Gold Price Uptrend Remains Intact - Key Technical Levels for XAU/USD
Gold Prices Overview:
- The latest swing lower by US Treasury yields has allowed gold prices to retain their uptrend from the May low.
- Precious metals underperform during periods of lower volatility as decreased uncertainty reduces the safe haven appeal of gold and silver. To this end, the 5-day correlation between GVZ and gold prices is 0.89, and the 20-day correlation is 0.90.
- Retail positioning warns that the current spot gold price trend may soon reverse higher despite the fact traders remain net-long.
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A week removed from the September Fed meeting and traders are no wiser regarding the US-China trade war and the prospective path for the Fed’s interest rate cut cycle. With more signs that global growth is flagging, traders have once again shifted funds into sovereign debt, driving German Bund and US Treasury yields lower. In an environment defined by falling bond yields, gold prices have been able to keep intact their uptrend from the May low.
US Treasury 10-year Yield Technical Analysis: Daily Chart (June 2016 to SEPTEMBER 2019) (Chart 1)
Since hitting its highest level in five weeks on September 13 at 1.907%, the US Treasury 10-year yield been steadily losing ground, trading at 1.665% at the time of writing. Comments made yesterday by US President Donald Trump at the United Nations General Assembly did little to soothe fears over the US-China trade war spiraling out of control again. It still holds that “a further retracement by US Treasury yields should prove supportive of higher gold prices.”
Gold Prices Weighed Down by Easing Gold Volatility
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. Heightened uncertainty in financial markets due to increasing macroeconomic tensions (like US-China trade war or the prospect of a no-deal, hard Brexit, for example) increases the safe haven appeal of gold and silver.
On the other hand, reduced uncertainty in financial markets due to decreasing macroeconomic tensions (like the US-China trade war talks being announced for October or a no-deal, hard Brexit being postponed) decreases the desire to hold onto precious metals.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2016 to September 2019) (Chart 2)
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 started to rebound, trading back up to 16.15 at the time of writing. Gold volatility levels remain below its 2019 high (and highest level since December 2017) set on August 15 at 18.
The 5-day correlation between GVZ and gold prices is 0.89, and the 20-day correlation is 0.90; four weeks ago, on August 20, the 5-day correlation was 0.62 and the 20-day correlation was 0.75. In our last gold price technical forecast update it was noted that the gold price-gold volatility relationship revealed that “there is a strong floor of support underneath gold prices at the moment.” To this end, the tightening of correlations since the last update has come as gold prices have risen once more.
Gold Price Technical Analysis: Daily Chart (AUGUST 2018 to SEPTEMBER 2019) (Chart 3)
In our last gold price technical forecast updated, it was noted that “a break above the September 12 high at 1524.05 would suggest the uptrend is resuming.” Such events transpired as of September 24, suggesting that the next wave up is beginning for gold prices.
Gold prices are back above the daily 8-, 13-, and 21-EMA envelope, which is aligning in bullish sequential order. Daily MACD has issued a buy signal in bullish territory, while Slow Stochastics are rapidly advancing towards overbought condition. The path of least resistance is now to the topside for gold prices. Traders should look for a return to the yearly high at 1556.88. Failure to achieve a new high, combined with a break of the uptrend from the May low, would suggest a top is in place otherwise; below 1479.73 a head and shoulders pattern may take shape for gold prices.
GOLD PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2011 TO SEPTEMBER 2019) (CHART 4)
Gold prices continue to trade above their weekly 8-, 13-, and 21-EMA envelope, rebounding from weekly 8-EMA as was the case in the first week of August. Weekly MACD has started to rise in bullish territory, while Slow Stochastics have arrested their pullback from overbought territory.
Accordingly, while there have been signs of a short-term pause in the bull trend, there hasn’t been convincing enough price action to suggest that gold’s longer-term bottoming effort has been invalidated – nor has the uptrend since the May low.
As such, the longer-term gold price inverse head and shoulders pattern initiated in the first half of 2019 continues to be the ‘north star’ for traders. 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 calls for a final target at 1685.67; aggressively, drawing the neckline breakout against the August 2013 high at 1433.61 calls for a final target at 1820.99.
IG Client Sentiment Index: Spot Gold Price Forecast (September 25, 2019) (Chart 5)
Spot gold: Retail trader data shows 62.6% of traders are net-long with the ratio of traders long to short at 1.67 to 1. The number of traders net-long is 3.1% lower than yesterday and 8.5% lower from last week, while the number of traders net-short is 3.5% higher than yesterday and 23.0% 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current spot gold price trend may soon reverse higher despite the fact traders remain net-long.
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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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