Gold Price Outlook:
- Gold prices have rallied in eight of the past ten sessions, breaking above symmetrical triangle resistance – the descending trendline from the November 2021 and January 2022 swing highs.
- While the longer-term fundamental backdrop for gold prices remains suspect, the more immediate prospect of a Russian invasion of Ukraine is stoking a shift to safe havens.
- According to the IG Client Sentiment Index, gold prices retain a bullish bias in the near-term.
Putin on a Show
Gold prices have continued their strong run through February, continuing to ignore their weak seasonality tendency and deteriorating fundamentals in the form of rising US Treasury yields and falling inflation expectations. Indeed, even with nearly all major central banks signaling that interest rate hikes are coming over the next few months, gold prices have been glittering thanks to geopolitical tensions.
The seemingly increased likelihood that Russia will invade Ukraine – despite diplomatic overtures by French President Emmanuel Macron and US President Joe Biden towards Russian President Vladimir Putin – has sparked significant volatility across asset classes. Gold prices may still have some upside potential in the near-term as tensions intensify, before ultimately succumbing to longer-term fundamentals that undercut faith in a sustainable rally.
Gold Volatility and Gold Prices’ Relationship Normalizes Rapidly
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 prospect of war in Eastern Europe has been a potent catalyst to drive gold volatility higher, proving supportive of higher gold prices.
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 18.96 at the time this report was written, the highest level since March 2020. The relationship between gold prices and gold volatility has rapidly normalized. The 5-day correlation between GVZ and gold prices is +0.88 while the 20-day correlation is +0.19. One week ago, on February 7, the 5-day correlation was -0.14 and the 20-day correlation was -0.35.
Gold Price Rate Technical Analysis: Daily Chart (February 2021 to February 2022) (Chart 2)
Gold prices have broken above symmetrical triangle resistance from the November 2021 and January 2022 swing highs, spurred by news that Russia is quickly mobilizing forces for an invasion of Ukraine. A near-term confluence level has been reached, with the November 2021 high and ascending trendline from the May 2019, March 2020, and March 2021 lows coming into focus around 1877. In the event that tensions between Russia and Ukraine spill into outright war, gold prices may be able to quickly reach the June 2021 high set at 1916.62.
Gold Price Technical Analysis: Weekly Chart (October 2015 to February 2022) (Chart 3)
After last week’s rally, the longer-term technical outlook has taken on a more bullish hue. Gold prices are above their weekly 4-, 13-, and 26-EMA envelope, which is in bullish sequential order. Weekly MACD is trending higher while above its signal line, and weekly Slow Stochastics are trending advancing quickly towards overbought territory. More gains may be on the immediate horizon; a break above 1916.62 would target a cluster of highs set at the end of 2020 and in early-2021 between 1959.41 and 1965.57.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (February 14, 2022) (Chart 4)
Gold: Retail trader data shows 68.28% of traders are net-long with the ratio of traders long to short at 2.15 to 1. The number of traders net-long is 10.89% higher than yesterday and 13.44% lower from last week, while the number of traders net-short is 7.19% higher than yesterday and 38.37% 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.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Gold trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist
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