Gold Price Outlook:
- Gold prices haven’t made significant progress in recent weeks, with rising US Treasury yields and stronger US equity markets offsetting a weaker US Dollar.
- A break above the October high could quickly find resistance anew, with former trendline support – now resistance – looming above around 1810/15 through the rest of the month.
- According to the IG Client Sentiment Index, gold prices have a mixed bias in the near-term.
Stuck in a Range
Gold prices have edged higher throughout October, consistent with its seasonal tendency to post modest gains during the month. Recently, the accumulation has gone in-hand with US Dollar weakness, even though the gold price rally has been constrained by rising US Treasury yields and stronger US equity markets – both of which are signaling stronger growth conditions, which doesn’t cater to a hospitable environment for bullion.
That said, the conditions favor continue sideways price action in gold prices. With no strong directional bias among technical indicators and a meager fundamental backdrop, there is no discernible reason to think that gold prices are about to breakout higher – or breakdown lower.
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. Recent signs of falling gold volatility aren’t a good omen for gold prices.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2020 to October 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 15.18. The relationship between gold prices and gold volatility is normalizing, insofar as the 5-day correlation has turned negative, following the 20-day correlation which remains in negative territory. The 5-day correlation between GVZ and gold prices is -0.32 while the 20-day correlation is -0.67. One week ago, on October 14, the 5-day correlation was -0.10 and the 20-day correlation was -0.51.
Gold Price Rate Technical Analysis: Daily Chart (June 2020 to October 2021) (Chart 2)
Last week it was noted “is the downtrend over? It’s too soon to say. Gold prices did carve out a series of ‘lower lows’ throughout September, and the flat trading through the bulk of October has not seen that trend break yet.” Indeed, the series of lower highs and lower lows remains, but price action has turned slightly more bullish with gold prices rebounding above the 50% Fibonacci retracement of the 2020 low/2021 high range at 1763.36 and the daily 21-EMA. Daily MACD has turned higher through its signal line, and daily Slow Stochastics are trending upwards above their median line. If gold prices are able to clear out their early-October high at 1800.65, former support (the ascending trendline from the May 2019, March 2020, and March 2021 lows) lingers above as resistance.
Gold Price Technical Analysis: Weekly Chart (October 2015 to October 2021) (Chart 3)
Gold prices’ technical structure on the weekly timeframe doesn’t indicate a significant directional bias. The weekly 4-, 13-, and 26-EMA envelope’s negative slope remains in place, while weekly MACD continues to linger below its signal line. However, weekly Slow Stochastics are beginning to inch above their median line. With a triangle continuing to take shape (starting in June 2020), it appears that the sideways shuffle in gold prices is set to continue for the foreseeable future.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (October 21, 2021) (CHART 4)
Gold: Retail trader data shows 76.04% of traders are net-long with the ratio of traders long to short at 3.17 to 1. The number of traders net-long is 0.45% lower than yesterday and 6.24% higher from last week, while the number of traders net-short is 3.32% higher than yesterday and 25.72% 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 Strategist
