GOLD PRICES STRUGGLING, EVEN AS DOLLAR SLIDES
Whenever a USD-denominated asset is trading lower on a day when the US Dollar (via the DXY Index) is trading lower too, you know that something is amiss. Unfortunately, that’s where gold prices find themselves as the week heads into the final stretch of the week.

Despite fresh two-year lows in the DXY Index amid a breakout in EUR/USD rates after the European Central Bank announced fresh stimulus, gold prices are trading in the lower half of their multi-month downtrend, carving out a ‘lower high’ in the process.

We’re still in the early innings of what may be the worst case scenario for gold prices. As we’ve seen since the US presidential election, no ‘blue wave’ means no significant fiscal stimulus. With the US economy is regaining its long-term economic potential thanks to the vaccine news (even if the short-term outlook is increasingly dark, with a likely contraction in Q1’21), the reach for gold as a safe haven has been cut down.

GOLD PRICES AND GOLD VOLATILITY, OUT OF TOUCH
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. Reduced political tensions tend to decrease the safe haven appeal of gold.

GOLD PRICE RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020)

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Gold prices may be carving out what could be an evening star candle cluster, a bearish topping pattern. The context of the move, occurring at the parallel trendline taken from the August and November swing highs, suggests that the ‘lower high’ being carved out is consistent with a bearishly-inclined technical structure for gold prices. It’s been previously noted that observations like these suggest that “gold prices are in the process of carving out a near-term top.”

Gold price momentum is quickly reversing its nascent attempts to find bullish footing. Daily MACD is starting to narrow while in bearish territory, and daily Slow Stochastics failed to reach overbought territory during the run high; moreover, there is a divergence between the prior two daily Slow Stochastics peaks and the price of gold.

Gold prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. More choppy trading appears likely on the horizon, but the overall technical tone of the gold market remains relatively bearish barring a meaningful change in the fundamental backdrop.

Reference by: Christopher Vecchio, CFA, Senior Currency Strategist