Gold Price Outlook:
- Skepticism remains around rebound in gold prices in early October as US Treasury yields rise.
- Concerns about the US debt ceiling may provide a tailwind, but even in 2011 – when the US was stripped of one of its “AAA” ratings – the rise in the price of gold did not. not lasted more than a few weeks.
- According toIG Customer Sentiment Index, gold prices have a mixed short-term bias.
Hard to have faith
While October has been a historically bullish month for gold prices thanks in part to a reduced risk appetite elsewhere, October 2021 brought a mix of fears of a US default as well as a slowdown. potential of the Chinese real estate market thanks to Evergrande. But mounting inflationary pressures appear to be the most important factor in restraining gold prices, as long-term US Treasury yields continue to rise, reducing the attractiveness of precious metals.
While concerns about breaching the US debt ceiling may persist for a few more weeks, it does not appear that they will remain a powerful catalyst for any significant period of time. After all, even in 2011 – when the United States was stripped of one of its “AAA” ratings – the rally in the price of gold only lasted a month before reaching the all-time high and was not seen again for almost a decade.
The fact remains that as the FOMC continues to offer clear signals that tapering is coming soon, Gold prices continue to trade against fundamental headwinds that are unlikely to break in their favor.
Anomalous relationship between gold volatility and gold prices
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. Persistent negative correlations suggest gold prices may still see tough trading conditions.
GVZ technical analysis (gold volatility): daily price chart (October 2020 to October 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 was trading at 16.52. The relationship between gold prices and gold volatility continues to evolve in fundamentally atypical ways. The 5-day correlation between the GVZ and gold prices is -0.70 while the 20-day correlation is -0.84. A week ago, on September 28, the 5-day correlation was -0.47 and the 20-day correlation was -0.84.
Technical analysis of the gold price: daily chart (July 2020 to October 2021) (Chart 2)
Gold prices set a series of “lower lows” throughout September, and the rebound so far in October has not broken that trend. The recent rebound stopped at a confluence of technical resistance: the 50% Fibonacci retracement of 2020/2021 low at 1763.36; and the daily 21-EMA. The Daily MACD remains below its signal line, although the Daily Slow Stochastics have returned to their midline. The fact remains that “a fall below 1700 in the coming weeks – especially if the deadline for the US debt ceiling passes without problem – is entirely possible”.
Technical analysis of the gold price: weekly chart (October 2015 to October 2021) (Chart 3)
The technical structure of gold prices over the weekly horizon remains weak despite the recent rebound in lower maturities. The negative slope of the Weekly Envelope 4, 13 and 26 EMA remains in place, as the Weekly MACD continues to fall further below its signal line. However, the Weekly Slow Stochastics hold at the midline. For now, the prospect persists that “selling the rally may be the modus operandi now.”
IG CUSTOMER FEELING INDEX: GOLD PRICE FORECAST (October 5, 2021) (CHART 4)
Gold: Retail traders data shows 72.86% of traders are net long with a ratio of long / short traders at 2.68 to 1. The number of net long traders is 1.13% higher than yesterday and 3.67% lower than last week, while the number of net-short traders is 7.84% lower than yesterday and 4.88% higher 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 more net-long than yesterday but less net-long 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 Strategist