Gold Price Forecast: Better Times Ahead?

• Gold ended the first quarter at the highest level since Q2, 2014.
• The yellow metal strengthened 1.6 percent in Q1.
• The weekly chart favors the bulls, big gains likely above 38.2% Fib hurdle.
• The USD rebound could hurt in the short-term.

Gold clocked a high of $1,366 in January and ended the first quarter at $1,324 - the highest quarterly close since the second quarter of 2014.

Asset	Q1 Performance
Gold	+1.76 percent
Dollar Index	-2.1 percent
S&P 500	-1.2 percent
US 10-year yield	+34 basis points
German 10-year yield	+7 basis points

The American dollar nosedived in January on speculation the European Central Bank (ECB), Bank of Japan (BOJ) and other advanced nation central banks will begin the process of policy normalization this year.

Consequently, the German 10-year yield rose as high as 0.808 basis points (bps) - the highest level since September 2015. The US 10-year yield witnessed an inverse head and shoulders breakout and clocked a high of 2.96 percent. The rate differential remained supportive of USD. However, investors switched to EUR, JPY and other majors on the belief the Fed is close to neutral rate and rates will rise at a faster pace in Europe and other advanced economies.

The resulting drop in the USD put a bid under the yellow metal amid the rising yield environment. However, gold seems to have underperformed in the first quarter, if we take into account the drop in stock markets, turmoil in Washington, fears of a trade war, NKorea issue. If it were not for the rising yields, these risk-off developments could have pushed the yellow metal to $1,400.

The prospects of higher rates in advanced economies seem to have played a spoilsport. That said, things are likely to get better for gold in the second quarter.

To start with, the German 10-year yield fell more than 20 basis points to 0.497 in March. Further, the Spanish 10-year yield collapsed close to 50 basis points in March. The drop in the Eurozone bond yields indicates lowered expectations of inflation/policy normalization. Also, BOJ remains miles away from policy normalization.  

The good news doesn't end there... Also, the market isn't buying the Fed's hawkish dot plot.  This is evident from the fact that short-term interest rate futures are discounting only about 75 basis points of tightening by the end of 2019, according to a Reuters report.

Further, the technical studies favor a bullish move in the yellow metal.

Weekly chart outlook: Gold eyes big bullish break above $1,380

 

• The above chart shows a convincing break above the descending trendline (in July 2017), followed by a higher lows pattern (represented by the ascending trendline) a bull flag pattern.
• The long-run momentum studies - weekly 50,100 and 200 MAs (moving average) are biased bullish.
• So the metal looks set to take out resistance at $1,380 (38.2 percent Fibonacci retracement)and rally to $1,500 this year.

In the short-run, the metal may fall back to $1,300-$1,280 as:

• The USD could benefit from the drop in inflation/interest rate expectations across Europe and Japan.
• The news of negotiations between the United States and the Chinese government has calmed market nerves.
• Also, the metal may run into offers if the US March wage growth number, scheduled for release next Friday, beats estimates by a big margin.