Gold Price Forecast: Drop Towards 1700 in Progress - Levels for XAU/USD
Gold Price Outlook:
- Gold prices have been carving out a series of ‘lower lows’ throughout September as US Treasury yields march higher.
- It remains the case that “selling the rally may be the modus operandi henceforth.”
- According to the IG Client Sentiment Index, gold prices curiously retain a bullish bias in the near-term.
Carving Out Lower Lows
The post-September Fed period has been difficult for gold prices. With the FOMC offering stronger and stronger hints on its taper timeline, rising US Treasury yields (and in particular,
higher US real yields (nominal yields less inflation)), gold prices are sailing into fundamental headwinds that don’t seem likely to abate any time soon.
And while month-end and quarter-end profit taking on shorts can lead to a short-term rebound, it remains the case that the overall technical posture remains bearish.
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. Even as gold volatility rebounds, negative correlations suggest continued 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 16.52. The relationship between gold prices and gold volatility remains abnormal. The 5-day correlation between GVZ and gold prices is -0.98 while the 20-day correlation is -0.89. One week ago, on September 23, the 5-day correlation was +0.04 and the 20-day correlation was -0.73.
Gold Price Rate Technical Analysis: Daily Chart (August 2020 to September 2021) (Chart 2)
Last week it was noted that “gold prices remain below former support in the symmetrical triangle that encompassed price action from January through July, and more recently have traded below the ascending trendline from the May 2019, March 2020, and March 2021 lows…gold prices have since failed at these former support levels, duly treating them as resistance after what appeared to be a ‘dead cat bounce.’ More losses may be on the way given the posture of momentum indicators.”
With fresh monthly lows reached yesterday, gold prices have been establishing a series of ‘lower lows’ throughout September. Gold prices are still below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD continues to decline while below its signal line, and daily Slow Stochastics holding in oversold territory. A drop below 1700 in the next few weeks – particularly if the US debt ceiling deadline (October 15) passes without issue – is very much on the table.
Gold Price Technical Analysis: Weekly Chart (October 2015 to September 2021) (Chart 3)
Gold prices’ technical structure on the weekly timeframe has eroded further after last week’s September Fed meeting. The weekly 4-, 13-, and 26-EMA envelope continues to tilt to the downside. Weekly MACD is sliding further below its signal line, and weekly Slow Stochastics are accelerating lower below their median line. It still holds that “selling the rally may be the modus operandi henceforth.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (September 30, 2021) (CHART 4)
Gold: Retail trader data shows 71.78% of traders are net-long with the ratio of traders long to short at 2.54 to 1. The number of traders net-long is 1.08% lower than yesterday and 4.74% higher from last week, while the number of traders net-short is 10.69% higher than yesterday and 42.63% 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 Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.