Gold Prices Maintain Uptrend, Eye Continuation Effort Around Jackson Hole
Gold Price Talking Points:
- Gold prices have been trading sideways the past few days, in line with our gold price weekly trading forecast.But now that the Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming is here, all that could change.
- Precious metals tend to benefit during periods of higher volatility as heightened uncertainty increases the safe haven appeal of gold and silver. To this end, the 5-day correlation between GVZ and gold prices is 0.86; and the 20-day correlation is 0.78.
- Retail trader positioning suggests that the gold price rally may not be ready to resume just yet.
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Gold prices have been trading sideways the past few days, in line with our gold price weekly trading forecast. But now that the Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming is here, all that could change. Speeches by various central bank officials, but most prominently Fed Chair Jerome Powell, will likely spur acute price action across asset classes over the coming days – and there is a high probability that markets gap open after the weekend.
Whereas volatility has been trending lower in the run-up to the Fed’s Jackson Hole summit, it seems possible that volatility makes a return as traders reallocate capital ahead of what should be an exciting September for central banks: both the Fed and the European Central Bank are expected to cut rates, while the Reserve Bank of Australia may not be far behind.
Volatility Remains a Key Factor for Gold Price Action
While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit during periods of higher volatility as heightened uncertainty increases the safe haven appeal of gold and silver.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2016 to August 2019) (Chart 1)
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) has slipped back in recent days after setting another fresh yearly high close on August 15 at 18.72; GVZ is back at 15.29.
The 5-day correlation between GVZ and gold prices is 0.86; and the 20-day correlation is 0.78 (one month ago, on July 22, the 5-day correlation was 0.93 and the 20-day correlation was 0.76). To this end, if gold volatility continues to drop, then it will be a difficult environment for gold prices to continue their recently rally.
Gold Price Technical Analysis: Daily Chart (AUGUST 2018 to AUGUST 2019) (Chart 2)
Despite the pullback in gold volatility via GVZ, gold prices have been resilient in the content of an environment that would otherwise cater to weaker price action. In our last gold price technical update on August 12, it was noted that gold prices were in an “ascent towards the range’s measured move at 1523.98; that level was achieved by August 13.
Since August 13’s doji candle, gold price action has been decidedly flat. The doji candle’s range between 1479.73 and 1534.89 has yet to be tested on either end. Concurrently, bullish momentum has dissipated, with both daily MACD and Slow Stochastics turning lower (albeit both still in bullish territory) in recent days.
Gold Volatility Environment Feels Familiar
Yet, like at the end of May, and again at the beginning of July, gold price action is proving resilient in an environment marked by a significant pullback in gold volatility and drop in bullish momentum indicators. It would stand to reason that the current uptrend not only remains intact, but that traders are simply biding their time before engaging the uptrend. Any weakness in the near-term thus may be best viewed as profit taking rather than a top coming into place.
GOLD PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2011 TO AUGUST 2019) (CHART 3)
Big picture, gold prices continue to advance in the context of a multi-year inverse head and shoulders pattern. As previously noted, “The placement of the neckline determines the final upside targets in a potential long-term gold price rally: conservatively, drawing the neckline breakout against the January 2018 high at 1365.95; aggressively, drawing the neckline breakout against the August 2013 high at 1433.61 calls for a final target at 1820.99.”
The longer-term bullish perspective remains valid. With gold prices holding above the weekly 13-EMA – the one-quarter moving average – and both weekly MACD and Slow Stochastics trending higher, bullish momentum remains strong on longer-term timeframes.
IG Client Sentiment Index: Spot Gold Price Forecast (August 22, 2019) (Chart 4)
Spot gold: Retail trader data shows 64.6% of traders are net-long with the ratio of traders long to short at 1.83 to 1. The number of traders net-long is 2.6% higher than yesterday and 11.9% higher from last week, while the number of traders net-short is 1.5% lower than yesterday and 6.9% 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-bearish contrarian trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at email@example.com
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