Gold Price Outlook:
- Gold prices traded to a 15-month high before retreating back to levels last seen in January 2021.
- More upside is possible as the Russia-Ukraine crisis unfolds, but significant resistance has already been reached and rejected.
- According to the IG Client Sentiment Index, gold prices retain a bearish bias in the near-term.
Geopolitical Hedge
Ten days ago, when Russia was accumulating troops along Ukraine’s eastern front, it was noted that “the seemingly increased likelihood that Russia will invade Ukraine…has sparked significant volatility across asset classes. Gold prices may still have some upside potential in the near-term as tensions intensify, before ultimately succumbing to longer-term fundamentals that undercut faith in a sustainable rally.”
Indeed, intensification of tensions allowed gold prices to achieve upside price targets, having briefly traded to their highest level in 15-months. While Russia’s invasion of Ukraine is ongoing, markets are behaving as if the conflict won’t spread beyond Ukraine’s borders and thus won’t draw in NATO, keeping the crisis contained, relatively speaking. Further upside is still possible, but it stands to reason that gold prices have already carved out their apex.
Gold Volatility and Gold Prices’ Relationship Normalizes Rapidly
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. The breakout of war in Eastern Europe has sparked gold volatility, translating into higher gold prices.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (February 2021 to February 2022) (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 18.99 at the time this report was written, just off the highest level since March 2020. The 5-day correlation between GVZ and gold prices is -0.03 while the 20-day correlation is +0.74. One week ago, on February 17, the 5-day correlation was +0.89 and the 20-day correlation was +0.62.
Gold Price Rate Technical Analysis: Daily Chart (October 2020 to February 2022) (Chart 2)
Last week it was noted that “in the event that tensions between Russia and Ukraine spill into outright war, gold prices may be able to quickly reach the June 2021 high set at 1916.62.” Trading at 1924.92 at the time this report was written, gold prices have achieved their first upside target following their bullish breakout earlier this month. Another push higher is still possible in the near-term, with gold prices above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to trend higher while above its signal line, and daily Slow Stochastics are holding in overbought territory.
It’s worth noting that the daily candle appears to be shaping up as a shooting star with a long upper wick, suggesting that a new range between 1916.62 and 1974.49 may emerge. A drop below 1916.62 would likely only transpire once Russian troops vacate Ukrainian territory.
Gold Price Technical Analysis: Weekly Chart (October 2015 to February 2022) (Chart 3)
Earlier this month, we observed that “more gains may be on the immediate horizon; a break above 1916.62 would target a cluster of highs set at the end of 2020 and in early-2021 between 1959.41 and 1965.57.” Gold prices overshot the cluster of highs, setting a fresh yearly high at 1974.49.
The longer-term technical outlook has taken on a more bullish tone, suggesting that another push higher towards 1974.49 can’t be ruled out in the near-term. Gold prices are above their weekly 4-, 13-, and 26-EMA envelope, which is in bullish sequential order. Weekly MACD is trending higher while above its signal line, and weekly Slow Stochastics have advanced into overbought territory. Given the long upper wick on the weekly timeframe, it stands to reason that resistance held (despite the overshoot).
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (February 24, 2022) (Chart 4)
Gold: Retail trader data shows 68.46% of traders are net-long with the ratio of traders long to short at 2.17 to 1. The number of traders net-long is 5.35% lower than yesterday and 0.69% lower from last week, while the number of traders net-short is 21.94% lower than yesterday and 19.28% 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
