Gold Price Outlook:
- Gold prices are edging higher towards the end of the month, bolstered by a wave of US Dollar weakness.
- A return above 1810 would see the May 2019, March 2020, and March 2021 reclaimed, while the inverse head and shoulders neckline resides at the summer swing highs near 1835.
- According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.
Gold Shining Again?
Gold prices have been clawing higher throughout October, even though the fundamental backdrop remains difficult thanks to the reality that FOMC continues to offer clear signals that tapering is arriving soon. With the November Fed meeting arriving next week, the recent bullish impulse higher may soon face a considerable test.
Nevertheless, thanks in part to a weaker US Dollar and long-end US Treasury yields coming down in the face of rising short-term inflation expectations, gold prices have been able to move back above the 1800 level as the final days of trading in October near. Despite the challenging fundamental environment, it may soon be the case that the technical picture offers a more promising outlook in the near-term for gold prices.
Gold Volatility and Gold Prices’ Normalizing 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 gold prices tracking volatility suggest the relationship is returning to more historical terms.
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 16.77 at the time this report was written. The relationship between gold prices and gold volatility is normalizing, insofar as the 5-day correlation is positive and the 20-day correlation may flip into positive territory for the first time since early-June. The 5-day correlation between GVZ and gold prices is +0.62 while the 20-day correlation is -0.03. One week ago, on October 21, the 5-day correlation was -0.34 and the 20-day correlation was -0.67.
Gold Price Rate Technical Analysis: Daily Chart (May 2020 to October 2021) (Chart 2)
Last week it was observed that “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…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.”
As trading is a function of both price and time, the ascending trendline from the May 2019, March 2020, and March 2020 now resides closer to 1810 as key resistance. In the event that gold prices are able to clear this hurdle, it could be a quick trip upwards to the swing highs established over the summer near 1835, which constitutes the neckline of an inverse head and shoulders pattern that’s potentially been forming since June.
For now, bullish momentum continues to gather pace, slowly but surely. Gold prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD is climbing through its signal line, while daily Slow Stochastics are hovering just below overbought territory. Should 1835 be achieved, then there would be a sound technical basis to suggest that gold prices have bottomed.
Gold Price Technical Analysis: Weekly Chart (October 2015 to October 2021) (Chart 3)
Gold prices’ technical structure on the weekly timeframe still doesn’t indicate a significant directional bias. The weekly 4-, 13-, and 26-EMA envelope’s slope has started to flatten out, suggesting a loss of bearish momentum. While weekly Slow Stochastics have turned higher through their median line, weekly MACD remains below its signal line. It remains the case that “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,” unless the 1835 level is broken.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (October 28, 2021) (CHART 4)
Gold: Retail trader data shows 75.60% of traders are net-long with the ratio of traders long to short at 3.10 to 1. The number of traders net-long is 5.63% lower than yesterday and 2.63% lower from last week, while the number of traders net-short is 8.55% higher than yesterday and 0.27% 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.
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
