Gold Price Rally Cools as Traders Await G20 Summit - Key Levels for XAU/USD
Gold Price Talking Points:
- With the G20 summit in Osaka, Japan, markets have started to seize up in anticipation of a potentially significant announcement coming out of the weekend. US President Donald Trump and Chinese President Xi Jingping will meet on the sidelines to try and end the US-China trade war.
- Gold volatility, as measured by the Cboe’s ETF, GVZ (which tracks the 1-month implied volatility of gold as derived from the GLD ETF option chain) has come down in recent days, pulling lower gold prices in the process.
- Retail traders’ holdings are beginning to warn that positioning may weigh on the gold price rally soon.
With the G20 summit in Osaka, Japan, markets have started to seize up in anticipation of a potentially significant announcement coming out of the weekend. US President Donald Trump and Chinese President Xi Jingping will meet on the sidelines to try and end the US-China trade war.
The relationship between the G20 summit and gold prices seem fairly obvious: if uncertainty around Federal Reserve interest rate policy remains thanks to the US-China trade war, gold volatility will remain elevated. The G20 summit in Osaka, Japan this coming weekend offers a critical litmus test for the recent gold price rally: a deal could scuttle even the best laid technical patterns for higher prices due to the feedback loop around the timing of Fed rate cuts.
Gold Volatility Stays in the Driver’s Seat
Gold volatility has been the biggest supporting factor of the gold price rally, it’s genesis in the uncertainty created by the US-China trade war and its potential impact on Fed interest rates. The uncertain path forward translates into volatility in financial markets. While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility as uncertainty increases the appeal of gold’s and silver’s safe haven appeal. That we’ve seen gold volatility come down as traders seek more clarity out of the G20 summit has been a negative development for gold prices in the short-term.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (September 2017 to June 2019) (Chart 1)
Earlier this week, gold volatility (as measured by the Cboe’s gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) lodged its highest close of 2019 and its highest close since December 16, 2016. As we’ve previously noted, “the breakout in gold volatility underpins the breakout in gold prices.” This continues to ring true, as both the 5-day and 20-day correlations between gold prices (XAU/USD) and gold volatility (GVZ) are a near-perfect 0.93 and 0.98, respectively.
Gold Price Rally Fit the Definition of Overbought
In our gold price technical review at the start of the week, we said that “traders should remain cautious.” Why? Gold prices had exhibited the same type of price action it had in the previous five instances in which gold prices in which gold prices were more than 2% above their daily 21-EMA (i.e. overbought). During those prior instances, gold prices averaged a 1-week return of -0.55%. Since Monday’s high, gold prices have dropped by -1.01%. If we are still are in the throes of a longer-term rally, then this will not be the top.
Gold Price Technical Analysis: Daily Chart (July 2018 to June 2019) (Chart 2)
Keeping in mind the technical perspective that the gold price rally is overbought, we may not be topping but rather in the midst of another healthy correction, not dissimilar from what was experienced in the middle of June. It still holds that “only if gold prices move below the daily 8-EMA, which has held up as support on a closing basis every session since the bullish outside engulfing bar on May 30, would the near-term bullish outlook for gold prices become invalid.”
If the daily 8-EMA is maintained on a closing basis, technicals still potentially see gold prices aiming for the 100% extension of the gold price rally from the August 2018 low, February 2019 high, and May 2019 low at 1452.72. If the daily 8-EMA is lost, then a deeper setback for gold prices might ensue towards the neckline of the inverse head and shoulders pattern near 1355/65.
IG Client Sentiment Index: Spot Gold Price Forecast (June 24, 2019) (Chart 3)
Spot gold price: Retail trader data shows 60.2% of traders are net-long with the ratio of traders long to short at 1.51 to 1. The number of traders net-long is 3.3% higher than yesterday and 20.9% higher from last week, while the number of traders net-short is unchanged than yesterday and 12.4% higher 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. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger spot gold price-bearish contrarian trading bias.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at firstname.lastname@example.org
Follow him on Twitter at @CVecchioFX
View our long-term forecasts with the DailyFX Trading Guides
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.