Gold Price Forecast: Russian Sanctions Trigger Rebound and Volatility Spike
Gold Price Outlook:
- Gold prices are back above 1900 – but a return to historic highs requires greater escalation between Russia and the West.
- Still, more upside is possible as the Russia-Ukraine crisis unfolds, but it’s likely that the 2022 high has been established.
- According to IG Customer Opinion Indexgold prices maintain a short-term bearish bias.
Sanctions trigger spike in volatility
Last week it was noted that “further increases are still possible, but it stands to reason that gold prices have already peaked”. Gold prices have since rebounded from last week’s low below 1880 to trade around 1910 at the time of writing. Aggressive sanctions against Russia by the European Union and the United States have raised tensions as Russia continues its invasion of Ukraine. The central thesis remains: it is the third world war or the bust whether gold prices will have a chance to return to their highs set last week.
Soaring Gold Volatility Supports Gold Price Rise
Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks don’t like the increased volatility – signaling greater uncertainty around cash flow, dividends, coupon payments, etc. – gold tenders benefit during periods of higher volatility. The ongoing war in Eastern Europe continued to push gold volatility, translating into higher gold prices.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (Feb 2021 – Feb 2022) (Chart 1)
Gold volatility (as measured by the Cboe’s Gold Volatility ETF, GVZ, which tracks 1-month implied gold volatility as derived from the options chain GLD) was trading at 9:00 p.m. at the time of writing, maintaining the highest level since March 2021. The 5-day correlation between the GVZ and the price of gold is +0.03 while the 20-day correlation is by +0.79. A week ago, on February 17, the 5-day correlation was +0.53 and the 20-day correlation was +0.71.
Gold Price Rate Technical Analysis: Daily Chart (February 2021 to February 2022) (Chart 2)
Last week it was noted that “it is worth noting that the daily candle appears to form as a shooting star with a long upper wick, suggesting that a new range between 1916.62 and 1974.49 may be emerging. A drop below 1916.62 would likely only occur once Russian troops left Ukrainian territory. This was obviously a miscalculation in hindsight, but it’s worth noting that gold prices failed to break above 1916.62 on Friday and today, suggesting that markets are not do not necessarily believe that the Russian invasion of Ukraine will continue for an extended period.
Still, “another upside push is still possible in the near term, with gold prices above their daily envelope of 5, 8, 13 and 21-EMA, which is in a bullish sequential order”. But it’s worth nothing that the daily MACD is rising as above its signal line fades, and the daily Slow Stochastics have dipped out of overbought territory. Any news of a Russian-Ukrainian ceasefire could cause a sharp setback.
Gold Price Technical Analysis: Weekly Chart (October 2015 to February 2022) (Chart 3)
Nothing has changed in recent days for the longer term technical outlook. “The longer-term technical outlook has taken on a more bullish tone, suggesting another push towards 1974.49 cannot be ruled out in the near term. Gold prices are above their weekly envelope 4 -, 13-, and 26-EMA, which is in bullish sequential order.The weekly MACD is trending higher while above its signal line, and the weekly Slow Stochastic has advanced into the territory of overbought Given the long upper wick on the weekly timeframe, it stands to reason that resistance held (despite the overshoot) The disappearance of any rally makes sense until NATO officially enters the Russo conflict -Ukrainian.
CUSTOMER SENTIMENT INDEX IG: GOLD PRICE FORECAST (February 28, 2022) (Chart 4)
Gold: Retail trader data shows that 75.39% of traders are net long with a ratio of long to short traders of 3.06 to 1. The number of net long traders is 6.37% higher than that of yesterday and 7.69% higher than last week, while the number of net-short traders is 2.20% higher than yesterday and 39.84% lower 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.
Traders are sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a stronger contrarian gold-bearish trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist