Gold Price Forecast Talking Points:
- The ONE Thing:The US Dollar remains a limiting factor and hindrance on the rise in Gold, but the weakness in Emerging Markets, a long-time buyer of Gold and earning an increasing share of the global buying power could lift the yellow metal to new heights.
- Holding a bullish view of the US Dollar and Bullion is typically mutually exclusive, unless you have a period of unique distress that leads to the unwind of de facto USD short trades (i.e., EM) at the same time capital is flooding into havens like Gold.
- A weekly view of the price of Gold shows that we are testing and holding a price polarity point, which is a technical phrase indicating prior resistance has possibly shifted to become support. A look to the weekly chart shows a 7.5-year trendline and Ichimoku cloud that both sit below the price, possibly indicating future strength.
- Traders beware. The price of gold is acting more like the pricing of bonds than the pricing of stocks in that the price action of gold and anticipated price action per options data suggests a muted future
Technical Forecast for the gold price / XAUUSD: Bullish
Chart Source: ProRealTime charting, IG UK Price Feed. Created by Tyler Yell, CMT
The chart above paints a picture that can either excite you or put you to sleep. I chose the former. Yes, the price volatility of gold has been relatively low, especially in May to other assets. However, the low price moves have been happening above higher levels, and more importantly above long-term support points on the chart suggesting underlying strength.
The weekly chart documents price from 2010-present. While price fell aggressively from 2011-2014, and has been somewhat muted, it’s important to look at a few key factors. In short, the trendline drawn from the 2011 high to the 2018 peak looks to align with Ichimoku to show price may have found longer-term support, which could indicate underlying strength absent a breakdown that damages the current structure.
The white fame drawn off key pivots favors a frame or road for potential price action. Should the price hold within this frame with a bullish foundation, the price could move to $1,400/oz. or should the price trade to the top of the channel, we could see price above $1,500/oz.
Another important point and one I feel is often overlooked is that we typically look at Gold priced in USD, which year-to-date is flat. However, looking to Gold priced in the Swedish Krona, you can see a fundamentally different chart and one that is more encouraging for the bulls.
Regardless of the Asset, Currencies Matter
Data source: Bloomberg
Gold traders should note that few currencies have outperformed the US Dollar in 2019 thus far, and that has muted the moves of Gold, especially viewed through the lens of the US Dollar. Gold has an aggressive inverse correlation to the US Dollar at nearly -0.8 over 120-day suggesting that these two markets, USD & Gold should be expected to move in opposite ways. In fact, Gold’s inverse relationship to the US Dollar aligns with EUR’s inverse correlation at -0.89. Correlation coefficients are measured between -1 to +1 indicating a perfect opposite or positive relationship respectively.
Another Way of Saying, Currencies Effect Gold
Data source: Bloomberg, Deutsche Bank
The chart above plots two data sets, the DB Currency Volatility Index (blue) and the price of Gold (orange) going back to 2010. The two lines seem to communicate that currency moves matter. In other words, with the blue line falling (i.e., lack of currency moves) traders may find themselves wanting for Gold volatility.
However, if currency volatility kicks higher, the price of Gold could follow suit. Though, as argued above, traders may want to express that view via other currencies if US Dollar strength persists. Year to Date, currency volatility as measured by DB’s CVIX has fallen 34%.
Options Insight: Bias for Directional Protection is Higher, But Not Aggressively
Data source: Bloomberg
Option insight is nearly invaluable to me. The chart above shows two aspects of the options market. The orange line shows implied volatility (a bet on how much prices will move in the future) over the coming month in Gold. The blue line shows a ratio of bullish to bearish bets, which I’ll explain a bit more soon.
The orange line is discouraging, to a point. If gold is a hedge, as many investors and central bankers believe it is, then this low price is a good thing. A hedge is meant to be unrelated or inversely related to other assets so that when they (presumably the larger share of your portfolio) underperform, you’re sitting in a position to benefit that those with concentrated risk exposure will feel pain.
The blue line is a bit more exciting, though it is still muted relative to the annual range. The blue line are 25 delta (i.e., out of the money) risk reversals and show premiums paid as a ratio for calls (a bet on price upside) and puts ( a bet on price downside.) A rising risk-reversal as we see on the far-right side of the chart indicates a bid to buy protection (or participate in cheaply) gold upside. Should this blue line continue to rise, traders may see that it may do so alongside the price of Gold, and especially in non-USD currencies.
We’ll see.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.
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