Gold Price Outlook:
- Gold prices remain elevated as volatility across a variety of asset classes sustains its push higher.
- Technically, gold prices have more upside into 1860/1870 in the near-term. However, the Fed meeting tomorrow could upend the technical outlook swiftly.
- According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.
Fed Meeting Tomorrow
Gold prices briefly touched a fresh monthly and yearly high earlier today as risk appetite continues to flounder. News flow out of Eastern Europe remains concerning at best, with demand for safe havens stoked amid the prospect of a Russian invasion of Ukraine. The Japanese Yen, Swiss Franc, and US Dollar remain among the top performers in FX, an occurrence that typically gives room for stronger gold prices, too.
And with the Federal Reserve rate decision due tomorrow, measures of volatility have remained elevated. There is a bit of a catch-22 for gold prices around the FOMC, however. While a more dovish Fed should theoretically undercut the US Dollar, relaxed volatility measures would ultimately weigh on gold prices. An overly aggressive FOMC, on the other hand, could keep volatility elevated, but rising US Treasury yields (and more importantly, US real yields) could cap any significant upside.
Gold Volatility and Gold Prices’ Relationship More Normal
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 volatility across several asset classes remaining elevated, gold prices have been able to reach for new highs.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (January 2021 to January 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 16.59 at the time this report was written. The relationship between gold prices and gold volatility has continued to normalize in recent days. The 5-day correlation between GVZ and gold prices is +0.58 while the 20-day correlation is +0.30. One week ago, on January 18, the 5-day correlation was +0.58 and the 20-day correlation was -0.29.
Gold Price Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 2)
Truth be told, gold prices have not made much of a significant move one way or the other since we checked in last week. At the time, it was noted, and remains valid, that “with the 1835 hurdle cleared, traders may want to look higher before exploring new selling opportunities. The next cluster of resistance lies around 1860/1870, where the ascending trendline from the May 2019, March 2020, and March 2021 lows comes into play.” New monthly and yearly highs confirm the near-term prospects remain bullish, from a technical perspective.
Gold Price Technical Analysis: Weekly Chart (October 2015 to January 2022) (Chart 3)
Nothing changes on a longer-term perspective: “It’s worth reminding that January is the best month of the year for gold prices according to seasonality studies, so there is a quantitative tailwind helping provide support in the near-term. It also remains the case that the weekly 4-, 8-, and 13-EMA envelope is taking on a positive slope. Alongside weekly MACD turning higher through its signal line, and weekly Slow Stochastics advancing above their median line, bullish momentum has increased in recent weeks, opening the possibility for more gains henceforth before fundamental headwinds curtail the rally.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (January 25, 2022) (Chart 4)
Gold: Retail trader data shows 69.96% of traders are net-long with the ratio of traders long to short at 2.33 to 1. The number of traders net-long is 1.07% lower than yesterday and 0.61% lower from last week, while the number of traders net-short is 0.81% higher than yesterday and 0.37% 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Gold price trend may soon reverse higher despite the fact traders remain net-long.
— Written by Christopher Vecchio, CFA, Senior Strategist