Gold Price Forecast Overview:
- Gold prices have stabilized after suffering their worst daily loss since April 2013. Are bulls still in control? For now, yes.
- The technical structure remains bullish as the uptrend from the March low remains intact, and the fundamental argument – that negative real yields will persist – has not been harmed.
- According to the IG Client Sentiment Index, the gold price rally may not resume just yet.
Gold Prices Pull Back – It’s a Crowded Trade
Consider this: thus far, the US Treasury 10-year yield is up by +11.4-bps, concurrent with gold price’s -4.4% loss. But back in the first week of June, when the US Treasury 10-year yield added +24.4-bps, gold fell by -2.6%. That there has been a deeper pullback in gold prices this week amid a more restrained rise in US Treasury yields relative to June suggests that the long gold trade is overcrowded.
And so, with the worst daily performance since April 2013 this Tuesday, it may be the case that these weak hands – recent participants in the long gold trade, who were stopped out – have been shaken out of the market. This wasn’t necessarily a surprise; as was noted in the previous gold price forecast issued on August 6, “even if gold prices have hit a near-term point of exhaustion, the longer-term prospect for gold prices (and precious metals generally speaking) continues to hold.”
Backdrop Remains Strong, Bulls Undeterred?
It’s a testament to the underlying strength of the gold market that, even as the US Treasury 10-year yield rose to its highest level since the second week of July (66-bps), gold prices are currently trading near 1950, whereas in the second week of July gold prices were trading near 1800. Relatively speaking, this is a stronger market than it was in July.
As it were, there is little reason to believe that the fundamental and technical backdrop remains anything other than robust. After all, interest rates will remain low and government stimulus continues to flow, depressing real interest rates.Thanks to expansionary monetary policy and even now enhanced fiscal policy responses real yields continue to fall and remain depressed: short-term rates are stuck near zero while growth and inflation rates are rising. An environment defined by depressed and/or negative real yields has historically proven bullish for precious metals.
These factors will continue to enhance the negative real yield argument that has been fueling gold’s rally in recent months, and only if this narrative changes will the argument for higher gold prices subside.
You can read more about the impact of negative real yields more in a prior gold price forecast.
Gold Volatility has Stabilized, Suggesting Gold Prices are Settling
Our longstanding axiom holds: “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.”
A reminder: 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 – which, by the way, are back in the news thanks to the latest US-China trade war headlines.
Read more: How Do Politics and Central Banks Impact FX Markets?
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2008 to August 2020) (Chart 1)
Gold volatility has stabilized despite the sharp pullback in gold prices, leading to a deterioration in short-term correlations. 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 24.99. The 5-day correlation between GVZ and gold prices is -0.52 while the 20-day correlation is 0.77; one week ago, on August 6, the 5-day correlation was 0.93 and the 20-day correlation was 0.92.
Gold Price Technical Analysis: Daily Chart (August 2019 to August 2020) (Chart 2)
Now that the acute bull move has subsided, we can return back to pattern-based analysis rather than strictly examining momentum. To this end, the pullback in gold prices this week has been halted at two key levels: the rising trendline support from the March and June 2020 lows – effectively the coronavirus pandemic trendline; and the former all-time high near 1921.07. Support arrived as the daily candle carved out a doji, a classic sign of a market readying to turn higher; bulls ultimately were able to pull prices back to their open level, and today, we’re seeing follow through higher.
If gold prices regain the daily 5-EMA (1960), it would be a strong sign that the rally is resuming. Otherwise, traders will need to keep an eye on the weekly low at 1862.90; should this level break, we’ll have broken the pandemic support trendline, demanding a strong reconsideration of the technical outlook.
Gold Price Technical Analysis: Weekly Chart (June 2011 to August 2020) (Chart 3)
“Gold prices have completed the inverse head and shoulders pattern first identified in mid-2019. Depending upon the placement of the neckline, the final upside target was 1820.99. The long-term gold thesis is now evolving, but with the bottoming effort completed, we can now turn our attention to all-time highs at 1921.07 – and well-beyond over the coming months.” 1921.07 is the key level to keep an eye on for a weekly close; falling below 1921.07 would raise eyebrows, while below 1862.90 would be a major warning sign of a near-term top.
IG Client Sentiment Index: Gold Price Forecast (August 14, 2020) (Chart 4)
Gold: Retail trader data shows 76.13% of traders are net-long with the ratio of traders long to short at 3.19 to 1. The number of traders net-long is 9.40% higher than yesterday and 2.91% higher from last week, while the number of traders net-short is 13.12% lower than yesterday and 29.76% 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
