Gold Price Forecast: Seeking Support After Fed Meeting
Gold Price Outlook:
- Gold prices turned out to be the “canary in the coal mine” around the Federal Reserve meeting. Weak gold foreshadowed a more hawkish Fed, which resulted in a stronger US dollar.
- Gold prices have found initial support around the 50% Fibonacci retracement of the 2020 high / low move.
- According toIG Customer Sentiment Index, gold prices have a mixed short-term bias.
Canary in the coal mine indeed
Gold prices are looking for support following the Federal Reserve’s June policy meeting. In advance, we suggested that “gold is the ‘canary in the coal mine’ for the Federal Reserve’s June policy meeting on Wednesday. Gold prices have benefited from the combination of an accommodating fiscal and monetary policy. But if the FOMC signals that taper talk is on the menu (ultimately with a formal announcement of a desire to type in September, followed by technical details in December, then the start of actual tapering in January 2022), prices of gold will lose a potential catalyst that has gilded the way higher over the past year. “
Indeed, with the Fed signaling that rate hikes could arrive as early as 2023, the narrative around gold prices has been undermined; the tides have turned.
Gold prices have since entered a time window where real US yields have started to rise. Overall, changes in the US Treasury yield curve, suggesting a period with stronger short- and medium-term rates, have been consistent with a stronger US dollar. As it stands, this is again a surge for gold prices as investors seek higher yielding, more growth sensitive assets.
Gold volatility and gold price out of sync
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 flow, dividends, coupon payments, etc. – gold tenders benefit from it during times of higher volatility.
GVZ technical analysis (gold volatility): daily price chart (June 2020 to June 2021) (Chart 1)
Gold volatility (as measured by Cboe’s Gold Volatility ETF, GVZ, which tracks 1-month implied gold volatility as derived from the GLD options chain) is trades at 16.79. Last week it was noted that “despite the increasing volatility of gold (generally an upward movement in gold prices) spot bullion is declining. With the relationship between gold prices and gold volatility still out of sync, questions remain about the ability of the gold price to sustain a significant rebound. The 5-day correlation between the GVZ and gold prices is -0.90 while the 20-day correlation is -0.70. A week ago, on June 14, the 5-day correlation was -0.58 and the 20-day correlation was -0.40.
Technical analysis of the gold price: daily chart (March 2020 to June 2021) (Chart 2)
Beforehand gold price forecast, it was noted that “by losing the uptrend of the March and April lows, both short-term and long-term bullish positions in the price of gold could be jeopardized. The bearish momentum has started to accelerate, with gold prices entirely below their daily EMA envelope (which is not yet on a sequential bearish decline). The MACD’s daily contraction into bullish territory accelerated and the Daily Slow Stochastics quickly fell into oversold territory … if gold prices are the canary in the coal mine for the Federal Reserve meeting on Wednesday , it may be that the alleged taper schedule being updated by the markets may be too accommodating.
The decline in gold prices caused a return to the descending channel measured from the August 2020 and January 2021 highs. Initial support was found at the 50% Fibonacci retracement of the 2020 high / low move at 1763.57; last week’s low was found at 1761.04. Failure below this confluence of support would suggest a deeper pullback towards 1730 by the end of the month (where time meets the uptrend line of the lower swing lows of May 2019 and March 2020).
Technical analysis of the gold price: weekly chart (October 2015 to June 2021) (Chart 3)
It has been noted previously that “as long as technical studies remain favorable, the modus operandi is to ‘buy the downside’, as a bullish breakout of a bullish flag for several months requires a bullish trading posture at more. long term. However, prior to the FOMC meeting, we stated that “This thesis is being tested in real time around the FOMC meeting; a change of perspective may soon be required. In accordance with this perspective, it is no longer applicable d ‘Apply a longer term bullish view on gold prices; the outlook is decidedly neutral at the moment.
IG CUSTOMER FEELING INDEX: GOLD PRICE PROVIDE (June 21, 2021) (GRAPHIC 4)
Gold: Retail traders data show that 86.04% of traders are net long with a ratio of long / short traders at 6.16 to 1. The number of net long traders is 6.70% higher than yesterday and 16.60% higher than the week the number of net-short traders is 9.93% higher than yesterday and 39.81% 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.
The positioning is shorter on the net than yesterday but longer on the net than last week. The combination of current sentiment and recent changes gives us another mixed bias for gold trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist