Gold Price Outlook:
- Gold prices haven’t done much of anything since mid-May, and have started June constrained in a range.
- Stability in the US Dollar and US Treasury yields – both real and nominal – turning higher represent headwinds for gold prices.
- According to the IG Client Sentiment Index, gold prices nevertheless hold a bullish bias in the near-term.
Nothing Gained, Nor Lost
Gold prices have eased back from their highs last week, returning to the area around 1850 – a familiar area where gold prices have levitated since mid-May. A rebound by the US Dollar, thanks to a rise in both real and nominal US Treasury yields, as well as elevated Fed rate hike odds, have short-circuited gold’s early-June attempt at sustaining a topside move.
It thus remains the case that “fundamentally speaking, nothing has changed materially…the main rationale for not having a longer-term bullish perspective – rising US real yields – remains valid. Any short-term rallies by gold prices retain a ‘sell the rally’ mindset, particularly as gold prices don’t have a bullish seasonality tendency in June.
Gold Volatility Drops, Gold Prices Can’t Rally
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. Gold volatility falling in recent weeks presents a challenge for gold prices’ ability to sustain a meaningful turn higher.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (June 2021 to June 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 16.15 at the time this report was written. The 5-day correlation between GVZ and gold prices is +0.37 while the 20-day correlation is -0.69. One week ago, on June 1, the 5-day correlation was -0.25 and the 20-day correlation was -0.31.
Gold Price Rate Technical Analysis: Daily Chart (June 2021 to June 2022) (Chart 2)
Last week it was noted that “a near-term swing higher towards dynamic support/resistance dating back to November 2021 near 1877 is possible.” Gold prices traded above 1874 last week before turning lower anew. Bullion continues to consolidate above the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48, but momentum is lacking. Daily MACD is climbing, but remains below its signal line, and daily Slow Stochastics are moving away from overbought territory. With gold prices intertwined among their daily 5-, 8-, 13-, and 21-EMA envelope, it remains the case that “there is not enough technical evidence to think that the worst is over for gold prices.”
Gold Price Technical Analysis: Weekly Chart (October 2015 to June 2022) (Chart 3)
Nothing has changed. “The weekly timeframe continues to suggest that a double top is forming for gold prices, with the two peaks carved out by the August 2020 and March 2022 highs. Ever since the bearish outside engulfing bar on the weekly timeframe in late-April, gold prices have not been able to sustain a meaningful bid.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (June 8, 2022) (Chart 4)
Gold: Retail trader data shows 79.50% of traders are net-long with the ratio of traders long to short at 3.88 to 1. The number of traders net-long is 1.62% lower than yesterday and 1.04% lower from last week, while the number of traders net-short is 13.16% higher than yesterday and 10.90% 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.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
