Gold Price Outlook:
- Gold prices have rallied in seven of the past eight sessions, sending it towards symmetrical triangle resistance – the descending trendline from the November 2021 and January 2022 swing highs.
- The mix of higher US Treasury yields, falling inflation expectations, and a drop in gold volatility draws into question the sustainability of the recent rally by gold prices.
- According to the IG Client Sentiment Index, gold prices retain a bullish bias in the near-term.
Strong Start to February
Gold prices are having a strong start to February, rallying in seven of the past eight sessions – and bucking a weak seasonality profile in the process. And while the technical picture has become more bullish in the short-term, questions remain about the sustainability of the rally in gold prices considering that fundamental backdrop remains challenging. US Treasury yields continue to rise and inflation expectations continue to fall – curating higher real yields – while gold volatility has trended lower through the first week-plus of February.
Gold Volatility and Gold Prices’ Relationship Inverts
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. The ongoing slide in gold volatility warns that the rally in gold prices may have its limits.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (February 2021 to February 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 15.54 at the time this report was written. The relationship between gold prices and gold volatility continues to turn more negative, which is historically problematic for a sustained rally. The 5-day correlation between GVZ and gold prices is -0.21 while the 20-day correlation is -0.41. One week ago, on February 2, the 5-day correlation was -0.95 and the 20-day correlation was -0.26.
Gold Price Rate Technical Analysis: Daily Chart (February 2021 to February 2022) (Chart 2)
Gold prices have continued to rally after reaching a cluster of support just above 1780, the descending trendline from the August 2020 and June 2021 swing highs as well as rising channel support from the August 2021 and December 2021 swing lows. As noted last week, “if gold prices continue to rally over the coming days around the January US NFP report, it may present a ‘sell the rally’ opportunity amidst a backdrop of still-rising US real yields, which present a significant headwind for gold prices in 2022.” Gold prices are nearing symmetrical triangle resistance near 1845, which may present the opportunity to look for shorts.
Gold Price Technical Analysis: Weekly Chart (October 2015 to February 2022) (Chart 3)
Not much has changed for the longer-term technical outlook. Gold prices are above their weekly 4-, 13-, and 26-EMA envelope, which is in bullish sequential order. Weekly MACD is trending higher just above its signal line, while weekly Slow Stochastics are trending lower albeit still above their median line. It remains the case that “the weekly timeframe for gold prices suggests that more choppy, sideways trading is ahead for the foreseeable future.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (February 9, 2022) (Chart 4)
Gold: Retail trader data shows 71.09% of traders are net-long with the ratio of traders long to short at 2.46 to 1. The number of traders net-long is 3.68% lower than yesterday and 16.12% lower from last week, while the number of traders net-short is 15.07% higher than yesterday and 62.04% 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.
— Written by Christopher Vecchio, CFA, Senior Strategist