Gold price prediction for January 2020: yellow metal will remain buoyed and may go higher

The short-term technicals now point to consolidation, but prices remain above a key breakout level

Gold prices whipsawed during the second week of January as traders buoyed the price of the yellow metal on the heels of increased geopolitical unrest. What appeared initially to be a clear-cut break out now is less convincing. The short-term technicals now point to consolidation, but prices remain above a key breakout level.

The dollar is moving sideways to lower against the euro, as the US and German yield differential in the 2-year sectors moves in favour of the euro. Hedge funds continue to add to their long position in futures and options, which will likely keep a floor under gold prices. Volatility has also perked up. Let’s take a closer look at all these factors.

Gold price this month: geopolitical risks

Geopolitical events in the Middle-East were percolating but jumped into full swing in early January. US President Donald Trump ordered a strike to kill Iranian military leader Qasem Soleimani.

Initially, the uproar in Iran grabbed the headlines. Gold prices moved higher but surged when Iran struck back sending ballistic missiles into Iraq hitting a US airbase. Following an Iranian retaliation, both the US and Iran pulled back their rhetoric, saying that neither side wanted a war. While most believe this is only the beginning of the escalation of tensions in the middle east, over the short-term, tensions have been eased.

Geopolitics has also been reduced when Iran accidentally shot down a Ukrainian Boeing 737. Hundreds of people protested in several cities around Iran. In Tehran, protesters gathered near universities and called for the resignation of Supreme Leader Ali Khamenei and chanted, "death to the dictator". This has taken some of the focus from the US conflict with Iran, as the US government announced last week that it was increasing sanctions on Iran. This has taken some of the edge off gold prices and has led to consolidation.

Gold volatility eases

Gold implied volatility retested its 2019 lows in mid-December, moving below 10 per cent. The GVZ is an index that is produced by the Chicago Board of Options Exchange and is similar to the VIX volatility index. The GVZ measures the implied volatility of the “at the money” strike prices of gold. In the wake of the US strike on Iran, the GVZ surged 50 per cent from below 10 per cent annual volatility to nearly 15 per cent annual volatility. In the latter half of the second week of January, gold price volatility eased back to 13 per cent annualised volatility. At 13 per cent annualised implied volatility, options traders are pegging gold to $1,755 (£1,351, €1,577) per ounce at a cap over the next 12-months.

The dollar is sliding

Economic data in the US has been mixed for December which was released in January. ISM manufacturing data was negative and points to a recession. ISM services data was positive and point to continued expansion. Jobs data for December came in weaker than expected and will likely continue to weigh on US yields. This will provide a backdrop that could allow the euro to gain traction as the yield differential moves against the greenback. This could pave the way for higher gold prices.

Hedge fund continue to bet on higher prices

The most recent commitment of trader’s report released for the date ending January 7, 2020, shows that hedge funds are continuing to bet that gold prices will rise. According to the CFTC, managed money increased long-positions in futures and options by 13 000 contracts, bringing the total open interest in the managed money category up to 300 000 contracts. This compares to short-positions in the managed money space of 27 000 contracts. What this tells us is that hedge funds are betting heavily that gold prices will rise, and a contrarian might believe that this length is offsides and could lead to a correction of significant proportions if prices begin to slide.

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Gold price this month and beyond: the technicals

Gold prices broke out above the 2019 highs in January and continue to consolidate above these levels. Short term support on gold is the breakout level which coincides with the 10-day moving average near $1,552 per ounce. Short-term resistance on gold prices is the January high which was reached in the wake of the Iranian attacks on the Iraqi airbase at $1,611 per ounce.

Short term momentum has turned negative to neutral. The RSI (relative strength index) which is a momentum oscillator has declined from severely overbought levels and is printing a reading of 66 below the overbought trigger level of 70. The fast stochastic has also tumbled from extreme overbought levels and is printing a reading near 59. Daily positive momentum is decelerating as the MACD (moving average convergence divergence) histogram is printing in the black with a declining trajectory which points to a protentional sell signal.

The weekly chart of gold prices is more supportive. Medium-term momentum has turned positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses above the MACD signal line (the 9-week moving average of the MACD line) The weekly MACD histogram is printing in the black with an upward sloping trajectory which points to higher gold prices.

Gold forecast this month: take away

The upshot is that gold should continue to remain buoyed and grind higher in January. With the dollar on the defensive and geopolitical risks remaining, the positive momentum reflected in the weekly gold charts should keep prices rising in January.

FURTHER READING: Gold price predictions for 2020 and beyond

FURTHER READING: Tokenised commodities: what you need to know

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