Gold Price Outlook:
- Gold prices are holding below a confluence of technical resistance that may imperil the recovery.
- Intensifying Fed taper talk, which has reinvigorated the US Dollar (via the DXY Index), is doing no favors for bullion either.
- According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.
Shine Wears Off
Gold prices washed out last week when 24,000 futures contracts ($4 billion notional value) were sold on August 9. Falling below their March 2021 lows, a fresh yearly low was established only to be met by a feverous buying spree that negated the entire downward move. And yet, bulls still haven’t regained control. Gold prices have not yet recovered into their July range, and remain below what was multi-month symmetrical triangle support. Intensifying Fed taper talk, which has reinvigorated the US Dollar (via the DXY Index), is doing no favors for bullion either.
Gold Volatility and Gold Prices Realigning
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. Increasing gold volatility and strengthening correlations suggests gold bulls may have some hope yet.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (August 2020 to August 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 16.15. The relationship between gold prices and gold volatility is normalizing as gold prices rally while gold volatility gains. The 5-day correlation between GVZ and gold prices is +0.53 while the 20-day correlation is -0.81. One week ago, on August 12, the 5-day correlation was -0.93 and the 20-day correlation was -0.81.
Gold Price Rate Technical Analysis: Daily Chart (August 2020 to August 2021) (Chart 2)
Gold prices are holding near descending channel resistance measured against the August 2020 and January 2021 swing highs, have yet to return to their July range as well as back into the symmetrical triangle that governed price action since the start of 2021.
While momentum has taken a bullish turn following the sharp rebound from last week’s lows, it has waned in recent days; the daily EMA envelope remains in bearish sequential order. Daily MACD is drifting higher but remains below its signal line, while daily Slow Stochastics appear on the cusp of a turn lower after briefly rising above their median line.
Another drop below the ascending trendline from the May 2019, March 2020, and March 2021 lows would likely spell trouble for gold prices.
Gold Price Technical Analysis: Weekly Chart (October 2015 to August 2021) (Chart 3)
It was previously stated that “a loss of 1780 would put focus back towards the rising trendline from the May 2019, March 2020, and March 2021 lows.” Currently trading right near 1780, there is enough technical evidence to suggest that a deeper setback remains possible. Weekly MACD continues to trend lower below its signal line, while weekly Slow Stochastics remain below their median line. With gold prices below their weekly 4-, 13-, and 26-EMA envelope, it may be the case that gold rallies are sold with prices ultimately targeting a return back under 1700.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (August 18, 2021) (CHART 4)
Gold: Retail trader data shows 65.11% of traders are net-long with the ratio of traders long to short at 1.87 to 1. The number of traders net-long is 3.94% lower than yesterday and 14.78% lower from last week, while the number of traders net-short is 9.82% higher than yesterday and 13.08% 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 Currency Strategist