Gold Price Forecast Overview:
- Gold prices have been coiling below their 2020 high set earlier this month, and price action suggests that more gains may be ahead.
- As gold volatility churns higher, gold prices remain well-supported as heightened uncertainty in financial markets tends to benefit the safe haven precious metal.
- According to the IG Client Sentiment Index, traders have reduced their net-long gold positioning.
Recommended by Christopher Vecchio, CFA
Trading Forex News: The Strategy
Gold Prices Continue to Edge Higher
Gold prices are slowly but surely edging higher back towards their April and 2020 high, largely thanks to deflated optimism over the global economy’s ability to rebound quickly (see: V-shaped recovery) after the coronavirus pandemic. American pharmaceutical company Gilead’s failed drug trial of Remsedivir pulled the rug out from underneath risk appetite yesterday, taking away the market’s best hope for an effective antiviral treatment in the short-term.
And so, the slog continues. It’s increasingly apparent that no V-shaped recovery will materialize, and that fiscal and monetary authorities across the world will continue to need to provide significant stimulus in order to keep the basic economy afloat. Accordingly, it’s still the case that an environment defined by aggressive stimulus depressing government bond yields, regardless of the inflation outlook, tends to be a supportive fundamental bedrock for precious metals, particularly gold prices.
Gold Volatility Supporting Gold Price Rally
Gold prices have a relationship with volatility unlike other asset classes, even including precious metals like silver which have economic uses. 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. Heightened uncertainty in financial markets due to increasing macroeconomic tensions increases the safe haven appeal of gold.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2008 to April 2020) (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) is trading at 30.25, having continued its rebound from its coronavirus pandemic low set on March 16 at 23.96.
As was the case earlier this week, the correlations between gold prices and gold volatility have continued to strengthen. The 5-day correlation between GVZ and gold prices is 0.55 while the 20-day correlation is -0.44; one week ago, on April 17, the 5-day correlation was 0.77 and the 20-day correlation was -0.59; and one month ago, on March 26, the 5-day correlation was 0.35 and the 20-day correlation was -0.64. Slowly but surely, the 20-day correlation between gold prices and gold volatility is normalizing.
The observation made throughout April holds: “as has been the case many times over the past year, when gold volatility falls but gold prices do not follow, leading to a situation of negative correlations in the short-term, it has typically indicated a digestion period for the market prior to further gains.”
Gold Price Technical Analysis: Daily Chart (April 2019 to April 2020) (Chart 2)
In the last gold price technical forecast, it was noted that “after dipping back over the past week following the achievement of two key Fibonacci targets, gold prices pulled back to the daily 21-EMA, finding support ahead of the moving average before turning higher…The pullback may now allow gold prices to advance beyond both of these key Fibonacci levels after the brief period of digestion.”
[The two Fibonacci levels referenced are (1) the 100% extension taken from the May 2019 low, September 2019 high, and November 2019 low, with a calculated target at 1736.39, and (2) the 76.4% retracement of the 2011 high to 2015 low range at 1714.66.]
In effect, a short-term sideways range has been carved out between the April 14/2020 high at 1747.72 and the April 21 swing low (which found support at the aforementioned daily 21-EMA) at 1661.42. To this end, given the gold prices rallied into this consolidation, the market retains an upside bias. If gold prices do break higher from here, the near-term measured move calls for gains towards 1834.02.
Momentum continues to build in a bullish manner, with gold prices extending above their daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD is rising in bullish territory, while Slow Stochastics have moved in overbought territory. In the last gold price technical forecast it was concluded that “a breach of the yearly highs may be in the cards.” The technical case for such an outcome appears to be strengthening.
Gold Price Technical Analysis: Weekly Chart – Inverse Head and Shoulders Pattern (May 2011 to April 2020) (Chart 3)
Gold prices have made significant progress within the confines of the multi-year inverse head & shoulders pattern, achieving their highest level since November 2012 earlier this week. It thus still holds that the rally into and through the 76.4% retracement (1714.66) must be viewed in context of the longer-term technical picture: the gold price inverse head and shoulders pattern that originated earlier this year is still valid and guiding gold price action.
Depending upon the placement of the neckline, the final upside targets in a potential long-term gold price rally, if drawing the neckline breakout against the August 2013 high at 1433.61, calls for a final target at 1820.99. This dovetails neatly with the measured move on the daily timeframe looking for gold prices to rally into 1834.02.
IG Client Sentiment Index: Gold Price Forecast (April 24, 2020) (Chart 4)
Gold: Retail trader data shows 69.17% of traders are net-long with the ratio of traders long to short at 2.24 to 1. The number of traders net-long is 0.52% lower than yesterday and 22.96% higher from last week, while the number of traders net-short is 13.61% higher than yesterday and 3.20% 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.
Recommended by Christopher Vecchio, CFA
Traits of Successful Traders
— Written by Christopher Vecchio, CFA, Senior Currency Strategist