Gold Price Outlook:
- Gold prices are flirting with a drop below 1960, the area (1959/1965) where the November 2020 and January 2021 highs were carved out.
- Speculation that a ceasefire between Russia and Ukraine may emerge in the coming days is cooling off demand for safe haven assets; US Treasury yields have risen sharply.
- According to the IG Client Sentiment Index, gold prices hold a mixed bias in the near-term.
Top-Ticked
Gold prices have proved exceptionally volatile throughout March, but evidence of a failed attempt to new all-time highs is beginning to accumulate. Incidentally, in declaring last week that “the base case scenario is that a move to and through all-time highs is around the corner,” we may have top-ticked the market: gold prices peaked minutes after the note was published.
Nevertheless, evidence is accumulating for a double top in gold prices. The failed move to overcome all-time highs has been met with a swift drop lower, and with commodity prices cooling off in general – from energy to grains to base metals – market measures of inflation have started to ease. Coupled with a rise in US Treasury yields, US real rates have moved off their lows, proving to be a material headwind for further gains by gold prices here.
If gold prices are to make another attempt to climb to and through their all-time highs, we’re going to need to see another spike in oil prices and in wheat prices to help revitalize inflation expectations. Otherwise, what’s shaping up to be an ugly monthly candle for gold prices warns that the highs are in, and more downside is ahead.
Gold Volatility Sags, Drags Down Gold Prices
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 plunge in gold volatility in the past week has undercut gold prices’ attempt to set new all-time highs, and a further drop imperils any forthcoming upside attempts.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (March 2021 to March 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 24.12 at the time this report was written, back to levels last seen on March 4. The 5-day correlation between GVZ and gold prices is +0.91 while the 20-day correlation is +0.93. One week ago, on March 7, the 5-day correlation was +0.98 and the 20-day correlation was +0.89.
Gold Price Rate Technical Analysis: Daily Chart (June 2020 to March 2022) (Chart 2)
Last week it was noted that “barring a ceasefire or reversal of sanctions – neither of which seem likely – gold prices are poised to overcome their all-time high set in August 2020 at 2075.28. Once cleared, we’re in unchartered territory; using the daily 5-EMA as a potential guide as support may be prudent.” Efforts towards a ceasefire have advanced, which implicitly means that some sanctions against Russia could be lifted; gold prices have dropped below their daily 5-EMA.
Momentum is starting to turn bearish. Gold prices are below their daily 5- and 8-EMAs, but still above their daily 13- and 21-EMAs; the daily EMA envelope is in neither bearish nor bullish sequential order. Daily MACD is on the cusp of issuing a sell signal (albeit above its signal line), while daily Slow Stochastics have dropped out of overbought territory and are approaching their median line.
Gold Price Technical Analysis: Weekly Chart (October 2015 to March 2022) (Chart 3)
The weekly timeframe is where the double top in gold prices becomes clear, with the apex this March and the August 2020 high constituting significant resistance. Falling below the highs from November 2020 and January 2021 around 1959/1965 hint that a false bullish break higher has transpired, and a drop back towards 1900 may be around the corner soon.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (March 14, 2022) (Chart 4)
Gold: Retail trader data shows 70.75% of traders are net-long with the ratio of traders long to short at 2.42 to 1. The number of traders net-long is 3.52% higher than yesterday and 5.67% higher from last week, while the number of traders net-short is 10.50% higher than yesterday and 0.38% 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
