Gold Price Forecast: Another Move to New Highs - Levels for XAU/USD
Gold Price Forecast Overview:
- Gold price momentum remains bullish, holding above the daily 5-EMA, and a move to fresh yearly highs and the highest levels since 2011 is in reach.
- Even as gold volatility pulls back, gold prices have not; our axiom that ‘falling gold volatility is not necessarily a negative development, whereas rising gold volatility has almost always proved bullish’ still holds.
- According to theIG Client Sentiment Index, even though traders are net-long, it doesn’t mean that the rally is finished.
Gold Prices Look to Breach July High
Even as some truly parabolic moves take place in individual stocks and equity markets in Asia, gold prices have not been phased. The commensurate drop in gold volatility has yielded little by way of damage to the gold price rally (more on the below), as gold prices remain supported by an extremely bullish fundamental environment.
Falling real yields, thanks to expansionary monetary policy, coupled with the global economic uncertainty brought about by the coronavirus pandemic, has provoked traders to diversify into precious metals. (You can read more about these themes in-depth in a prior gold price forecast.) Gold prices, having weathered the storm of improved risk appetite, appear to be gearing up for another move to fresh yearly highs, and their highest level since 2011.
Gold Volatility Eases, Gold Prices Ignore
Gold prices have a relationship with volatility unlike other asset classes, even including precious metals like silver which have more significant economic uses. While other asset classes like bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – gold tends to benefit during periods of higher volatility.
Heightened uncertainty in financial markets due to increasing macroeconomic tensions increases the safe haven appeal of gold. Now that there are plenty of signs that no V-shaped economic recovery will occur, and the Federal Reserve intent on keeping the liquidity spigot open for the foreseeable future, the winds of an inflationary US economic environment are blowing through financial markets.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2008 to July 2020) (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) is trading at 16.80, still less than 25% of the absolute high set in mid-March near 85.50. It’s worth noting that gold volatility hasn’t traded higher than 23.04 in six weeks.
Now, after a period where gold prices have rallied higher and gold volatility has dropped, the 5-day correlation between GVZ and gold prices is -0.48 while the 20-day correlation is -0.36; one week ago, on June 30, the 5-day correlation was -0.38 and the 20-day correlation was 0.43; and four weeks ago, on June 9, the 5-day correlation was 0.41 and the 20-day correlation was 0.36.
As we’ve noted previously, “given the current environment, falling gold volatility is not necessarily a negative development for gold prices, whereas rising gold volatility has almost always proved bullish; in the same vein, gold volatility simply trending sideways is more positive than negative for gold prices.” This axiom still holds.
Gold Price Technical Analysis: Daily Chart (July 2019 to July 2020) (Chart 2)
Gold prices are consolidating just below their yearly high set last week, continuing to follow gold futures higher, which have stretched their gains above 1800 to achieve their highest level since 2011. The developments remain in-line with expectations, given that we’ve been tracking the bullish breakout from the sideways range carved out between the April 14/2020 high at 1747.72 and the April 21 swing low at 1661.42; ahead of the breakout that “given that gold prices rallied into this consolidation, the market retains an upside bias.”
The measured move, derived from the high/low range between 1675 and 1748, calls for a move towards 1821, now that resistance is broken. Support comes in at the daily 5-EMA, which gold prices have not closed below since breaking out on June 24.
Gold Price Technical Analysis: Weekly Chart – Inverse Head and Shoulders Pattern (June 2011 to July 2020) (Chart 3)
Gold prices have made significant progress within the confines of the multi-year inverse head & shoulders pattern, achieving their highest level since November 2012 earlier this week. It thus still holds that the rally into and through the 76.4% retracement (1714.66) must be viewed in context of the longer-term technical picture: the gold price inverse head and shoulders pattern that was triggered in mid-2019 is still valid and guiding gold price action.
Depending upon the placement of the neckline, the final upside targets in a potential long-term gold price rally, if drawing the neckline breakout against the August 2013 high at 1433.61, calls for a final target at 1820.99. This dovetails neatly with the measured move on the daily timeframe looking for gold prices to rally into 1834.02.
IG Client Sentiment Index: Gold Price Forecast (July 7, 2020) (Chart 4)
Gold: Retail trader data shows 66.57% of traders are net-long with the ratio of traders long to short at 1.99 to 1. The number of traders net-long is 4.29% lower than yesterday and 1.45% lower from last week, while the number of traders net-short is 1.98% lower than yesterday and 6.12% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests 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 Gold trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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