Gold Price Outlook:

• Last week’s bullish engulf bar is not producing much upside for gold prices.
• Failure to cross 1800 after last week’s price action suggests that a return to the range’s recent lows may be in the pipeline.
• According to IG Customer Sentiment Index, gold prices have a mixed short-term bias.

Failure of technical recovery

As concerns about the omicron variant of COVID-19 have started to fade in global financial markets, gold prices are losing their relative appeal as a safe haven asset. US equity markets are recovering, US Treasury yields are higher and inflation expectations continue to stabilize as rate markets continue to integrate up to 150bp of Federal Reserve tightening until the end of 2023. A disappointing development for the bulls, ILast week’s bullish outer engulfing bar does not do much on the upside for the price of goldes; the best opportunity for a rally supported above 1800 may have been lost.

The relationship between gold volatility and gold prices remains inverted

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.Last week it was observed that “the advance of gold may prove to be limited if the volatility of gold thus continues to decline”, and indeed, the decline in gold volatility has proved to be an obstacle to further increases in the price of gold.

GVZ technical analysis (gold volatility): daily price chart (December 2020 to December 2021) (Chart 1)

Gold volatility (as measured by Cboe’s Gold Volatility ETF, GVZ, which tracks the 1-month implied volatility of gold derived from the GLD options chain) was trading at 15 , 36 at the time of writing. The relationship between gold prices and gold volatility continues to deteriorate, as the 5-day correlation becomes less negative while the 20-day correlation becomes more and more negative. The 5-day correlation between the GVZ and gold prices is -0.48 while the 20-day correlation is -0.46. A week ago, on December 14, the 5-day correlation was -0.53 and the 20-day correlation was -0.40.

Technical analysis of the gold price: daily chart (December 2020 to December 2021) (Chart 2)

Gold prices began to fall back below their daily 21-EMA, after another unsuccessful attempt to climb above the descending trendline of August 2020 (all-time high) and June highs. 2021. In addition, gold prices have once again slipped below the uptrend from the August and September lows, suggesting that the recent surge in upward activity has been exhausted. The Daily MACD begins to move lower while below its signal line, and the Daily Slow Stochastic has issued a bearish cross after failing to reach overbought territory. More declines could prevail in the very short term around 1760.

Technical analysis of the gold price: weekly chart (October 2015 to December 2021) (Chart 3)

Last week it was noted “The weekly candle offers an even more bullish prognosis for gold prices. If this weekly candle closed above last week’s high of 1793.16, we would have a bullish outer engulf bar in place, suggesting more upside in the very near term. However, there was no higher follow-up for gold prices; failure to take advantage of the short-term weekly bullish engulf bar may cause gold prices to pull back. The 4, 8 and 13 EMA weekly envelope is flat, which does not suggest any momentum bias. The Weekly MACD and Weekly Slow Stochastic are both stable at their respective signal lines and medians. More side chops may prevail until the end of the year, a downgrade in perspective from the previous update.

IG CUSTOMER FEELING INDEX: GOLD PRICE FORECAST (December 21, 2021)

Gold: Retail traders data show that 82.53% of traders are net long with a ratio of long / short traders at 4.73 to 1. The number of net long traders is 6.19% higher than yesterday and 9.54% lower than last week, while the number of net-short traders is 20.64% lower than yesterday and 3.18% 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 trading gold.

— Written by Christopher Vecchio, CFA, Senior Strategist