Gold Price Outlook:
- Gold prices remain in their downtrend since the August 2020 high, but a turn of the calendar may bring a fresh perspective to bullion.
- Gold prices have been performing well in April, with gains averaging +2.39% over the past 5-years and +1.4% over the past 10-years.
- According to the IG Client Sentiment Index, gold prices have a bullish bias in the near-term.
Gold Prices Rally from Familiar Support
Gold prices are closing out March on a strong note, following the plunge earlier in the week back to monthly and yearly lows. Even though the rebound is occurring at a familiar support region, the fact remains that gold prices remain trapped in two prevailing downtrends. But for gold bulls, hope is far from gone: we’re now entering one of the more bullish months of the year for gold prices, from a seasonality perspective.
It maybe the case that gold prices are able to climb out of their intrayearly downtrend, but remain in the broader confines of the longer-term bull flag that’s been forming relative to the August 2020 (all-time) high.
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Gold Prices, Gold Volatility Realigning in Typical Fashion
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 (March 2020 to March 2021) (Chart 1)
The ebbs and flows of gold volatility has aligned neatly with gold price action in recent days, higher, lower, and sideways. 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 17.25, far below the yearly high set during the first week of February at 24.03. The 5-day correlation between GVZ and gold prices is -0.96 while the 20-day correlation is -0.68. One week ago, on March 24, the 5-day correlation was +0.03 and the 20-day correlation was +0.36.
Gold Price Rate Technical Analysis: Daily Chart (March 2020 to March 2021) (Chart 2)
In early-March, it was noted that “if gold prices are going to find a bottom, this may be an ideal place from a technical perspective.” Soon after, gold prices rallied from key confluence: the 38.2% Fibonacci retracement of the 2015 low/2020 high range at 1682.27; the 61.8% Fibonacci retracement of the 2020 low/high range at 1689.74; and longer-term bull flag support (as measured from the August 2020 and January 2021 highs measured against the November 2020 low).
After a rough second half of the month, gold prices found themselves back at this Fibonacci retracement cluster. But to close the month, gold prices have rallied from this familiar support region once more, which has also been buffeted by the ascending trendline from the May 2019 and March 2020 lows. This also raises the stakes: failure below the March 2021 lows threatens a much more significant technical breakdown.
Nevertheless, the prevailing downtrends remain: from the intrayearly high in January 2021; and then from the August 2020 (all-time high) and January 2021 highs. As it were, more constructive price action is likely required before traders can have more confidence in the counter-trend gold price rebound.
Gold Price Technical Analysis: Weekly Chart (October 2015 to March 2021) (Chart 3)
It’s been previously noted that “further downside from here (below the 50% Fibonacci retracement of the 2020 low/high range) would warrant a reconsideration the 1Q’21 forecast, which suggests that gold prices could hit new highs this quarter.” Such 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.
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IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (March 31, 2021) (CHART 4)
Gold: Retail trader data shows 88.94% of traders are net-long with the ratio of traders long to short at 8.04 to 1. The number of traders net-long is 9.07% higher than yesterday and 11.14% higher from last week, while the number of traders net-short is 10.66% lower than yesterday and 37.01% 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 Currency Strategist