Hawkish Central Banks a Hurdle

Weekly Fundamental Gold Price Forecast: Neutral

• Gold prices are facing difficulties in the coming days as more and more central banks take a hawkish turn.
• The last week of October may have served as a precursor for a much weaker environment to come for gold prices.
• The IG Client Sentiment Indexsuggests that gold prices in USD-terms (XAU/USD) have a bearish trading bias.

Gold Prices Week in Review

Gold prices struggled mightily last week, against all major currencies but for the Euro (gold in EUR-terms (XAU/EUR), +0.23%) and the British Pound (gold in GBP-terms (XAU/GBP), 0%). Rapidly rising bond yields, particularly among the commodity currency sovereigns – Australia, Canada, and New Zealand – plagued precious metals. Gold in AUD-terms (XAU/AUD) dropped by -1.27% on the week, the worst performing gold-cross, while gold in NZD-terms (XAU/NZD) fell by -0.67%), the second worst performing gold-cross. Even gold in USD-terms (XAU/USD) closed the week lower by -0.51%, thanks in part to the sharp end-of-month rally by the US Dollar (via the DXY Index).

Economic Calendar Week Ahead

Coming into the first week of November where a trio of major central banks are expected to take a more hawkish turn – the Bank of England, the Federal Reserve, and the Reserve Bank of Australia – the last week of October may have served as a precursor for a much weaker environment to come for gold prices.

– On Monday, gold in USD-terms (XAU/USD) will be in the spotlight as the October US Markit Manufacturing PMI and October US ISM Manufacturing PMI will be released shortly after the US cash equity open.

– On Tuesday, gold in AUD-terms (XAU/AUD) will garner attention amid the November Reserve Bank of Australia rate decision, while gold in NZD-terms (XAU/NZD) will likewise be in focus around the release of the 3Q’21 New Zealand labor market report.

– On Wednesday, gold in USD-terms (XAU/USD) is back at the forefront of gold-crosses thanks to the November Federal Reserve rate decisions.

– On Thursday, gold in GBP-terms (XAU/GBP) is in the spotlight when the Bank of England concludes its November rate decision, which will include the release of the Quarterly Inflation Report.

– On Friday, the week concludes with gold in CAD-terms (XAU/CAD) and gold in USD-terms (XAU/USD) in focus as the October Canada labor market report and October US NFP report are released ahead of the US cash equity open.

GOLD PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (October 2020 to October 2021) (CHART 1)

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended October 26, speculators increased their net-long gold futures positions to 225,443 contracts, up from the 199,446 net-long contracts held in the week prior. The futures market is now the most net-long since the second week of June.

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (October 29, 2021) (CHART 2)

Gold: Retail trader data shows 78.48% of traders are net-long with the ratio of traders long to short at 3.65 to 1. The number of traders net-long is 10.17% higher than yesterday and 16.01% higher from last week, while the number of traders net-short is 3.83% lower than yesterday and 1.12% higher 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