Gold Price Outlook:
- Gold prices have pulled back sharply on the day, ahead of what’s expected to be a very strong US nonfarm payrolls report on Friday.
- Gold prices have fallen below their daily 13-EMA for the first time since May 5.
- According to the IG Client Sentiment Index, gold prices have a mixed bias in the near-term.
Losing Some Luster
Gold prices were steadily climbing through the first week of June until a barrage of better than expected US economic data arrived on Thursday. US initial jobless claims have fallen below 400K for the first time since the pandemic began, while the May US ADP employment report showed gains of +978K.
Gains in US Treasury yields coupled with a rebound in the US Dollar (via the DXY Index) are dragging gold prices to their lowest level since May 25, but perhaps more importantly, gold prices have fallen below their daily 13-EMA for the first time since May 5.
With the May US nonfarm payrolls report due on Friday – and it’s expected to be another good report – the uptrend from the March and April lows may be imperiled.
Gold Volatility, Gold Prices Decoupling
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 (June 2020 to June 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 15.88, now near its low over the past month. The pullback in gold volatility has not been met by a corresponding drop in gold prices thus far, but given the movement in prices today, an uptick in volatility may actually be met by a downturn in prices (typically a bearish development for gold). The 5-day correlation between GVZ and gold prices is -0.01 while the 20-day correlation is -0.40. One week ago, on May 27, the 5-day correlation was +0.11 and the 20-day correlation was +0.62.
Gold Price Rate Technical Analysis: Daily Chart (March 2020 to June 2021) (Chart 2)
In the prior gold price forecast, it was noted that “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.” Technical studies have started to sour, suggesting that a bullish trading posture is no longer applicable in the near-term.
Gold’s bullish momentum has decelerated quickly, with daily MACD issuing a sell signal (albeit in bullish territory) while daily Slow Stochastics have dropped from overbought territory. Furthermore, gold prices have started to drop through their daily 5-, 8-, 13-, and 21-EMA envelope; of note, gold prices have fallen below their daily 13-EMA for the first time since May 5. A deeper pullback to the uptrend from the March and April swing lows is possible; support would come in closer to 1850 through the end of the week.
Gold Price Technical Analysis: Weekly Chart (October 2015 to June 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.”
Thus far, the technical evidence suggests that a longer-term bullish bias is still appropriate, but it may be the case that some profit taking occurs resulting in a retest of the bull flag breakout levels.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (June 3, 2021) (CHART 4)
Gold: Retail trader data shows 75.55% of traders are net-long with the ratio of traders long to short at 3.09 to 1. The number of traders net-long is 1.19% higher than yesterday and 5.64% higher from last week, while the number of traders net-short is 2.88% higher than yesterday and 0.83% 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
