Gold Price Outlook:
- Gold prices have found support at the 61.8% Fibonacci retracement of the 2020 high/2021 low range at 1923.09, but have struggled to maintain a move above their one-month moving average (21-EMA) in recent days.
- Rapidly rising US Treasury yields alongside fading US inflation expectations are providing a lift to US real rates, which hurts gold prices.
- According to the IG Client Sentiment Index, gold prices hold a bearish bias in the near-term.
Slowly Losing Luster
Last week it was noted that, “with a rise in US Treasury yields, US real rates have moved off their lows, proving to be a material headwind for further gains by gold prices here.” US real rates have continued to edge up in recent days, thanks to the seemingly unstoppable rise in US Treasury yields around commentary from Federal Reserve officials that a series of rapid rate hikes are around the corner.
So, the fundamental picture has become more difficult – aside from the still-embedded geopolitical risk premium thanks to the Russian invasion of Ukraine – and the technical picture remains muddled as well. The long upper wick on the monthly candle for gold prices continues to warn that “the highs are in, and more downside is ahead.”
Gold Volatility Falls Further
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 continued drop in gold volatility over the past two weeks has undercut gold prices, and it remains the case that “a further drop imperils any forthcoming upside attempts.”
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (March 2021 to March 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 20.56 at the time this report was written, back to levels last seen on February 28. The 5-day correlation between GVZ and gold prices is 0.00 while the 20-day correlation is +0.90. One week ago, on March 15, the 5-day correlation was +0.70 and the 20-day correlation was +0.93.
Gold Price Rate Technical Analysis: Daily Chart (June 2020 to March 2022) (Chart 2)
Last week it was noted that “momentum is starting to turn bearish,” a trend that has continued in recent days. Gold prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, but the daily EMA envelope is in neither bearish nor bullish sequential order. Daily MACD continues to trend lower (albeit above its signal line), while daily Slow Stochastics are on the cusp of entering oversold territory. Failure to maintain the current area around 1916/1923 increases the likelihood of a return to the March low at 1895.07 in the near-term.
Gold Price Technical Analysis: Weekly Chart (October 2015 to March 2022) (Chart 3)
The weekly timeframe continues to suggest that a potential double top is forming, with the highs from this month and the August 2020 high constituting significant resistance. Last week it was noted that “falling below the highs from November 2020 and January 2021 around 1959/1965 hint that a false bullish break higher has transpired, and a drop back towards 1900 may be around the corner soon.” Having done so before stabilizing around 1920, the weekly momentum profile continues to erode, warning at further losses ahead.
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (March 22, 2022) (Chart 4)
Gold: Retail trader data shows 78.63% of traders are net-long with the ratio of traders long to short at 3.68 to 1. The number of traders net-long is 0.16% higher than yesterday and 14.66% higher from last week, while the number of traders net-short is 5.36% lower than yesterday and 18.87% lower 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Gold-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist