Gold Price Forecast: Bottoming Effort Falters

Gold Price Outlook:

• Gold prices are slipping as US yields – both nominal and real – rise again
• It remains the case that until gold prices break the downtrend from the March and August swing highs, any rally should be viewed with caution.
• Gold prices have a mixed bias in the near-term, according to the IG Client Sentiment Index.

Real Yields Bounce Back

The gold price rally that began to develop in the second half of the month is faltering as October comes to a close. A rebound in US yields – both nominal and real – is weighing on precious metals, a theme that has been consistent for much of 2022. Signs of a technical turnaround, a potential double bottom identified last week, are not finding much follow through at present time. And while the double pattern has not yet been invalidated, it remains the case that the technical structure for gold prices suggests that traders can’t write off a dip to fresh yearly lows.

Gold Volatility, Gold Price Relationship Tightens

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. Gold volatility has fallen back from its October highs, and with it, so too have gold prices.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2021 to October 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 18.43 at the time this report was written. The 5-day correlation between GVZ and gold prices is +0.43 while the 20-day correlation is +0.38. One week ago, on October 24, the 5-day correlation was -0.22 and the 20-day correlation was +0.31.

Gold Price Rate Technical Analysis: Daily Chart (October 2021 to October 2022) (Chart 2)

In a sense, nothing has changed for gold prices over the past few weeks. Indeed, the observations from last week remain valid: “first, a double bottom may be formed against 1614/17, buttressed by the morning star candlestick pattern at the end of last week. This suggests a more bullish outlook moving forward. Second, however, it remains the case that another run to the descending trendline from the March and August highs is possible, but until the downtrend breaks, it’s difficult to have faith in a meaningful rally by gold prices.

“Until the second condition is fulfilled – the multi-month downtrend breaks – then the double bottom potential remains constrained. Patience is needed, but it remains the case that a move above the area around 1680 by the end of October would see gold prices trade back above former multi-month support (turned resistance) and break the downtrend in place from the March and August highs.”

Momentum is staring to turn more bearish again, highlighting the increased potential for a return to the yearly lows. Gold prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is aligned in bearish sequential order. Daily MACD has issued a bearish crossover while below its signal line, and daily Slow Stochastics have started to turn lower after failing their signal line.

Gold Price Technical Analysis: Weekly Chart (October 2015 to October 2022) (Chart 3)

The longer-term view remains unchanged as no significant progress has been made on the weekly timeframe: “a double top remains in place, but a quadruple bottom around 1680 warrants a reconsideration: a massive sideways range between 1680 and 2075 may have formed. A bounce from 1680 sees 1800 as the first area before resistance is found. The sudden shift in the environment suggests that the daily timeframe (and lower, like the 4-hour timeframe) will be better suited to pay attention to over the coming days/weeks as it will take a long time for technical indicators to evolve on the weekly timeframe.”

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (October 25, 2022) (Chart 4)

Gold: Retail trader data shows 81.80% of traders are net-long with the ratio of traders long to short at 4.50 to 1. The number of traders net-long is 1.05% lower than yesterday and 1.18% lower from last week, while the number of traders net-short is 49.18% higher than yesterday and 20.82% 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