Gold Price Outlook:
- Gold prices have been turned away from an area that capped gains earlier in the summer.
- Until 1835 is overtaken, it’s difficult to have faith in any more upside potential in gold prices given recent technical developments.
- According to the IG Client Sentiment Index, gold prices have a bearish bias in the near-term.
Nice Little Rally, But…
On the back of declining Fed rate hike odds and a weaker US Dollar, gold proves proved their mettle at the end of August by rallying into the end of the month. Indeed, gold prices were able to return to their July range, even if the critical 1835 level was never breached.
However, as September has arrived, gold prices are seemingly losing their luster once more. Fed rate hike odds have stabilized, and alongside higher US Treasury yields, the US Dollar (via the DXY Index) has started to come off of its lows. With gold volatility slumping again, the environment has become unfavorable in the short-term for bullion.
Gold Volatility and Gold Prices’ Abnormal Relationship
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. Falling gold volatility and weak correlations suggests difficult trading may be ahead for gold prices.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (September 2020 to September 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 16.15. The relationship between gold prices and gold volatility is normalizing as gold prices rally while gold volatility gains. The 5-day correlation between GVZ and gold prices is -0.22 while the 20-day correlation is -0.65. One week ago, on August 31, the 5-day correlation was -0.85 and the 20-day correlation was -0.71.
Gold Price Rate Technical Analysis: Daily Chart (August 2020 to September 2021) (Chart 2)
Gold prices have been able to return to their July range as well as back into the symmetrical triangle that governed price action since the start of 2021, but not much more than that. Failure to overcome the July highs – clearing the 1835 level discussed ad nauseum over the past six weeks – suggests that bullish momentum of late will soon fade.
Price action is already suggesting a turn may be forming. Gold prices have dropped below their daily 5-, 8-, and 13-EMAs, with the daily 21-EMA nearby. Daily MACD’s ascent through its signal line has started to stall, while daily Slow Stochastics have already begun to drop out of overbought territory.
Failure to sustain the move above symmetrical triangle support could see a return towards 1790 in the near-term, with deeper losses towards the ascending trendline from the May 2019, March 2020, and March 2021 lows thereafter should the July range break.
Gold Price Technical Analysis: Weekly Chart (October 2015 to September 2021) (Chart 3)
The rebound in gold prices has yet to result in a meaningful turn on the weekly timeframe, which has seen an acceleration higher in its momentum indicators despite failure to overtake the July highs. The weekly 4-, 13-, and 26-EMA envelope is flat, suggesting that the longer-term impulse is neutral. Should gold prices overcome 1835, however, upside potential towards 1860 could be realized rather quickly before symmetrical triangle resistance comes into focus.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (September 7, 2021) (CHART 4)
Gold: Retail trader data shows 78.80% of traders are net-long with the ratio of traders long to short at 3.72 to 1. The number of traders net-long is 4.23% higher than yesterday and 11.81% higher from last week, while the number of traders net-short is 14.90% lower than yesterday and 28.51% 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 Strategist
