Gold Price Forecast: Flag Forms Like Double Bottom Failure
Gold Price Outlook:
- Since the end of resistance to consolidation in mid-April, gold prices have been slowly moving sideways.But gold prices may simply drop – in a bullish flag, that is – after establishing their double bottom, which means more upside may still be to come.
- Seasonality, which was extremely bullish for gold in April, has taken a dramatic turn: May was one of the worst, if not the worst months of the year for gold prices.
- According to IG Client Sentiment Index, gold prices have a short-term bullish bias.
Gold price waiting to shine?
Gold prices had a good April in part due to a bullishsimple background. Gold prices were able to establish a double floor during the month after erasing consolidation resistance in mid-April. Unfortunately, the price action was lacking, with the appearance of tedious sideways moves.
But this gold price action may just be a bullish flag after the breakout of the double bottom, suggesting that more upside potential remains. And in an environment defined by the type of movements US Treasury yields that don’t help the US dollargold may also have a fundamental appeal thanks to falling real US yields.
Sadly, at the start of the month, seasonal trends are often on the mind as they offer a much needed historical perspective versus the short-term perspective. And for the price of gold, the news couldn’t be worse: May was one of the worst, if not the worst, month of the year for gold prices.
Quantitative studies are clearly bearish on gold prices, and if fundamentals and technique tilt higher, it may prove that these forces are acting as counterweights and keeping gold prices trapped in their recent flag for a long time. a little bit longer. Since the quantitative outlook is fixed (e.g. historical data will not change), it would appear that gold prices will need a strong improvement from their fundamental backdrop if the the bullish technical structure is to realize its potential.
Gold price, gold volatility turns to the key
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 regarding cash flow, dividends, coupon payments, etc. – gold tenders to take advantage during periods of higher volatility.
GVZ technical analysis (gold volatility): daily price chart (May 2020 to May 2021) (Chart 1)
Gold volatility (as measured by the Cboe Gold Volatility ETF, GVZ, which tracks the one-month implied volatility of gold derived from the GLD options chain) is trading at 15 , 65, after resisting a fall to the closing low of the past year. set for mid-April at 2:26 pm Gold prices and gold volatility have seen their relationship continue to strengthen in recent days, and a further rebound in gold volatility could occur. prove to be beneficial for gold prices (or, if gold volatility decreases, gold prices seem likely to follow). The 5-day correlation between GVZ and gold prices is +0.96 while the 20-day correlation is +0.20. A week ago, on April 20, the 5-day correlation was +0.70 and the 20-day correlation was -0.29.
Technical analysis of the gold price rate: daily chart (March 2020 to May 2021) (Chart 2)
In previous forecasts of the price of gold, it was noted that ‘in recent weeks it has been suggested that’gold prices may have established a double bottom in the short term ”. So far, this outlook remains valid, as gold prices have not returned below the confluence of the old resistance turned support: the 50% Fibonacci retracement of the low / high range. 2020 at 1763.36; the low of November 2020; and resistance to lateral consolidation from March to mid-April 2021. ”
By staying above the ‘confluence of old resistance turned support’, gold prices created short-term sideways consolidation, which, in the context of the potential double bottom, could be seen as a flag. bullish.
If the double bottom prospect holds, then it also remains that “a mere doubling of recent consolidation (1759.95-1677.36) above resistance suggests gold prices may be heading towards 1842 , 54 in the short term – which would bring back another set of Fibonacci retracements that were found to be substantial in early 2021. ”
As such, the prospect remains that “fwing below the trifecta of key technical levels c. 1763.36 would suggest that a false bullish breakout has developed, creating a potential return to annual lows below 1700. “
Technical analysis of the gold price: weekly chart (October 2015 to May 2021) (Chart 3)
It has been previously noted (repeatedly) that “the review was triggered with the drop below 1763.36. Gold prices are currently viewed with a neutral bias over the weekly period, but the technical outlook may soon shift from neutral to bearish below 1682.27, the 38.2% Fibonacci retracement of the 2015 low range. / 2020. While the wider boundaries of the descending parallel channel that formed from the (unprecedented) August 2020 high remain in place, now back above 1763.36, the rebound gives long-term bulls hope that by maintaining the pandemic’s uptrend, gold prices define their nine-month pullback as a bullish flag.“
IG CUSTOMER FEELING INDEX: GOLD PRICE FORECAST (May 4, 2021) (CHART 4)
Gold: Retail traders data show that 76.38% of traders are net long with the ratio of long to short traders at 3.23 to 1. The number of net long traders is 7.34% lower than that of yesterday and 9.54% lower than the number of net-short traders is 27.98% higher than yesterday and 24.92% higher than last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that gold prices may continue to decline.
However, traders are shorter than yesterday and compared to last week. Recent changes in sentiment warn that the current trend in the price of gold may soon reverse to the upside despite traders staying long term.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist