Gold Price Outlook:
- A stronger US Dollar and negative monthly seasonal tendencies leaves gold prices on unstable footing.
- Until gold prices move above 1810, there is little reason to think that the technical picture is supportive.
- According to the IG Client Sentiment Index, gold prices still have a bullish bias in the near-term.
Tough Sailing Ahead
Gold prices have been trading sideways at the start of November, facing difficult conditions as risk appetite remains firm – US equity markets have moved to fresh all-time highs – and the US Dollar (via the DXY Index) has been bolstered by higher US Treasury yields. While Wednesday’s downturn was rebuffed by the rally on Thursday, it remains the case that the next few weeks may prove difficult as November has been the worst month of the year for gold prices during the QE era.
Negative seasonal tendencies aside, the fundamental backdrop continues to erode as the Federal Reserve has officially begun to taper its asset purchases while new fiscal stimulus from Washington appears limited in scope. The technical picture, which looked promising just last week, needs to shift more considerably before traders have a reason to embrace long gold positions.
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 (November 2020 to November 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 15.77 at the time this report was written.
The relationship between gold prices and gold volatility continues to shift towards its historical tendency, with the 20-day correlation strengthening to its strongest point since early-June. The 5-day correlation between GVZ and gold prices is -0.19 while the 20-day correlation is +0.45. One week ago, on October 28, the 5-day correlation was +0.62 and the 20-day correlation was -0.03.
Gold Price Rate Technical Analysis: Daily Chart (May 2020 to November 2021) (Chart 2)
Last week it was noted that “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.”
Unfortunately, gold prices haven’t been able to make significant technical progress and the dreadful seasonal backdrop suggests that November may not be the month to clear the aforementioned technical hurdles.
While gold prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, the moving averages are in neither bearish nor bullish sequential order. Daily MACD is falling while above signal line, and daily Slow Stochastics are hovering around their median line. Until 1835 is achieved, then there is no sound technical reason to believe that gold prices have bottomed.
Gold Price Technical Analysis: Weekly Chart (October 2015 to November 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 remains flat, suggesting neither bearish nor bullish momentum. Even as weekly Slow Stochastics trended above 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 (November 4, 2021) (CHART 4)
Gold: Retail trader data shows 70.82% of traders are net-long with the ratio of traders long to short at 2.43 to 1. The number of traders net-long is 13.81% lower than yesterday and 5.37% lower from last week, while the number of traders net-short is 18.39% higher than yesterday and 20.82% 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
