Gold Price Outlook: Technicals, Volatility & USD May Align for a Rally
- Ascending wedge, price support in view
- Quantitative evidence is supportive of bullish view
Gold Technical Outlook
Gold continues to chop around, and while doing so it is forming an ascending wedge. Yesterday at one point gold looked poised to break to its best levels since June, but fell sharply to close near the low-end of its daily range.
This brought into play the lower side of the developing ascending wedge, and also highlighted why it is important to avoid getting chopped up by waiting for a confirming breakout versus predicting. As long as the lower line holds then so too does a neutral outlook.
To flip the trading bias firmly into bullish territory we will need to see a daily close above 1834. A clean breakout is seen as having gold running towards the August 2020 trend-line, currently up around the vicinity of 1870/75.
On the flip-side, should gold decline firmly below 1805 and the rising trend-line, then gold will be at risk of once again visiting the May 2019 trend-line.
For the immediate future we are in 'wait-and-see' mode. Keep in mind it's August and trading may lack any real conviction in the absence of a strong catalyst, so being patient could be the name of the game for now.
Gold Daily Chart
Gold Quantitative Outlook
When analyzing option implied volatility to get a sense of market expectations, there is also quantitative evidence supporting the technical setup and bullish view.
The CBOE Gold Volatility Index (GVZ) currently stands at 14.88%, which implies a weekly one standard deviation range of +/- $37.50. This certainly puts a move above $1834 within the realm of statistical probabilities, but also leaves room for gold to trade towards the bottom of its recent range, should it break lower and violate the $1805 level.
Given this range of probable outcomes, how can we use volatility as a signal? When looking at the relationship between volatility and price performance, there's a fairly strong inverse correlation of -0.63 on a rolling 30-day basis. Meaning, at least for now, gold has a tendency to exhibit positive price performance amid declining levels of volatility.
Though correlation is not causation, it’s often noted that capital tends to flow towards assets with decreasing volatility and away from assets experiencing increasing levels of volatility. Should gold vol remain stable or fall from here, it might lend further confidence to the bullish thesis.
Finally, two of the biggest factors that often influence the price of gold are interest rates and the relative value of the dollar. While both nominal and “real” yields on 10 year U.S. Treasury notes have pushed lower recently, it might be the dollar we want to keep a closer eye on for confirmation of gold's pending move higher.
Like many commodities, there's often an inverse correlation with the value of the dollar (see table below). Should we see this relationship hold along with further dollar weakness, it’s one more box we can check on the list of bullish signals.
Gold vs 10YR & USD
- Ascending wedge developing, but needs confirmation (>1834)
- Relationship between gold and volatility is supportive of higher prices
- USD weakness may hold the key as to whether gold can rally or not
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---Written by Paul Robinson and Ryan Grace
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.