Gold Prices Overview:
- Gold prices continue to ride trend support dating back to May, keeping the stakes elevated ahead of the September Fed meeting tomorrow.
- Precious metals underperform during periods of lower volatility as decreased uncertainty reduces the safe haven appeal of gold and silver. To this end, the 5-day correlation between GVZ and gold prices is 0.57, and the 20-day correlation is 0.80.
- Retail positioning warns that the combination of current sentiment and recent changes gives us a stronger spot gold-bearish contrarian trading bias in the short-term.
Looking for longer-term forecasts on Gold and Silver prices? Check out the DailyFX Trading Guides.
Gold prices have had a September to remember, for both good reasons and bad. The temporary distraction that was the attack on the Saudi Arabian oil processing facility at Abqaiq has provided markets a much-needed distraction from the US-China trade war and the haphazard Brexit negotiations.
But now that the September Fed meeting is squarely in focus and the pre-FOMC drift is taking control, it’s a good time for traders to take a step back and re-assess the charts ahead of what should be a volatile, market moving policy gathering on Wednesday. With rates markets weighing the odds of a 50-bps rate cut versus no rate cut at all, traders should be anticipating volatility in US Treasury yields, and as a result, gold prices.
Why Do ‘Real Yields’ Matter to Gold Prices?
The shifts in US Treasury yields around the latest US-China trade war news feeds directly into one of the most important fundamental underpinnings of precious metals’ rallies: environments that produce falling real yields tend to be the most bullish. On the other hand, environments that produce rising real yields tend to be the most bearish for precious metals.
Real yields are inflation-adjusted yields: in this case, the US Treasury 10-year yield minus the headline inflation rate. Why does this matter? Investing is all about asset allocation and risk-adjusted returns. On the asset allocation side, it’s about achieving required returns given the investor’s wants and needs.
If inflation expectations are rapidly increasing, you would expect to see fixed income underperform: the returns are fixed, after all. Why would you want to have a fixed return when prices are increasing? On a real basis, your returns would be lower than otherwise intended.
Rising US real yields means that the spread between Treasury yields and inflation rates isincreasing. If precious metals yield nothing (no dividends, coupons, or cash flows), they would be ill-suited to hold when US real yields rose. And vice-versa: falling US real yields tend to be supportive of higher gold prices.
US Treasury 10-year Yield Technical Analysis: Daily Chart (June 2016 to SEPTEMBER 2019) (Chart 1)
Since hitting a yearly low and its lowest level since July 2016 on September 3 at 1.464%, the US Treasury 10-year yield has rebounded sharply, hitting a high of 1.907% on September 13. At the time of writing, as traders began to prep their trade books for the September Fed meeting tomorrow, the US Treasury 10-year was yielding 1.813%.
Movements by US yields in September have occurred in lockstep with Fed funds futures and Eurodollar contracts showing a decreased likelihood of aggressive Fed rate cuts over the coming months; or, the ongoing reduction in uncertainty around the US-China trade war is reducing the need and desire by investors to hold safe have assets. Another jump by US Treasury yields would be bad news for gold prices in the short-term.
Gold Price Rally Undermined by Falling Gold Volatility
While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit during periods of higher volatility. Heightened uncertainty in financial markets due to increasing macroeconomic tensions (like US-China trade war or the prospect of a no-deal, hard Brexit, for example) increases the safe haven appeal of gold and silver. On the other hand, reduced uncertainty in financial markets due to decreasing macroeconomic tensions (like the US-China trade war talks being announced for October or a no-deal, hard Brexit being postponed) decreases the desire to hold onto precious metals.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (November 2016 to September 2019) (Chart 2)
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) has started to rebound, trading back up to 15.67 at the time of writing. Gold volatility levels remain below its 2019 high (and highest level since December 2017) set on August 15 at 18.72.
The 5-day correlation between GVZ and gold prices is 0.57, and the 20-day correlation is 0.80; four weeks ago, on August 20, the 5-day correlation was 0.94 and the 20-day correlation was 0.87. A further rebound in gold volatility may help buttress a rebound in gold prices moving forward.
Gold Price Technical Analysis: Daily Chart (AUGUST 2018 to SEPTEMBER 2019) (Chart 3)
In our most recent gold price technical forecast update, it was noted that “the [August 13] doji support coincides with the rising trendline from the May 30 and August 1 lows, the backbone of the uptrend over the past four months. A break below this level around 1479.73 would suggest that a near-term top is in place for gold prices.”
In this regard, nothing has changed: gold prices have traded sideways in recent days. Prices remain below the daily 8-, 13-, and 21-EMA envelope. Daily MACD continues to trend lower, although its decline is slowing, and it remains in bullish territory; Slow Stochastics are starting to rise out of oversold condition. A break above the September 12 high at 1524.05 would suggest the uptrend is resuming.
GOLD PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2011 TO SEPTEMBER 2019) (CHART 4)
When the gold price inverse head and shoulders pattern began to breakout in June, it was noted that “the placement of the neckline determines the final upside targets in a potential long-term gold price rally: conservatively, drawing the neckline breakout against the January 2018 high at 1365.95; aggressively, drawing the neckline breakout against the August 2013 high at 1433.61 calls for a final target at 1820.99.”
Gold prices have been able to maintain their elevation above their weekly 8-, 13-, and 21-EMA envelope having just re-tested the weekly 8-EMA for only the second time since the end of May (the other occurring on August 1). But the lack of upside movement in the past two weeks has seen momentum indicators ease off their bullish biases: weekly MACD has started to narrow and decline (albeit in bullish territory) Slow Stochastics continue to pullback from overbought territory.
As it were, while there have been evidence of a short-term pause in the bull trend, there hasn’t been convincing enough price action to suggest that gold’s longer-term bullish multi-year inverse head and shoulders pattern has been invalidated.
IG Client Sentiment Index: Spot Gold Price Forecast (September 17, 2019) (Chart 5)
Spot gold: Retail trader data shows 70.2% of traders are net-long with the ratio of traders long to short at 2.35 to 1. The number of traders net-long is 6.8% higher than yesterday and 5.2% higher from last week, while the number of traders net-short is 0.2% higher than yesterday and 3.6% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests spot 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 spot gold-bearish contrarian trading bias.
FX TRADING RESOURCES
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at email@example.com
Follow him on Twitter at @CVecchioFX
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