Gold Price Forecast: From Bull Flag to Symmetrical Triangle - Levels for XAU/USD
Gold Price Outlook:
- Gold prices are finally showing life in what should be one of the best fundamental environments in recent history.
- While gold prices may be exiting ‘the technical woods,’ a move through 1835/40 would suggest that the technical posture has become more bullish.
- According to theIG Client Sentiment Index, gold prices have a bullish bias in the near-term.
How the Tables Turn
Throughout July, we’ve been monitoring gold prices as it appeared that decision time was soon approaching. It was previously noted that “Technical gauges of momentum have indeed started to turn higher, but questions remain. As the saying goes, ‘more wood needs to be chopped’ before gold prices exit ‘the technical woods.’ Since then, gold prices have been chopping that wood, sitting along the brush line now, with the clearing in sight.”
Indeed, gold prices may have finally stepped into that clearing. In what should be one of the best fundamental environments in recent history – ongoing stimulus efforts by the Federal Reserve, record deficits and debt burdens among developed economies, and all-time lows in negative US real yields – gold prices are finally starting to perk up.
Gold Volatility and Gold Prices In Sync, Sort Of
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. But it doesn’t appear to be market instability (e.g. higher volatility) that’s helping support the rally in gold prices right now.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (July 2020 to July 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) was trading at 15.16. The relationship between gold prices and gold volatility is eroding as gold prices rally while gold volatility falls (which is atypical). The 5-day correlation between GVZ and gold prices is -0.11 while the 20-day correlation is -0.41. One week ago, on July 22, the 5-day correlation was -0.04 and the 20-day correlation was -0.68.
Gold Price Rate Technical Analysis: Daily Chart (July 2020 to July 2021) (Chart 2)
Gold prices are attempting to clear the hurdle that is the descending channel measured against the August 2020 and January 2021 swing highs, but has thus far been rebuffed by the cluster of Fibonacci levels in the low-1830s. It was previously noted that “it would appear that gold prices aren’t out of ‘the technical woods’ until 1835 is achieved,” and its now possible that our bullish confidence threshold is obtained.
Gold Price Technical Analysis: Weekly Chart (October 2015 to July 2021) (Chart 3)
As noted throughout July, “we may be nearing the point at which it is once more appropriate to take a longer-term bullish perspective.” But taking a step back, price action since the start of 2021 may have been shaping into a symmetrical triangle, which in context of the longer-term trend, still projects further upside: triangle resistance comes into play near 1900 during August.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (July 29, 2021) (CHART 4)
Gold: Retail trader data shows 77.29% of traders are net-long with the ratio of traders long to short at 3.40 to 1. The number of traders net-long is 9.36% lower than yesterday and 10.19% lower from last week, while the number of traders net-short is 29.73% higher than yesterday and 29.39% 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Gold price trend may soon reverse higher despite the fact traders remain net-long.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.