Weekly Fundamental Gold Price: Neutral

• Sovereign bond yields continue to rise while inflation expectations pull back. It’s not a good mix for gold prices.
• If real yields continue to rise, gold prices are likely to come under renewed pressure.
• The IG Client Sentiment Index suggests that gold prices in US dollar-terms (XAU/USD) have a mixed trading bias.

Gold Prices: Week in Review

Gold prices had a mixed week, settling +0.87% higher against an equal-weighted basket of the eight major currencies. Individually, four gold-crosses were higher on the week while four were lower. Gold prices in US dollar-terms (XAU/USD) led the way to the upside, adding +0.97%, followed by gold in Japanese yen-terms (XAU/JPY; +0.88%) and gold in Canadian dollar-terms (XAU/CAD; +0.86%).

To the downside, gold in euro-terms (XAU/EUR) led decliners with a loss of -1.75%, while gold in Australian dollar-terms (XAU/AUD; -0.25%) and gold in New Zealand dollar-terms (XAU/NZD; -0.12%) only posted minor losses.

The significant developments of the week came in the second half, when the European Central Bank finally acknowledged that persistently high inflationary pressures could provoke policy tightening this year, sending European bond yields soaring.

Similarly, US Treasury yields spiked after the January US nonfarm payrolls report handily beat expectations, keeping intact expectations for an aggressive rate hike cycle by the Federal Reserve.

Gold prices are thus facing an unappealing quandary: rising nominal bond yields in the world’s developed economies are coinciding with deteriorating longer-term inflation expectations, provoking a rise in real yields. Historically speaking, rising real yields have been associated with softer gold prices, making for a difficult environment for gold prices in the here-and-now.

Economic Calendar for the Week Ahead

After several central bank rate decisions started off February, as well as a slew of ‘high’ rated US economic data, the coming week presents a much lighter global economic calendar. In fact, the first three days of the week present little by way of data releases that are likely to inject volatility into the gold markets.

• On Monday, Feb. 7, gold prices in EUR-terms (XAU/EUR) will be in focus when ECB President Christine Lagarde delivers a speech at 15:45 GMT.
• On Wednesday, Feb. 9, gold prices in CAD-terms (XAU/CAD) and gold prices in USD-terms (XAU/USD) will share the spotlight at 17:00 GMT when Bank of Canada Governor Macklem and Cleveland Fed President Loretta Mester give speeches.
• On Thursday, gold prices in USD-terms (XAU/USD) will be eyed as weekly US jobless claims and the January US inflation rate report (CPI) are released at 13:30 GMT. Later in the day, gold prices in GBP-terms (XAU/GBP) will be in focus when Bank of England Governor Andrew Bailey gives remarks at 20:15 GMT. Shortly thereafter, gold in AUD-terms (XAU/AUD) will draw attention when Reserve Bank of Australia Governor Philip Lowe speaks at 22:30 GMT.
• On Friday, gold prices in AUD-terms (XAU/AUD) are back in focus when the February Australia consumer inflation expectations report is published at 04:00 GMT. At 07:00 GMT, gold in EUR-terms (XAU/EUR) and gold in GBP-terms (XAU/GBP) share the spotlight when the January German inflation rate report (HICP) and the Q4’21 UK GDP report are released, respectively. Immediately thereafter at 07:30 GMT, gold in CHF-terms (XAU/CHF) will garner attention with the release of the January Switzerland inflation rate report (CPI). Rounding out the week, gold in USD-terms (XAU/USD) may experience a final bout of volatility when the Fed’s Monetary Policy Report and the preliminary February US Michigan consumer sentiment survey are released at 15:00 GMT.

Gold Price vs. COT Net Non-Commercial Positioning: Daily Time Frame (February 2019 to February 2022) (Chart 1)

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended Feb. 1, speculators decreased their net-long gold futures positions to 189,762 contracts, down from the 245,782 net-long contracts held in the week prior. The futures market is now the least net-long since the first week of October 2021.

IG Client Sentiment Index: Gold Price Forecast (Feb. 4, 2022) (Chart 2)

For gold, retail trader data shows 81.86% of traders are net-long with the ratio of traders long to short at 4.51 to 1. The number of traders net-long is 2.90% lower than yesterday and 4.57% lower from last week, while the number of traders net-short is 3.51% lower than yesterday and 21.77% 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. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed gold trading bias.