Gold Price Outlook:
- Gold prices are making strides as US real yields fall back.
- However, unless gold prices break the downtrend from the March and August swing highs, it’s too soon to call a short-term bottom.
- Gold prices have a bullish bias in the near-term, according to the IG Client Sentiment Index.
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Trading Off of Triple Bottom
The surprise drop in US inflation rates in October has helped propel gold prices to their highest level since mid-August. US real yields have fallen back meaningfully, own to 1.486% today, some -34-bps off of their November high. Coupled with a materially weaker US Dollar, the fundamental turnaround has helped buffer the technical reversal in gold prices during November, which has gained increased legitimacy.
Gold Volatility, Gold Prices Correlation Deeply Negative
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 has continued to drop, and amid the weaker US Dollar, this has translated into a surprisingly strong environment for gold prices.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2021 to November 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 17.37 at the time this report was written. The 5-day correlation between GVZ and gold prices is -0.99 while the 20-day correlation is -0.53. One week ago, on November 7, the 5-day correlation was +0.01 and the 20-day correlation was +0.34.
Gold Price Rate Technical Analysis: Daily Chart (November 2021 to November 2022) (Chart 2)
Last week it was noted that “a triple bottom may be formed against 1614/17, reinforced by multiple morning star candlestick patterns since the end of September…a move above the area around 1680…would see gold prices trade back above former multi-month support (turned resistance) and break the downtrend in place from the March and October highs.” Gold prices have traded above 1680 and the area around the October highs near 1730, reinforcing the belief that a short-term bottom has been found. With momentum having turned more bullish on a short-term basis, the rally may still have legs into the August high at 1807.96.
Gold Price Technical Analysis: Weekly Chart (October 2015 to November 2022) (Chart 3)
In last week’s update, it was concluded that “should gold prices break the downtrend from the March and October highs, hurdling 1680 – as well as the 38.2% Fibonacci retracement of the 2015 low/2020 high range at 1682.27 – would warrant a more bullish outlook moving forward.” Having achieved that, gold prices may be working their way out of a bullish falling wedge of sorts which sets the table for a more bullish outlook for the foreseeable future. Clearing 1807.96 would put into focus the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48.
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IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (November 14, 2022) (Chart 4)
Gold: Retail trader data shows 71.32% of traders are net-long with the ratio of traders long to short at 2.49 to 1. The number of traders net-long is 1.19% higher than yesterday and 14.04% lower from last week, while the number of traders net-short is 12.92% higher than yesterday and 3.86% 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.
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.
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— Written by Christopher Vecchio, CFA, Senior Strategist