Gold Price Forecast: US CPI Sparks Next Leg Lower – Levels for XAU/USD

Gold Price Outlook:

• Gold prices are barely holding above 1700 after the August US inflation report surprised markets.
• The US Dollar (via the DXY Index) rebound, alongside higher US Treasury yields and US real yields, is weighing on gold prices.
• Gold prices retain a bearish bias in the near-term, according to the IG Client Sentiment Index.

Fed Won’t Pivot Yet

The August US inflation report (CPI) surprised financial markets today, showcasing higher than anticipated price pressures. In turn, US Treasury yields and US real yields have turned higher, lifting Fed rate hike odds, and helping the US Dollar (via the DXY Index) erase losses accumulated in recent days.

The move in US real yields is perhaps the most damning development for gold prices. The US 10-year real yield hit a fresh yearly high today, moving up to +100-bps at the time this report was written. These renewed fundamental pressures are keeping technical pressures on gold prices, which are already contending with a bearish September seasonality tendency.

Gold Volatility Resumes Rebound as Gold Prices Drop

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. Gold volatility is turning higher again, and in the context of higher US yields (both nominal and real) and a stronger US Dollar, it remains a headwind for gold prices in the near-term.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (September 2021 to September 2022) (Chart 1)

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 16.46 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.62 while the 20-day correlation is -0.84. One week ago, on September 6, the 5-day correlation was -0.97 and the 20-day correlation was -0.67.

Gold Price Rate Technical Analysis: Daily Chart (August 2021 to September 2022) (Chart 2)

The September rally in gold prices was short-circuited today, failing once again at the descending trendline from the March and April swing highs. Momentum is turning bearish anew. Gold prices are back below their daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD is trending lower below its signal line again, and daily Slow Stochastics are heading lower after failing to clear their median line. Accordingly, what was said last week remains valid: “a return to the yearly low can’t be ruled out in the near-term.”

Gold Price Technical Analysis: Weekly Chart (October 2015 to September 2022) (Chart 3)

The longer-term view remains unchanged as no significant progress has been made on the weekly timeframe: “a double top remains in place, but a quadruple bottom around 1680 warrants a reconsideration: a massive sideways range between 1680 and 2075 may have formed. A bounce from 1680 sees 1800 as the first area before resistance is found. The sudden shift in the environment suggests that the daily timeframe (and lower, like the 4-hour timeframe) will be better suited to pay attention to over the coming days/weeks as it will take a long time for technical indicators to evolve on the weekly timeframe.”

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (September 13, 2022) (Chart 4)

Gold: Retail trader data shows 89.10% of traders are net-long with the ratio of traders long to short at 8.18 to 1. The number of traders net-long is 6.13% lower than yesterday and 5.01% higher from last week, while the number of traders net-short is 30.18% lower than yesterday and 28.57% lower 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist