Gold Price Outlook:
- Gold prices are flirting with a drop below 1960, the zone (1959/1965) where the peaks of November 2020 and January 2021 were dug.
- Speculation that a ceasefire between Russia and Ukraine could emerge in the coming days is dampening demand for safe-haven assets; US Treasury yields rose sharply.
- According to IG Customer Opinion Indexgold prices exhibit a mixed short-term bias.
Gold prices proved exceptionally volatile throughout March, but evidence of a failed attempt to reach new all-time highs is beginning to mount. Incidentally, stating last week that “the base case is that a move to and through all-time highs is imminent,” we may have topped the market: Gold prices spiked minutes after the note was released.
Nonetheless, evidence is mounting for a double top in gold prices. The failed attempt to surmount all-time highs ended in a rapid fall, and with the general cooling of commodity prices – from energy to grains to base metals – measures of inflation in the market began to subside. Coupled with a rise in US Treasury yields, US real rates have moved off their lows, which has proven to be a significant headwind for further gains in gold prices here.
If gold prices are to make another attempt to reach and surpass their all-time highs, we will need to see another surge in oil prices and wheat prices to help revitalize inflation expectations. Otherwise, what looks like an ugly monthly candle for gold prices warns that the highs have been reached and more lows are ahead.
Gold Volatility Slumps and Lowers Gold Prices
Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks don’t like the increased volatility – signaling greater uncertainty around cash flow, dividends, coupon payments, etc. – gold tenders benefit during periods of higher volatility. The drop in gold volatility over the past week has undermined gold prices’ attempt to set new all-time highs, and further decline jeopardizes any further upside attempts.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (Mar 2021 to Mar 2022) (Chart 1)
Gold volatility (as measured by the Cboe’s Gold Volatility ETF, GVZ, which tracks 1-month implied gold volatility as derived from the options chain GLD) was trading at 24.12 at the time of writing, back to levels last seen on March 4. The 5-day correlation between the GVZ and the price of gold is +0.91 while the 20-day correlation is +0.93. A week ago, on March 7, the 5-day correlation was +0.98 and the 20-day correlation was +0.89.
Gold Price Rate Technical Analysis: Daily Chart (June 2020 to March 2022) (Chart 2)
Last week it was noted that “barring a ceasefire or a reversal of sanctions – neither of which seems likely – gold prices are on course to break above their all time high. historical set in August 2020 at 2075.28. Once cleared, we are in uncharted territory; use the daily 5-EMA as a potential guide as support may be cautious. Efforts for a ceasefire have advanced, which implicitly means that some sanctions against Russia could be lifted; gold prices fell below their daily 5-EMA.
Momentum is starting to turn bearish. Gold prices are below their daily EMAs of 5 and 8, but still above their daily EMAs of 13 and 21; the daily envelope of the EMA is neither in a bearish nor bullish sequential order. The daily MACD is poised to issue a sell signal (albeit above its signal line), while the daily Slow Stochastics have broken out of overbought territory and are approaching their midline.
Gold Price Technical Analysis: Weekly Chart (October 2015 to March 2022) (Chart 3)
The weekly timeframe is when the double top in gold prices becomes clear, with the March top and August 2020 top providing significant resistance. Falling below the November 2020 and January 2021 highs around 1959/1965 hints that a false upside breakout has occurred, and a dip towards 1900 may soon be around the corner.
CUSTOMER SENTIMENT INDEX IG: GOLD PRICE FORECAST (March 14, 2022) (Chart 4)
Gold: Retail trader data shows that 70.75% of traders are net long with a ratio of long to short traders of 2.42 to 1. The number of net long traders is 3.52% higher than that of yesterday and 5.67% higher than last week, while the number of net-short traders is 10.50% higher than yesterday and 0.38% lower than last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that gold prices may continue to decline.
Positioning is less net-long than yesterday but net-long since last week. The combination of current sentiment and recent shifts gives us another mixed bias for gold trading.
— Written by Christopher Vecchio, CFA, Senior Strategist