Gold Price Outlook:
- Gold prices are losing ground ahead of what should be the highest US inflation reading in decades.
- If the November US inflation report (CPI) sparks increased Fed hike odds, gold prices may not benefit as an ‘inflation hedge.’
- According to the IG Client Sentiment Index, gold prices still have a bearish bias in the near-term.
What Inflation Hedge?
Gold prices have been trading lower ahead of the November US inflation report (CPI), which is due to show the highest inflation pressures in the US in nearly 40 years. Due in at +6.8% y/y, this would match the fastest rate of inflation since March 1982. And yet, despite these expected readings, gold prices aren’t benefiting; in fact, gold prices have been declining over the course of the week, throwing into question the precious metal’s role as an ‘inflation hedge.’
The picture is a bit more complicated in the near-term. While US inflation rates are running higher, pushing up nominal bond yields, longer-term inflation expectations have actually been declining. Perhaps a symptom of expected Federal Reserve rate hikes in 2022 and beyond, the US 5y5y inflation swap forward is off of its weekly high by about 5-bps to 2.484%, and is down from its 2021 peak of 2.646% on October 26.
As US Treasury yields – nominal yields – continue to inch higher, the decline in market-measures of longer-term US inflation expectations is curating a churn higher in US real yields. Gold prices don’t like environments where real yields increase, which is what may explain bullion’s lack of upside ahead of the November US inflation report. In fact, if the November US inflation report sparks another increase in Fed rate hike odds, it may very well be the case that gold prices decline further from here.
Gold Volatility and Gold Prices’ Relationship Inversion Ending
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. With gold volatility having dropped in December and gold prices following, the relationship between the two has started to realign in a rather typical fashion.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (December 2020 to December 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 16.70 at the time this report was written.
The relationship between gold prices and gold volatility is losing its negative correlation, and now lower volatility has started to feed into weaker gold prices. The 5-day correlation between GVZ and gold prices is +0.05 while the 20-day correlation is -0.57. One week ago, on December 2, the 5-day correlation was -0.57 and the 20-day correlation was -0.56.
Gold Price Rate Technical Analysis: Daily Chart (May 2020 to December 2021) (Chart 2)
The near-term gold price outlook has not changed, although momentum is starting to take on a more bearish tone. “Gold prices have lost their bullish technical formation in recent weeks, and are currently clinging onto trendline support from the August and September swing lows, which if lost, could suggest a deeper setback henceforth.”
Gold prices are now below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD’s decline below its signal line is accelerating again, while daily Slow Stochastics are failing to emerge from oversold territory. While choppy, sideways trading remains the most likely outcome, we may be on the verge of the next swing to the downside.
Gold Price Technical Analysis: Weekly Chart (October 2015 to December 2021) (Chart 3)
Two days ago it was noted that “having broken above then back below the 1835 level in November, it appears a false breakout has occurred above the descending trendline from the August 2020 (all-time high) and June 2021 highs. Gold prices are below the weekly 4-, 13-, and 26-EMA envelope, which is realigning into bearish sequential order. Weekly MACD is on the cusp of falling below its signal line, while weekly Slow Stochastics are dropping through their median figure. Gold prices’ technical structure on the weekly timeframe is shifting to more directionally bearish, though like on the daily timeframe, is neutral at present time.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (December 9, 2021)
Gold: Retail trader data shows 83.08% of traders are net-long with the ratio of traders long to short at 4.91 to 1. The number of traders net-long is 0.75% higher than yesterday and 1.30% higher from last week, while the number of traders net-short is 3.46% lower than yesterday and 9.07% 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