Gold Price Forecasts: Progress Towards Multi-Month Resistance
Gold Price Outlook:
- Despite inflationary fears that have spilled over into global financial markets, gold prices have risen sharply since early April and have weathered the “storm” around US inflation data. United this week.
- Seasonality, May was one of the worst, if not the worst months of the year for gold prices, which may turn out to be a headwind in an environment that has turned out to be bullish elsewhere.
- According to IG Client Sentiment Index, gold prices have a short-term bearish bias.
Two steps forward, one step back, two steps forward …
Gold prices have slowly but surely climbed their wall of worry, briefly touching a new monthly high at the start of the week, its highest level since early February. In a sense, as inflation fears have surfaced in recent weeks, gold prices have fulfilled their mythical role of hedging against inflation. Asregular erosion in real life we returns due to the combination of a loose monetary policy and an expansionary fiscal policy turns out to be a strong fundamental tailwind for gold prices, long awaited but maybe finally realized.
Gold volatility eases – Not bad for the price of gold?
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 benefit during times 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 1-month implied gold volatility derived from the GLD options chain) is trading at 17 , 03, after reaching its highest level since the end of March. But with gold volatility taking a step back today as gold prices rebound – the reverse of yesterday when prices fell and volatility increased – it may be that prices gold and gold volatility behave in a way that suggests that the price action, on the whole, remains bullish. The 5-day correlation between GVZ and gold prices is -0.25 while the 20-day correlation is +0.86. A week ago, on May 6, the 5-day correlation was +0.84 and the 20-day correlation was +0.69.
Technical analysis of the gold price rate: daily chart (March 2020 to May 2021) (Chart 2)
In the prior gold price forecast, it was noted that “by standing 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. Further, “a simple doubling of the recent consolidation (1759.95-1677.36) above resistance suggests that gold prices may be heading towards 1842.54 in the near term – which would push back the bullion to another set of Fibonacci retracements that turned out to be substantial in early 2021. ”
Gold prices peaked at 1845.54, briefly breaking through the Fibonacci retracement group, before taking a step back this week. But momentum remains bullish: Daily Slow Stochastics are still in overbought territory; and the daily MACD is still rising above its signal line. As long as gold prices continue to treat their daily EMA envelope as support (which has been the case since mid-April), their technical posture remains bullish.
Technical analysis of the gold price: weekly chart (October 2015 to May 2021) (Chart 3)
It was previously noted that “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.“If gold prices are higher1837 before June 15, then it would appear that gold prices are on track to move towards new heights through the end of the year.
IG CUSTOMER FEELING INDEX: GOLD PRICE FORECAST (May 13, 2021) (CHART 4)
Gold: Data from retail traders shows that 78.85% of traders are net long with the ratio of long to short traders at 3.73 to 1. The number of net long traders is 1.29% higher than yesterday and 2.97% lower than last week, while the number of net-short traders is 5.78% lower than yesterday and 7.51% 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 longer than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger bearish contrarian trading bias in gold.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist