Gold Price Outlook:
- With Fed Chair Jerome Powell retiring the phrase ‘transitory’ to describe inflationary pressures, we’ve seen elevated short-end US Treasury yields spillover into equally elevated Fed rate hike odds.
- If gold prices had been benefiting in recent months from the drop in US real yields to all-time lows, then bullion just had its most potent catalyst torn asunder.
- According to the IG Client Sentiment Index, gold prices still have a mixed bias in the near-term.
No Discernible Direction
Trading conditions have proved difficult for gold prices recently. With Fed Chair Jerome Powell retiring the phrase ‘transitory’ to describe inflationary pressures, we’ve seen elevated short-end US Treasury yields spillover into equally elevated Fed rate hike odds. A fall in US breakeven rates – forward-looking market expectations of price pressures – has helped trigger a rise in US real yields over the past two weeks.
If gold prices had been benefiting in recent months from the drop in US real yields to all-time lows, then the reversal has created a difficult trading enviroment. True, US inflation rates are expected to stay elevated over the coming months, which may cushion gold prices from a significant fall, as does the seasonality profile for gold prices, which shows December and January and the best two months of the year for gold prices in the post-Global Financial Crisis era.
It remains the case that the Fed’s renewed focus on combating inflation vis-à-vis a faster tapering schedule and potential hiking rates sooner than anticipated may duly prevent a significant rally by gold prices henceforth.
Gold Volatility and Gold Prices’ Relationship Inverts
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. In December thus far, the drop in gold volatility has not been met by a plunge in gold prices, a scant indication of bullion’s resiliency as inflation metrics remain historically elevated.
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 17.08 at the time this report was written.
The relationship between gold prices and gold volatility has inverted, whereby lower volatility has not fed into weaker gold prices. The 5-day correlation between GVZ and gold prices is -0.53 while the 20-day correlation is -0.70. One week ago, on November 30, the 5-day correlation was -0.37 and the 20-day correlation was -0.24.
Gold Price Rate Technical Analysis: Daily Chart (May 2020 to December 2021) (Chart 2)
Gold prices 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. For now, having held up at the 50% Fibonacci retracement of the 2020 low/2021 high range, gold prices are in a decidedly neutral state of affairs. Gold prices are above their daily 5-EMA, but remain below their daily 8-, 13-, and 21-EMAs. Daily MACD’s decline below its signal line is abating, while daily Slow Stochastics are beginning to emerge from oversold territory. More choppy, sideways trading appears ahead for bullion.
Gold Price Technical Analysis: Weekly Chart (October 2015 to December 2021) (Chart 3)
It’s been previously noted that “the 1835 level may soon be broken warranting a shift in the longer-term outlook from neutral to bullish.” However, 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 7, 2021)
Gold: Retail trader data shows 79.86% of traders are net-long with the ratio of traders long to short at 3.96 to 1. The number of traders net-long is 0.39% higher than yesterday and 3.69% lower from last week, while the number of traders net-short is 5.48% lower than yesterday and 13.32% higher 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