Gold Price Outlook:
- Gold prices are struggling to sustain a bid higher as rising US real yields have jumped back to yearly highs.
- The resurgent US Dollar (via the DXY Index) is doing no favors for gold prices either.
- According to the IG Client Sentiment Index, gold prices still have a bearish bias in the near-term.
Real Yields Keep Pressure On
Gold prices have been contending with two meaningful headwinds over the past two weeks: a resurgent US Dollar (via the DXY Index), thanks to sustained pressure on the British Pound, Euro, and Japanese Yen; and rising US real yields. For the latter, the US 10-year real yield is back to +81-bps, its highest level since achieving the yearly high on July 14 at +86-bps.
These fundamental pressures have translated into technical stress, with the charts indicating that a return to the 2022 lows remains a distinct possibility in the near-term – particularly as the September seasonality tendency for gold prices is bearish.
Gold Volatility Continues Rebound as Gold Prices Drop
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 continues to rise, and in the context of higher yields and a stronger US Dollar, it remains a headwind for gold prices in the near-term.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (September 2021 to September 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 17.69 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.97 while the 20-day correlation is -0.66. One week ago, on August 30, the 5-day correlation was -0.67 and the 20-day correlation was +0.08.
Gold Price Rate Technical Analysis: Daily Chart (August 2021 to September 2022) (Chart 2)
Over the prior two updates, it has been observed that “resolution around the multi-month descending trendline, sparked by Fed Chair Powell’s Jackson Hole speech, will help clarify the near-term trading bias: either back towards the August high at 1807.96; or back to the yearly low at 1680.94…it appears that the bias is to the downside towards the yearly lows as gold prices have rapidly sunk below the descending trendline from the March and April swing highs.”
Consistent with this view, gold prices have failed to sustain a bid as momentum remains bearish. Gold prices are still below their daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD is trending lower below its signal line, and daily Slow Stochastics are holding in oversold territory. A return to the yearly low can’t be ruled out in the near-term; a breach would likely require US real yields to set fresh yearly highs, however.
Gold Price Technical Analysis: Weekly Chart (October 2015 to September 2022) (Chart 3)
The longer-term view remains unchanged: “a double top remains in place, but a quadruple bottom around 1680 warrants a reconsideration: a massive sideways range between 1680 and 2075 may have formed. A bounce from 1680 sees 1800 as the first area before resistance is found. The sudden shift in the environment suggests that the daily timeframe (and lower, like the 4-hour timeframe) will be better suited to pay attention to over the coming days/weeks as it will take a long time for technical indicators to evolve on the weekly timeframe.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (September 6, 2022) (Chart 4)
Gold: Retail trader data shows 84.76% of traders are net-long with the ratio of traders long to short at 5.56 to 1. The number of traders net-long is 1.32% higher than yesterday and 11.38% higher from last week, while the number of traders net-short is 5.14% lower than yesterday and 17.25% 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist