Gold price trading outlook for Q2 2021

The trading outlook for gold in Q2 2021

The price of dollar denominated gold has given up roughly 8% year to date as risk aversion has waned and equity markets gained.

Gold price inversely correlated to US Treasury Yields

Gold has displayed an inverse correlation to that of US treasury yields which have been rising this year (see chart below).

Yields have been rising on the prospect of reflation within the market, expectant of rising interest rates in the future. The US Federal Reserve (Fed) has however remained dovish with regards to monetary policy, despite contradictory bond market movements. The central bank has guided that rates would remain accommodative until at least 2023 and will only start to rise when the economy, employment and inflation levels show evidence of sustained improvement.

The recent Fed guidance has helped stall the rally in yields over the last few weeks, prompting a near term rebound in gold, although traders, investors and speculators alike will be questioning the sustainability thereof.

Spot gold: technical analysis

While the longer-term trend for gold (since August 2020) remains down, the price of the precious yellow remains in a range trading environment over the near term.

Short-term bearish assumptions for the gold price

The gold price has recently formed a bearish reversal at the $1760/oz resistance level, which is supported by an overbought signal on the stochastic oscillator. These are negative indications in technical analysis terms and favour short-term weakness with $1720/oz the initial support target from the move. A close below $1720/oz could call for a retest of the range support low at $1675/oz. Traders who are short might consider using a close above resistance at $1775/oz as a stop loss indication for the trade.

Bullish case scenario for the gold price

Should the bearish reversal and downside assumptions fail with a price close above the $1775/oz level, this could instead be a sign of a longer-term trend reversal for the price of dollar denominated gold. A firm move above the $1775 level would suggest that the short-term trading range has been broken to the upside, and that the longer-term downtrend may no longer be applicable. In this scenario, the merits of a long bias to future trades on gold would need to be assessed.

In summary

• Dollar denominated gold has declined around 8% year to date
• Movements in gold have been inversely correlated to long term US Treasury Yields
• The Fed has reinforced its extremely accommodative monetary stance and is likely to keep lending rates on hold for the next two years
• Technical analysis of the gold price shows a long-term downtrend, but short-term trading range
• Only on a price move above $1775/oz would we reassess the merits of a long bias to trades on gold