Gold Price Forecast Overview:
- Gold prices are trading in the lower half of their multi-month downtrend, carving out a ‘lower high’ in the process.
- Gold prices are working on a shooting star/inverted hammer on the weekly candlestick, a sign of exhaustion and perhaps clear desire for the downtrend emanating from the all-time high to retain primacy.
- According to the IG Client Sentiment Index, gold prices have a mixed outlook.
Gold Prices Struggling, Even as Dollar Slides
Whenever a USD-denominated asset is trading lower on a day when the US Dollar (via the DXY Index) is trading lower too, you know that something is amiss. Unfortunately, that’s where gold prices find themselves as the week heads into the final stretch of the week.
Despite fresh two-year lows in the DXY Index amid a breakout in EUR/USD rates after the European Central Bank announced fresh stimulus, gold prices are trading in the lower half of their multi-month downtrend, carving out a ‘lower high’ in the process.
We’re still in the early innings of what may be the worst case scenario for gold prices. As we’ve seen since the US presidential election, no ‘blue wave’ means no significant fiscal stimulus. With the US economy is regaining its long-term economic potential thanks to the vaccine news (even if the short-term outlook is increasingly dark, with a likely contraction in Q1’21), the reach for gold as a safe haven has been cut down.
Gold Prices and Gold Volatility, Out of Touch
Gold prices have a relationship with volatility unlike other asset classes. 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. Reduced political tensions tend to decrease the safe haven appeal of gold.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2008 to December 2020) (Chart 1)
Gold volatility has inched higher in recent days, but the moves are still immaterial to gold price. 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 19.62. The 5-day correlation between GVZ and gold prices is +0.27 while the 20-day correlation is -0.62; one week ago, on December 3, the 5-day correlation was +0.26 and the 20-day correlation was +0.15.
In our last gold price forecast, it was suggested that “it seems that our longstanding axiom is being challenged as market dynamics shift.” Time has passed, and more evidence has accumulated in favor of the axiom further breaking down. Accordingly, it “may no longer be the case that 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.”
Gold Price Rate Technical Analysis: Daily Chart (December 2019 to December 2020) (Chart 2)
Gold prices may be carving out what could be an evening star candle cluster, a bearish topping pattern. The context of the move, occurring at the parallel trendline taken from the August and November swing highs, suggests that the ‘lower high’ being carved out is consistent with a bearishly-inclined technical structure for gold prices. It’s been previously noted that observations like these suggest that “gold prices are in the process of carving out a near-term top.”
Gold price momentum is quickly reversing its nascent attempts to find bullish footing. Daily MACD is starting to narrow while in bearish territory, and daily Slow Stochastics failed to reach overbought territory during the run high; moreover, there is a divergence between the prior two daily Slow Stochastics peaks and the price of gold.
Gold prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. More choppy trading appears likely on the horizon, but the overall technical tone of the gold market remains relatively bearish barring a meaningful change in the fundamental backdrop.
Gold Price Technical Analysis: Weekly Chart (October 2015 to December 2020) (Chart 3)
In the last update it was noted that “further losses towards the 50% Fibonacci retracement of the 2020 low/high range at 1763.36 can’t be ruled out.” Thereafter, gold prices fell as low as 1764.57 before rebounding. It would thus hold that the gains seen recently are simply a digestive move after reaching critical technical support.
Gold prices are working on a shooting star/inverted hammer on the weekly candlestick, a sign of exhaustion and perhaps clear desire for the downtrend emanating from the all-time high to retain primacy. Gold prices are trading right back at the 38.2% Fibonacci retracement of the 2020 low/high range at 1836.97, and a further drop below this level would offer more evidence a near-term top has been established.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (DECEMBER 10, 2020) (CHART 4)
Gold: Retail trader data shows 80.41% of traders are net-long with the ratio of traders long to short at 4.10 to 1. The number of traders net-long is 5.48% higher than yesterday and 8.15% lower from last week, while the number of traders net-short is 9.60% lower than yesterday and 0.34% 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 more net-long than yesterday but less 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
