Gold price trading outlook for Q2 2021
In this article we look at how the gold price has been under pressure while US Treasury Yields have risen and assess the commodity’s 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
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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