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XAU/USD: Gold Slides 5% as Volatility Wanes – Will Support Hold?

XAU/USD: Gold Slides 5% as Volatility Wanes – Will Support Hold?

2020-01-14 19:04:00
Rich Dvorak, Analyst
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GOLD FORECAST: EBBING VOLATILITY PRESSURES XAU/USD TOWARD TECHNICAL SUPPORT AFTER PIERCING $1,600

  • Gold has inked a strong start to 2020 with spot prices on pace for a 1% gain in the year-to-date, but the commodity is currently trading roughly 5% off last week’s swing high
  • The recent pullback in gold, driven largely by plunging volatility, has sent XAU/USD to test technical support with potential of keeping bullion’s broader uptrend intact
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Spot gold (XAU/USD) is down about 5% from its swing high above the $1,600 record last week. While gold prices have experienced downward pressured as of late, the commodity remains roughly 1% higher year-to-date.

Nevertheless, gold may soon resume its march higher in light of the series of technical support levels residing slightly below spot XAU/USD with potential of keeping the price of gold afloat.

XAU/USD – SPOT GOLD PRICE CHART: DAILY TIME FRAME (AUGUST 2019 TO JANUARY 2020)

Gold Chart XAU Price Forecast

Chart created by @RichDvorakFX with TradingView

A daily gold chart since August 2019 brings to focus gold’s recent topside breakout from the 4-month long bullish flag consolidation pattern, which I anticipated and noted in a prior gold forecast.

Since XAU/USD eclipsed its trendline of resistance extended through the series of lower highs from September to December 2019, gold surged almost 10% over just 9 trading days to an intraday high of $1,611.34 on January 08, 2020.

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Gold price action is currently fluctuating around the $1,545 mark after retracing roughly 38.2% of its trading range since the November 12 intraday low recorded by XAU/USD. The precious metal is now searching for technical support to stymie the drift lower in spot gold prices.

As such, levels of technical confluence highlighted by the $1,535 and $1,515 pose as possible areas of resistance-turned-support that might keep gold prices bolstered. Although the falling wedge pattern seemingly under formation could present a positive technical development for bullish gold prospects, the 9-day exponential moving average may keep XAU/USD bogged down over the short-term.

GOLD VOLATILITY – SPOT GOLD & GVZ INDEX PRICE CHART: DAILY TIME FRAME (MAY 2019 TO JANUARY 2020)

Chart of Gold Volatility XAU Forecast

Chart created by @RichDvorakFX with TradingView

The spike in spot gold price action to start the new year came largely in response to resurfacing safe-haven demand driven by a rise in geopolitical risk stemming from the Middle East as US-Iran tensions flared.

Gold has since edged lower subsequent to a Trump speech that outlined a lack of appetite for further military escalation between the two nations. Correspondingly, measures of volatility – such as Cboe’s gold volatility index (GVZ) – have taken a nosedive alongside perceived market risk and uncertainty.

In light of the generally strong positive correlation between spot gold and gold volatility, XAU/USD could continue to come under pressure until the next fundamental catalyst spurs demand for anti-risk assets such as gold.

STOCK MARKET VOLATILITY – S&P 500 TO GOLD RATIO & VIX INDEX PRICE CHART: DAILY TIME FRAME (MAY 2019 TO JANUARY 2020)

Spot Gold Price Chart Ratio to the S&P 500 Index Overlaid with VIX

Chart created by @RichDvorakFX with TradingView

Meanwhile, the VIX Index – a favorite barometer for perceived risk or uncertainty frequently referenced by traders and investors – approaches the 12.00 level and speaks to growing market complacency with the US equity benchmarks printing record-highs almost daily. The VIX Index has historically averaged a reading of 19.14 with a median reading of 17.23 dating back to January 1990.

Correspondingly, we may soon witness a ‘mean-reversion’ and reallocation of risk out of stocks and into safe-haven assets like gold. This concept is illustrated in the chart above with the ratio of the S&P 500 Index to spot gold, which is starting to appear a little top-heavy. As such, an abrupt return of volatility could send traders fleeting out of stocks and flocking into gold.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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