Gold Price Outlook:
- Gold prices have edged higher the past few days, but a meaningful technical breakout has yet to transpire.
- Fed Chair Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium should help spur volatility on Friday
- According to the IG Client Sentiment Index, gold prices have a mixed bias in the near-term.
Quiet Before the Storm?
Gold prices started the week on soft footing but have since recovered around +1.7% from their lows ahead of the Federal Reserve’s Jackson Hole Economic Policy Symposium, and most important, Fed Chair Jerome Powell’s speech on Friday. Price action across asset classes – a rebound in US equity markets and a marginally weaker US Dollar – suggest that traders are positioning for the remarks to be less hawkish than initially feared.
That said, the upward advance by gold prices merely brings bullion back to where they were trading a week ago, familiar territory near the descending trendline from the March and April swing highs, which have been a magnet for price action throughout August. No meaningful technical breakout or breakdown has been achieved, putting Fed Chair Powell’s speech in focus as a potentially potent catalyst for gold prices in the last few days of the month.
Gold Volatility Drops, Gold Prices Rebounds
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 volatility continues to fall, but in context of the weaker US Dollar, its not necessarily proving a headwind for gold prices in the near-term.
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 16.62 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.98 while the 20-day correlation is +0.12. One week ago, on August 18, the 5-day correlation was -0.64 and the 20-day correlation was -0.65.
Gold Price Rate Technical Analysis: Daily Chart (August 2021 to August 2022) (Chart 2)
Earlier this week it was observed that “a return to the yearly lows set around 1680 is not of the question, even though a significant bearish breakout appears unlikely in the near-term.” The latter proved to be true, with gold prices avoiding a sharper turn lower, instead returning to the descending trendline from the March and April swing highs.
Momentum is improving but remains weak, however, with gold prices above their daily 5-EMA but below their daily 8-, 13-, and 21-EMAs. The EMA envelope remains in bearish sequential order. Daily MACD is still trending lower below its signal line, although daily Slow Stochastics have exited oversold territory. Resolution around the multi-month descending trendline, sparked by Fed Chair Powell’s Jackson Hole speech, will help clarify the near-term trading bias: either back towards the August high at 1807.96; or back to the yearly low at 1680.94.
Gold Price Technical Analysis: Weekly Chart (October 2015 to August 2022) (Chart 3)
The longer-term view remains 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 25, 2022) (Chart 4)
Gold: Retail trader data shows 81.43% of traders are net-long with the ratio of traders long to short at 4.38 to 1. The number of traders net-long is 4.14% lower than yesterday and 4.05% higher from last week, while the number of traders net-short is 1.02% lower than yesterday and 24.33% 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 less net-long than yesterday but more 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