Gold Price Rally Struggles but Bull Flag Potential Persists - Levels for XAU/USD
Gold Price Forecast Overview:
- Hope for de-escalation in the US-China trade war and a Brexit breakthrough are helping temper investor demand for safe haven assets. Alongside a weaker Japanese Yen, gold and silver prices have dipped.
- Precious metals tend to 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 0.47, and the 20-day correlation is 0.71.
- Changes in retail trader positioninggives us a further mixed spot gold trading bias.
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Hope for de-escalation in the US-China trade war and a Brexit breakthrough are helping temper investor demand for safe haven assets. Even as the IMF released new global GDP forecasts that showed a reduction in topline growth expectations for the world economy, traders attempting to have the best of all worlds, in a ‘Goldilocks’ sense: tensions are just high enough to keep G10 currencies’ central banks looking to cut interest rates over the coming months.
Gold Prices Boosted by Rising 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.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2016 to October 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 traded sideways between 14.62 and 18.72 (its highest closing level since December 2017) for the past two months; it currently sits at 15.42. The 5-day correlation between GVZ and gold prices is 0.47, and the 20-day correlation is 0.71; four weeks ago, on September 6, the 5-day correlation was 0.58 and the 20-day correlation was 0.79.
Gold Price Technical Analysis: Daily Chart - Bull Flag/Descending Channel (October 2018 to October 2019) (Chart 2)
In the week since our last gold price forecast update, not much progress has been made: in fact, neither the October low (set on October 1 at 1458.97) nor the October high (set on October 3 at 1519.53) have been tested since the first week of the month.
For now, there is little reason to alter the perspective that gold prices are going through a period of profit taking rather than a topping effort. While the gold price bull flag continues to be the predominant price pattern monitored at present time, it is worth noting that momentum is starting to turn lower within the descending channel. Gold prices are below the daily 8-, 13-, and 21-EMA envelope, which are aligned in bearish sequential order. Daily MACD is slipping below its signal line, while Slow Stochastics have dropped back into bearish territory.
Bull flag support comes into play near 1445 by the end of the week, so a sharp turn lower may still not be the sign of a top. If the bull flag in gold prices is legitimate, a break above the late-September swing high at 1538.58 would need to be achieved. In doing so, gold prices would also retake the uptrend from the May and August 2019 lows. The 100% extension of the move from the May low, the September high, and the October low calls for a target price of 1726.31.
Gold Price Technical Analysis: Weekly Chart – Inverse Head and Shoulders Pattern (February to October 2019) (Chart 3)
Potential for near-term weakness in gold prices needs to be couched in longer-term technical machinations: the longer-term gold price inverse head and shoulders pattern that commenced earlier this year remains valid. The final upside targets in a potential long-term gold price rally are variable, determined by the placement of the neckline: 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. Only a break below the August 1 bullish outside engulfing bar low at 1400.38 would draw into question the longer-term bullish potential.
IG Client Sentiment Index: Spot Gold Price Forecast (October 15, 2019) (Chart 4)
Spot gold: Retail trader data shows 68.1% of traders are net-long with the ratio of traders long to short at 2.14 to 1. The number of traders net-long is 6.7% lower than yesterday and 1.6% lower from last week, while the number of traders net-short is 5.2% higher than yesterday and 6.8% lower 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. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed spot gold trading bias.
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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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