Gold Price Outlook:
- Gold prices have moved beyond multi-month bull flag resistance, suggesting that a march back to all-time highs has begun.
- However, with soft ag and industrial metal commodities pulling back and the US Dollar catching a bid post-FOMC minutes, the ‘runaway inflation’ narrative may be tempered, capping near-term price gains by gold prices.
- According to the IG Client Sentiment Index, gold prices have a mixed bias in the near-term.
Shining Again
Gold prices have climbed back to their highest level since the first week of 2021, thanks in part to the ongoing manifestation inflation fears, and perhaps, the bouts of weakness seen in cryptocurrency markets. The ongoing erosion in real US yields due to the combination of loose monetary policy and expansionary fiscal policy is once again proving to be a strong fundamental tailwind for gold prices.
Indeed, gold prices this week have moved beyond multi-month bull flag resistance, suggesting that a march back to all-time highs has begun; today will be the third day in a row with a close above bull flag resistance. However, with soft ag and industrial metal commodities pulling back and the US Dollar catching a bid post-FOMC minutes, the ‘runaway inflation’ narrative may be tempered albeit only temporarily, capping near-term price gains by gold prices.
Gold Volatility Rises with Gold Prices
Historically, 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.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (May 2020 to May 2021) (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 17.70, holding near their highest level since the end of March. Last week it was noted that “gold prices and gold volatility are behaving in a manner that suggest price action, on balance, remains bullish.” This remains true; further upticks in volatility remain bullish for gold prices. The 5-day correlation between GVZ and gold prices is +0.62 while the 20-day correlation is +0.89. One week ago, on May 12, the 5-day correlation was +0.22 and the 20-day correlation was +0.85.
Gold Price Rate Technical Analysis: Daily Chart (March 2020 to May 2021) (Chart 2)
In the prior gold price forecast, it was noted that “momentum remains bullish: daily Slow Stochastics are still in overbought territory; and daily MACD is still trending higher above its signal line. As long as gold prices continue to treat their daily EMA envelope as support (which has been the case since mid-April), their technical posture remains bullish.”
Momentum has firmed during the interim period: daily Slow Stochastics remain overbought; daily MACD has extended its advance above its signal line; and the daily EMA envelope is holding as support, with no closes by gold prices below their daily 5-EMA over the past week.
Even if the daily doji candle hints at potential indecision after the recent leg up – thereby allowing for some technical breathing room – as long as the technical studies remain supportive, the modus operandi is to ‘buy the dip,’ insofar as a bullish breakout from a multi-month bull flag necessitates a bullish trading posture on a longer-term basis.
Gold Price Technical Analysis: Weekly Chart (October 2015 to May 2021) (Chart 3)
It’s been previously noted that “while the broader confines of the descending parallel channel that’s been forming relative to the August 2020 (all-time) high remain in place, now back above 1763.36, the rebound gives long-term bulls hope that by holding the pandemic uptrend, gold prices are defining their nine-month downturn as a bull flag. If gold prices are above1837 by June 15, then it would appear that gold prices would be on track to pace towards new highs by the end of the year.” The conditions are being met to suggest that the bull flag breakout has started, and the march back to all-time highs has begun.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (May 19, 2021) (CHART 4)
Gold: Retail trader data shows 75.61% of traders are net-long with the ratio of traders long to short at 3.10 to 1. The number of traders net-long is 4.74% lower than yesterday and 4.62% lower from last week, while the number of traders net-short is 16.36% lower than yesterday and 6.71% higher 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
