Gold Price Outlook:
- Ever since clearing consolidation resistance in mid-April, gold prices have been tediously moving sideways.But gold prices may simply be flagging – in a bull flag, that is – after establishing their double bottom, meaning that more upside may be ahead yet.
- Seasonality, which was extremely bullish for gold in April, has taken a dramatic turn: May has been one of the worst, if not the worst, months of the year for gold prices.
- According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.
Gold Prices Waiting to Shine?
Gold prices enjoyed a strong month of April in part due to a bullish seasonal backdrop. Gold prices were able to establish a double bottom during the course of the month after clearing consolidation resistance in mid-April. Unfortunately, price action has been lacking, with tedious sideways movement emerging.
But this price action in gold may simply be a bull flag after the double bottom breakout, suggesting that more upside potential remains. And in an environment defined by the kind of movements in US Treasury yields that aren’t helping the US Dollar, gold may have some fundamental appeal to it too thanks to falling real US yields.
Alas, at the start of the month, seasonality trends are often in mind, as they offer much-needed historical perspective relative to the short-term point of view. And for gold prices, the news couldn’t be worse: May has been one of the worst, if not the worst, month of the year for gold prices.
Quantitative studies are clearly bearish on gold prices, and if the fundamentals and technical are leaning bullish, it may prove that these forces act as counterweights and keep gold prices trapped in their recent flag for a bit longer. Given that the quantitative perspective is fixed (e.g. historical data won’t change), it would appear that gold prices will need a strong improvement in their fundamental backdrop if the bullish technical structure is to fulfill its potential.
Gold Prices, Gold Volatility Turning Lockstep
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.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (May 2020 to May 2021) (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) is trading at 15.65, having bucked a drop back to the closing low of the past year set in mid-April at 14.26. Gold prices and gold volatility have seen their relationship continue to strengthen in recent days, and a further rebound in gold volatility may prove to be beneficial for gold prices (or, if gold volatility falls off, gold prices seem likely to follow). The 5-day correlation between GVZ and gold prices is +0.96 while the 20-day correlation is +0.20. One week ago, on April 20, the 5-day correlation was +0.70 and the 20-day correlation was -0.29.
Gold Price Rate Technical Analysis: Daily Chart (March 2020 to May 2021) (Chart 2)
In the prior gold price forecast, it was noted that “in recent weeks it has been suggested that ‘gold prices may have established a short-term double bottom.’ So far, this perspective remains valid, insofar as gold prices have not returned below the confluence of former resistance turned support: the 50% Fibonacci retracement of the 2020 low/high range at 1763.36; the November 2020 low; and the March to mid-April 2021 sideways consolidation resistance.”
In holding above the “confluence of former resistance turned support,” gold prices have carved out a short-term sideways consolidation, which in the context of the potential double bottom, could be considered a bull flag.
If the double bottom perspective remains valid, then it also remains the case that “a simple doubling of the recent consolidation (1759.95-1677.36) above resistance suggests that gold prices may heading towards 1842.54 in the near-term – which would see bullion back to another cluster of Fibonacci retracements that proved consequential in early-2021.”
As such, the perspective remains that “failure below the trifecta of key technical levels around 1763.36 would suggest a false bullish breakout has developed, setting up a potential return to the yearly lows below 1700.”
Gold Price Technical Analysis: Weekly Chart (October 2015 to May 2021) (Chart 3)
It’s been previously noted (many times) that “reconsideration was trigged with the drop below 1763.36. Gold prices are currently viewed with a neutral bias on the weekly timeframe, but the technical outlook could soon erode from neutral to bearish below 1682.27, the 38.2% Fibonacci retracement of the 2015 low/2020 high range. While the broader confines of the descending parallel channel that’s been forming relative to the August 2020 (all-time) high remain in place, now back above 1763.36, the rebound gives long-term bulls hope that by holding the pandemic uptrend, gold prices are defining their nine-month downturn as a bull flag.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (May 4, 2021) (CHART 4)
Gold: Retail trader data shows 76.38% of traders are net-long with the ratio of traders long to short at 3.23 to 1. The number of traders net-long is 7.34% lower than yesterday and 9.54% lower from last week, while the number of traders net-short is 27.98% higher than yesterday and 24.92% 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 Currency Strategist