Gold Price Edges Lower in Range as Gold Volatility Sinks
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Gold Price Talking Points:
- The gold breakout during the first half of May has failed, with price returning back into the 1266.18 to 1288.58 range from April 15 to May 13.
- After hitting a four-week high in early-May, gold implied volatility has quickly slumped back towards its all-time low.
- Changes in retail traders positioning suggest that gold prices could still fall.
The return of uncertainty over the US-China trade war negotiations initially proved bullish for safe haven assets like the Japanese Yen and US Treasuries. But amid a return of US Dollar strength alongside the bid in safe havens, gold prices have been hobbled in recent days, effectively neutralizing bullion’s appeal during a time of risks seemingly rising everywhere around the globe.
Shortly after hitting an all-time low on May 3, GVZ, the measure of 1-month implied Gold volatility, rebounded to a four-week high as new developments in the US-China trade war spooked investors globally. While rising volatility is usually seen as a disconcerting development for prices, gold benefits from rising volatility: higher levels of uncertainty increase the safe haven appeal of gold.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (May 2018 to May 2019) (Chart 1)
Keeping this relationship between gold prices and gold volatility in mind, the past few weeks have seen measures of gold volatility fall, and in turn, the appeal of Gold wane. GVZ peaked on May 13, and gold prices hit their monthly high the following day; as gold volatility has quickly slumped back towards its all-time low, the Gold price breakout from early-May has failed in turn.
Gold prices remain within the range carved out between 1266.18 and 1288.58 from April 15 to May 13 after having returned to said consolidation last week. Typically, when false breakouts occur, we see price return to the other side of the consolidation; we thus can’t rule out a further drop in gold prices towards the consolidation support - particularly if Gold volatility continues to head lower.
Gold Price Technical Analysis: Daily Chart (April 2018 to May 2019) (Chart 2)
In early-May, gold prices attempted to climb through four-week consolidation resistance above 1288.58, and for several days, it appeared that a bullish breakout was gathering pace; the downtrend from the February and March swing highs was temporarily broken as well.
Nevertheless, the gold price forecast is still neutral so long as the range is in place; the breakout is on hold for now. Should gold prices move above 1288.58, we would again be looking at topside break of the consolidation as well as the downtrend from the February and March 2019 highs, while, a drop below 1266.18 would constitute a downside break of the consolidation as well as the uptrend from the late-2018 swing lows.
IG Client Sentiment Index: Spot Gold Price Forecast (May 21, 2019) (Chart 3)
Spot gold: Retail trader data shows 79.3% of traders are net-long with the ratio of traders long to short at 3.83 to 1. The number of traders net-long is 3.9% lower than yesterday and 11.2% higher from last week, while the number of traders net-short is 3.2% lower than yesterday and 26.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests spot gold prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed spot gold trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at firstname.lastname@example.org
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