Gold Price Forecast Q2 2022: Fundamental and Technical Analysis

[MongiIG]

Gold Price Forecast Q2 2022: Outlook Proves Mixed

Apr 2, 2022 |  DailyFX
Christopher Vecchio, CFA, Senior Strategist

There’s no two-ways about it: gold prices outperformed our expectations in Q1’22. Our rationale for not taking a bullish outlook on gold was, and still is, well-grounded: central banks, including the Federal Reserve, have begun to winddown pandemic-era stimulus efforts, with rate hike cycles just getting started.

At least in the short-term, a potent catalyst arrived that trumped interest expectations: Russia’s invasion of Ukraine. With global financial markets upended and commodity supply chains in disarray, inflation expectations skyrocketed again. Instead of rising real yields, we saw falling real yields from mid-February through the end of March.

Alas, with the prospect of a Russia-Ukraine ceasefire gathering steam towards the end of Q1’22, it’s possible that sanctions against Russia are lifted, thereby removing pressure on global commodity supply chains. In turn, inflation expectations could backoff, and consistent with the longer-term narrative of central banks raising interest rates, real yields could start to rise again.

Therein lies the challenge for gold prices in Q2’22: unless there is a dramatic escalation in the conflict between Russia and Ukraine that ensnares the European Union and the United States into a protracted dispute, the catalyst that drove gold prices higher in recent months is likely to be short-lived.

US REAL YIELDS PROVE PROBLEMATIC

Despite the disruption created by the Russian invasion of Ukraine, the same obstacles remain for gold prices henceforth. With central banks acting to tamp down persistently higher realized inflation in the short-term, longer-term inflation expectations should begin to ease back, pushing down real yields and thus preventing gold prices from holding onto recent gains.

Gold, like other precious metals, does not have a dividend, yield, or coupon, thus rising US real yields remain problematic. In other words, when other assets are offering better risk-adjusted returns, or more importantly, offering tangible cash flows during a time when inflation pressures are raging, then assets that don’t yield significant returns often fall out of favor. Gold behaves, in effect, like a long duration asset (as measured by modified duration, not Macaulay duration); a zero-coupon bond.

Gold Futures vs US Treasury Nominal (Chart 1)

Source: Bloomberg

The facts on the ground haven’t changed and will become a greater influence should the Russia invasion of Ukraine stop. Monetary easing enacted by central banks and fiscal stimulus provided by governments are now firmly in the rearview mirror. A ceasefire between Russia and Ukraine will relieve pressure in food and energy prices, which in turn will help reduce inflation expectations. But because of how high inflation readings are in economies like the EU, the US, and the UK, central banks will still raise interest rates aggressively over the course of 2022.

Source: Bloomberg

It thus stands to reason that rising real rates are a meaningful obstacle for gold prices over the next few months. Over the past five years, gains by US real yields have been generally correlated with losses by gold prices. A simple linear regression of the relationship between the weekly price change in gold prices and the weekly basis points change for the US 10-year real yield, reveals a correlation of -0.34. As a rule of thumb, rising real yields are bad for gold prices.

Barring World War 3, it’s difficult to envision how the environment becomes any more appealing for gold prices from a fundamental perspective. Yes, there is chatter about how the EU and US sanctions against Russia threaten US Dollar hegemony, which ultimately may provoke more countries to abandon USD-denominated reserves and instead allocate more reserves to gold. But that’s a longer-term story, one that won’t play out over the next quarter, or even year, particularly as over 40% of global trade continues to be denominated in USD (and another 35% in EUR).

In short, gold prices have two likely paths forward: sideways (as the Russian invasion of Ukraine continues, keeping inflation expectations elevated as central banks raise rates, keeping the status quo in real yields); or lower (as the Russian invasion of Ukraine ends, sinking inflation expectations as central banks raise rates, pushing higher real yields).

[MongiIG]

Gold Price Q2 Technical Forecast: Bulls Rebuffed

Apr 1, 2022 |  DailyFX
James Stanley, Senior Strategist

SELLERS PICK UP STEAM

There was a quick flicker of excitement in Gold last quarter, and that ran parallel to the same fear that was injected into the global order as Russia invaded Ukraine. Gold prices broke out aggressively in late-February and early-March, right along with equities hitting fresh lows. The Nasdaq even temporarily took a trip into bear market territory.

But that fear left quickly in the middle of March as the Federal Reserve began lift-off by hiking rates by 25 basis points. And, from where we’re at, it seems as though this will be the start of something more than the end as the bank is expected to hike many more times this year, with some forecasts even looking for as many as eight more hikes in the final nine months of 2022 trade. Add in the expectation for Quantitative Tightening and this can make for a troubling backdrop for Gold into Q2, and the chart appears to reflect this well.

The Q1 breakout was unable to hold above the psychological $2k/oz level, with sellers picking up steam the week of the FOMC rate decision. That pushed prices right back to a key zone of support around the prior all-time-high from 2011, taken from around the 1900 handle.

SPOT GOLD (XAU/USD) – MONTHLY CHART – OLD RESISTANCE, CURRENT SUPPORT

Chart created with TradingView

From the weekly chart below, we can see where gold prices spent much of the past two years including almost all of 2021 in a rather consistent range. Support was plotted just below 1700 while resistance held around 1900, which is what helps to make this zone so incredibly important.

SPOT GOLD (XAU/USD) – WEEKLY CHART

Chart created with TradingView

At this point we have support at prior resistance and for bulls, this can be used to substantiate continued upside. The question then becomes whether the trader is comfortable with Gold prices moving above and holding the $2k figure, which, at this point, there’s little evidence of. We’ve had but one weekly close – ever – with Gold above the $2,000/oz level.

And from the weekly chart, a recently confirmed evening star formation has opened the door for reversal potential. The pattern would be invalidated on a breach of the high which is very close to the prior all-time-high set in the Summer of 2020 at 2089.

The technical forecast for Gold will be set to bearish for Q2, 2022.

[THT]

Major prior highs and lows often provide key levels for - I've been watching the 2011 level for a long time

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