What will happen to the gold price next? It depends on whom you ask

Usually stocks and gold are negatively correlated, but a breakdown in that negative correlation has been happening more and more frequently. On Monday, gold and stocks tumbled together. So why is this happening, and what does it mean for gold prices? Analysts provide differing views on what will happen to the yellow metal in the coming months.

The dollar and gold prices: what’s happening now

One indicator many investors watch when it comes to determining which way gold prices will go is the dollar index, and it’s been causing all kinds of problems for gold these last few trading days. The index climbed to its highest level in six weeks on Monday, but the gain might not last.

Win Thin told CNBC in an interview that he believes the dollar will test the lows seen in February 2018, bringing the index to about 88. That would imply a decline of approximately 5% from current levels.

He noted that since the pandemic picked up in March, the dollar has gained from short-lived bouts of risk-off sentiment. However, those gains haven’t lasted long. He said headwinds are building on the dollar and the U.S. economy.

Dollar remains inversely correlated with risk assets

The U.S. dollar did serve as a strong safe haven during the March selloff, but it has weakened since as risk assets have strengthened. Axios argues that the more recent strength in the dollar could be a warning sign that risk assets are about to weaken again. If risk assets weaken, we could see the dollar and gold prices move in step with one another even though they typically are negatively correlated.

Since the March selloff, the gold price has been marching steadily upward, reaching a new high of about before pulling back. For now, gold is just barely holding onto the key $1,900 an ounce level, although it briefly fell below that price to about $1,896.

Where will gold prices go next?

Many market watchers have been expecting inflation to provide a boost for the gold market. Phil Streible of Blue Line Futures told Kitco News that what happens to the gold price next depends on whether the economy shifts into stagflation or deflation. He said deflation would be bad for gold and other commodities and stocks. On the other hand, stagflation would be good for gold prices because it creates inflation.

He said slower growth creates inflation, so central banks will try to restimulate that growth, which is good for gold and other commodities. He called Monday’s selloff “manageable,” explaining that going into the Federal Reserve meeting last week, gold futures entered a wedge pattern, marking the place where the metal will “break out into the upside or downside.”

“I think it’s a small selloff that we’re having,” he said. “It looks big in its scale but depending on your position, it’s probably a scale-off if you’re managing your positions properly.”

Here’s what the bulls say about gold prices

Credit Suisse analysts warn that the difficult days for the gold price may not be over yet. They said in a recent note that gold could keep falling until it hits $1,765 an ounce. They added that the technical level to watch is the $1,897 to $1,837 an ounce range and whether it holds.

The December Comex gold futures were down to $1,897 an ounce on Monday, and Credit Suisse analysts said gold will continue to consolidate after hitting their base case target of $2,075. They believe the long-term trend of gold will be higher as U.S. real yields and a falling dollar provide boosts.

If the short-term downtrend drags on for longer than expected, the yellow metal could fall to $1,765 or even $1,726 an ounce, they warned. However, in the long term, the investment bank sees the gold price moving above $2,075 and breaking toward a new resistance level of $2,417 and then $2,700 or $2,720 in the long term.

About the Author

Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.