Gold Price Forecast: More Weakness Possible in April

Mar 31, 2021 08:49 PM ET
Gold Price Forecast: More Weakness Possible in April

The tragic decline of the gold prices accelerated this week as the market focused on US bond yields and the rising Bitcoin prices. Gold is trading at $1,687, which is 14% below the highest level this year. 

Gold and bond yields

There are several reasons why the price of gold has crashed this year. First, in the United States, investors have sold government bonds as they start pricing-in higher rates. This has pushed bond yields to their highest levels in more than a year. 

In a nutshell, investors are convinced that the US economy will have a swift recovery, helped by the large-scale vaccination drive and the massive fiscal stimulus offered by the government. The Federal Reserve, too, has continued with its expansionary policies that include lower rates and quantitative easing.

Therefore, the market believes that in the next few months, US inflation will rise and force the Fed to change the tune. This could see it commit to lower rates this year and then hike earlier than what it has guided.

The gold price has therefore declined because of the impact of the bond yields on the US dollar. As shown below, the dollar index has risen for the past three consecutive months. It has also had its best month since September last year.

US dollar index performance

US dollar index performance

Gold and the US dollar have an inverse relationship. In most cases, its price tends to rise when the dollar falls and vice versa.

Gold and Bitcoin

The gold price has also struggled because of the rising focus on Bitcoin, the digital currency. This year, the price of Bitcoin rallied to its all-time high of $62,000, helped by the rising demand from institutional investors. Bitcoin is often viewed as a digital alternative to gold.

Indeed, there is some evidence that the price of gold has been affected by Bitcoin. In the past few months, gold ETFs have lost their assets. In February, gold ETFs lost about 2% of their assets as investors fled the asset. In the same period, a Bitcoin ETF in Canada saw a substantial rise in holdings. In the United States, the Grayscale Bitcoin Trust holdings have been relatively strong. 

Therefore, gold could see more weakness in the coming month as Bitcoin targets its all-time high. Indeed, some analysts already believe that the BTC price will surge to more than $100,000 in the near term. 

Meanwhile, the gold price is falling as more central banks shun the metal. In the past few years, central banks like those from China and Russia were among the biggest buyers of the metal as they attempted to move away from the US dollar. 

In the past few months, very few banks have bought the metal. The only one to declare its intentions publicly to do so was the Bank of Poland that is buying 100 tons. Therefore, gold has struggled because of low institutional and central bank purchases.

Gold price technical forecast

Gold price technical forecast

The monthly chart shows that the gold price has dropped in the past three consecutive months. The chart also shows that the metal has moved below the important support at $1,912, which was the highest point in September 2011. It also seems to be forming the handle part of the cup and handle pattern. Therefore, the price may keep falling as bears target the support at $1,500 and then bounce back in the next few months.

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