Gold Price Outlook:
- Gold prices are treating former resistance – the descending trendline from the March and April swing highs – as support
- While recent data has suggested a less hawkish Federal Reserve, the upcoming July FOMC meeting minutes may give pause to said line of thinking.
- According to the IG Client Sentiment Index, gold prices have a mixed bias in the near-term.
First Technical Test
While the July US inflation report helped catalyze gold prices’ move above 1800 last week, the start of this week is proving problematic for bullion. The upcoming July FOMC meeting minutes on Wednesday should underscore policymakers’ belief that tighter monetary policy is necessary, even if recent US economic data has sparked speculation that the Fed will be less aggressive moving forward.
Positioning ahead of the July FOMC meeting minutes’ release is pushing up Fed rate hike odds and US Treasury yields, leading to a rebound in US real yields, a veritable negative development for gold prices. There is a slight shift in the paradigm around US economic data, though: good news is bad news again, insofar as anything that suggests that US economy is resilient will implicitly increase speculation of a more hawkish Fed, which gold prices haven’t liked in recent weeks.
Gold Volatility Steady Near June Lows
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 prices remain relatively depressed, but the implication for gold prices has been anything but clear.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (August 2021 to August 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 15.46 at the time this report was written. The 5-day correlation between GVZ and gold prices is +0.28 while the 20-day correlation is -0.87. One week ago, on August 8, the 5-day correlation was +0.06 and the 20-day correlation was -0.85.
Gold Price Rate Technical Analysis: Daily Chart (August 2021 to August 2022) (Chart 2)
Gold prices have reversed sharply, trading back into their EMA envelope and falling back to former resistance now support, the descending trendline from the March and April swing highs. For now, the momentum profile remains bullish. Gold prices are below their daily 5- and 8-EMAs but still above their daily13-, and 21-EMAs, while the EMA envelope remains in bullish sequential order. Daily MACD is still rising through its signal line, while daily Slow Stochastics are holding in overbought territory. A drop below the daily 21-EMA would constitute a failed bullish breakout, putting focus on the August low at 1754.35.
Gold Price Technical Analysis: Weekly Chart (October 2015 to August 2022) (Chart 3)
The longer-term view is 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 (August 15, 2022) (Chart 4)
Gold: Retail trader data shows 79.04% of traders are net-long with the ratio of traders long to short at 3.77 to 1. The number of traders net-long is 7.98% higher than yesterday and 5.35% lower from last week, while the number of traders net-short is 13.60% lower than yesterday and 3.23% 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 more net-long than yesterday but less 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