is not just transitory.

Gold price momentum remains bearish, with gold prices below their 5, 8, 13, and 21 EMA daily envelope, which is still in bearish sequential order. The Daily MACD continues to move lower below its signal line, while Slow Stochastics are still in oversold territory.

Gold Price Technical Analysis: Weekly Chart (October 2015 to December 2020) (Chart 2)

With the 38.2% Fibonacci retracement from the 2020 low / high range also breaking at 1836.97, the weekly charts suggest a short term top is established. Further losses towards the 50% Fibonacci retracement from the 2020 low / high range at 1763.36 cannot be ruled out. The path of least resistance is lower.

GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMETABLE (December 2019 TO December 2020) (CHART 3)

Then have a look when positioning on the futures market. According to the CFTC’s COT data, for the past week December 1st, speculators decreased their net long positions in gold futures up to 240.5K contracts, down from the 251K net-long ccontracts held for the week ending November 17 (no update for the week ending November 24 given the US Thanksgiving holiday).

The gold futures market is nowhere near its high participation watermark: the all-time high for net long contracts came in the week of February 18, 2020, when 353.6K was held. It still believes there is a lot of room for speculators to trigger significant swings in the gold price until the end of the year.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (December 4, 2020) (CHART 4)

Gold: Data from retailers shows that 80.66% of traders are net long with the ratio of long to short at 4.17 to 1. The number of net long traders is 1.33% lower than yesterday and 2.30% lower than last week, while number of net-short traders is 4.76% higher than yesterday and 16.91% higher than last week.

We usually take a contradictory view of mass sentiment, and the fact that traders are net long suggests that gold prices may continue to fall.

Still, traders are less net long than yesterday and last week. Recent changes in sentiment warn that the current gold price trend may soon move higher, despite traders remaining net long.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist