Gold Price Forecast: All That Glitters is Not Gold

Gold Price Forecast Overview:

• Gold prices are following US yields. Unlike in 2020, when falling US yields typically meant gains for gold prices, rising US yields present a fresh challenge in 2021.
• Significant technical damage and a return back to the August-November 2020 downtrend makes for difficult sledding in the near-term for gold prices.
• According to theIG Client Sentiment Index, gold prices may soon trade higher.

Gold Acting More Like Pyrite

It hasn’t been a fortuitous start for the year for gold prices, which just endured a loss in excess of -2.5% during the first week of the year, and have staged an unimpressive bid higher thus far in the second week of 2021. The dominant factor remains US Treasury yields, but this time, instead of leading to an erosion of US real yields propping up gold prices, the script has been flipped. Rising US real yields have been weighing on gold prices, as several short-term risks coincide.

What Changed for Gold Prices? Yields

Question around US President-elect Joe Biden’s first stimulus package in office, now that Democrats have secured control of both chambers of Congress, may be part of the reason why US real yields are running higher. While the last tranche of fiscal stimulus under the Trump administration has lifted inflation expectations, what appears to be a dark winter for the coronavirus pandemic and the onset of new lockdowns has jilted the rise in inflation expectations.

As nominal US Treasury yields rise but inflation expectations stagnate, US real yields increase, undercutting the appeal of precious metals like gold. While the longer-term fiscal stimulus impulse in the context of a low interest rate environment should be beneficial for gold prices (akin to the 2009-2011 period), it may prove to be tough sledding for gold prices the next few weeks if US Treasury yields sustain their advance.

Recommended by Christopher Vecchio, CFA

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Gold Price Rate Technical Analysis: Daily Chart (January 2020 to January 2021) (Chart 1)

We were previously looking for gold prices to make one more significant bullish achievement before declaring the downtrend done, but were patient insofar as gold prices had “have not yet cleared the November swing high at 1965.57.” Instead, gold prices were slammed lower last week, falling short of the November 2020 swing high but dropping back into the downtrend from the August and November 2020 highs. It may well be the case that we’ve witnessed a failed bullish breakout attempt in gold prices.

Support has been found at a confluence of technical levels. Including the rising trendline from the March and December 2020 lows, which already proved itself…