Gold Price Outlook:
We’ll All Float On, Alright
It’s been previously discussed that October tends to be a bullish month for gold prices, typically as risk appetite wanes in other parts of financial markets. But this October, there’s much ado about nothing – so far. Gold prices traded up near 1760 on October 1, and since then, have spent every day trading right around 1760.
Now that the US debt ceiling debate has been kicked down the road to December, and fears around China’s property market are simmering – some days bring worse news than others, but nothing too significant yet – there aren’t many viable catalysts for a significant gold price rally on the horizon. And with the fact remaining that the FOMC continues to offer clear signals that tapering is arriving soon, gold prices still have considerable fundamental headwinds working against them.
Gold Volatility and Gold Prices’ Relationship Starting to Normalize
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. Recent signs of falling gold volatility aren’t a good omen for gold prices.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2020 to October 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 16.52. The relationship between gold prices and gold volatility is normalizing, insofar as the 5-day correlation is becoming less positive this week while the 20-day correlation remains in negative territory. The 5-day correlation between GVZ and gold prices is +0.42 while the 20-day correlation is -0.46. One week ago, on October 5, the 5-day correlation was -0.70 and the 20-day correlation was -0.84.
Gold Price Rate Technical Analysis: Daily Chart (July 2020 to October 2021) (Chart 2)
Is the downtrend over? It’s too soon to say. Gold prices did carve out a series of ‘lower lows’ throughout September, and the flat trading through the bulk of October has not seen that trend break yet. Moreover, with gold prices pinned near 1760, it appears that a confluence of technical resistance (the 50% Fibonacci retracement of the 2020 low/2021 high range at 1763.36 and the daily 21-EMA) is holding firm with shooting star candlesticks (indicating selling pressure) emerging in two of the past three days. Daily MACD remains below its signal line, and daily Slow Stochastics are moving sideways. It remains the case that “a drop below 1700 in the next few weeks…is very much on the table.”
Gold Price Technical Analysis: Weekly Chart (October 2015 to October 2021) (Chart 3)
Gold prices’ technical structure on the weekly timeframe remains weak in spite of the recent rebound on lower timeframes. The weekly 4-, 13-, and 26-EMA envelope’s negative slope remains in place, while weekly MACD continues to drop further below its signal line. Weekly Slow Stochastics are holding at the median line, however. For now, the outlook persists that “selling the rally may be the modus operandi henceforth.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (October 12, 2021) (CHART 4)
Gold: Retail trader data shows 75.77% of traders are net-long with the ratio of traders long to short at 3.13 to 1. The number of traders net-long is 3.14% lower than yesterday and 5.25% lower from last week, while the number of traders net-short is 2.77% higher than yesterday and 18.68% 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