Daily analysis

Gold Price Forecast: Struggling to Get Above 1800 - Levels for XAU/USD

Following the August US CPI report, which showed US inflation rates starting to subside, gold prices have been unable to find any follow through higher. The bullish outside engulfing bar on Tuesday was met with a bearish inside bar today, cementing another failed attempt to climb back above the 1800 level.

The fact of the matter is that, even as the US Dollar (via the DXY Index) remains broadly weaker from its highs at the end of August, Fed rate hike odds remain firm (pricing in 89-bps through the end of 2023) and the shape of the US Treasury yield curve (as measured by the 2s5s10s butterfly) suggests that tapering is arriving soon.

It’s increasingly looking like the only bullish catalyst gold prices will have in the near-term is a potential breach of the US debt ceiling a la 2011 or a meltdown by China’s Evergrande, but beyond that, there’s little for gold to hang its hat on.

Historically, 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. Falling gold volatility and weak correlations suggests continued difficult trading may be ahead for gold prices. 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) was trading at 15.14. The relationship between gold prices and gold volatility isn’t necessarily normalizing as gold prices simmer and volatility lurches sideways. The 5-day correlation between GVZ and gold prices is -0.90 while the 20-day correlation is -0.40. One week ago, on September 8, the 5-day correlation was -0.53 and the 20-day correlation was -0.45.

Gold prices have been unable to sustain a move above symmetrical triangle support, keeping pressure towards the ascending trendline from the May 2019, March 2020, and March 2021 lows.

Gold prices have once again dropped below their daily 5-, 8-, 13-, and 21-EMA envelope; the differential between the daily 5- and 21-EMAs is less than 0.2%, suggesting no strong bias. Daily MACD has started to slip back below its signal line, while daily Slow Stochastics climb out of oversold territory has proven feeble.

Bigger picture, failure to overcome the July highs – clearing the 1835 level discussed ad nauseum over the past six weeks – suggests that the pair has bearish technical inclinations in the near-term.

Reference by: Christopher Vecchio, CFA, Senior Strategist