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Gold price analysis for April: yellow metal will remain volatile but may go higher

By David Becker

Technicals point to choppy price action but the recent surge points to a move to test the highs next month

prices have whipsawed during the past four weeks. The onset of the coronavirus in the West has generated significant volatility. The upward movement of the dollar index to fresh three-year highs has also generated headwinds for the prices.

When measured against the euro or yen, gold prices have performed better. Looking forward, there is likely to be more volatility as traders attempt to determine if the yellow metal is really a safe haven.

Gold volatility remains elevated

The volatility in the gold market continues to remain elevated. The Gold VIX, which measures the implied volatility of the “at the money” strike prices for gold options, has increased more than four-fold over the past four weeks. In late February, the Gold VIX was less than 11 per cent, and by March 1, it had increased to 18 per cent. By late March the Gold VIX hit a high of 55 per cent before it eased slightly down to 41 per cent. This means that gold options traders believe that gold prices will move up or down by 41 per cent during the next 12 months.

The introduction of a new unlimited QE

The Federal Reserve announced in late March they are planning to purchase treasury bonds and agency bonds at an unlimited rate. They basically said they would buy as many bonds as needed to stabilise the markets. The Fed earlier in March announced a specific bond purchase programme that included 500-billion in treasury bonds and 200-billion in agency bonds. This was followed by the announcement that their new quantitative easing (QE) would not be capped. A QE of this magnitude can generate headwinds for the dollar. Since this announcement by the Fed, the dollar index has declined by two-big figures. A declining dollar and a new QE may be the impetus needed to buoy gold prices as we head into April.

Gold price technical analysis

Gold prices rebounded sharply in the last full week of March, rising nearly 8 per cent. They were able to hold support near an upward sloping trend line that comes in near $1,498. Resistance is seen near the March highs at $1,703.

Short-term weekly momentum is negative to neutral as the fast stochastic moves lower with a flattening trajectory which points to consolidation. Medium-term momentum is also neutral. The MACD (moving average convergence divergence) histogram is printing in the red with a rising trajectory which points to consolidation. The relative strength index (RSI) moved higher from the middle of the neutral range which reflects accelerating positive momentum.

Analysis of gold price: the bottom line

Gold prices will remain volatile. The Feds QE should help buoy gold prices which may test resistance and break out in April. A close above the $1,703 level points to a test of the 2012 highs at $1,791. While the technicals point to choppy price action, which confirms the volatility, the surge in the last week of March likely points to a move to test the highs in April.

FURTHER READING: Is gold a good investment? Five ways to buy it – the pros and cons

FURTHER READING: How to start investing in gold

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