GOLD : Lost Momentum

(Fri, 29 Jan 2021). Gold prices are simply along for the ride in broader markets right now, a mere footnote to the volatility encompassing equity markets and some single stocks involved in a tug-of-war between retail and institutional traders. Consistent selling across asset classes mid-week suggest dramatic repositioning and potential liquidation, and the jump in gold price volatility – even without the corresponding rally in gold prices – suggests greater uncertainty settling into financial markets.

GOLD PRICES AND GOLD VOLATILITY OUT OF STEP

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 (JANUARY 2020 TO JANUARY 2021) (CHART 1)

Gold volatility has fallen in recent days, dragging down gold prices. 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 19.51. The 5-day correlation between GVZ and gold prices is -0.51 while the 20-day correlation is +0.69; one week ago, on January 28, the 5-day correlation was -0.39 and the 20-day correlation was +0.63.

A QUICK REMINDER ON THE FUNDAMENTALS

The longer-term fiscal stimulus impulse in the context of a low interest rate environment should be beneficial for gold prices (akin to the 2009-2011 period).

GOLD PRICE RATE TECHNICAL ANALYSIS: DAILY CHART (JANUARY 2020 TO JANUARY 2021) (CHART 2)

Gold prices remain below the August-November 2020 downtrend, continuing to aim towards a familiar support area, the 23.6% Fibonacci retracement of the 2015 low/2020 high range at 1832.48, as well as the 38.2% Fibonacci retracement of the 2020 low/high range at 1836.97. Failure below these levels opens up a quick drop back to the yearly low towards 1802.96. Gold prices are fully below their daily 5-, 8-, 13-, and 21-EMA envelope, which is now in bearish sequential order. Daily MACD is trending lower below its signal line, while daily Slow Stochastics are neutral.

GOLD PRICE TECHNICAL ANALYSIS: WEEKLY CHART (OCTOBER 2015 TO JANUARY 2021) (CHART 3)

In prior outlooks it has been noted that “breaking the downtrend from the August and November 2020 highs as well as the 38.2% Fibonacci retracement from the 2020 high/low range suggests that the next leg higher is beginning. A move higher through 1965.57 would suggest that the series of weekly ‘lower highs and lower lows’ has ended.” The bullish breakout never materialized, and instead, the first week of 2021 yielded a bearish outside engulfing bar, which occurring at a relative high, marks a weekly key reversal.

Technically speaking, further downside from here would warrant a reconsideration the 1Q’21 forecast, which suggests that gold prices could hit new highs this quarter.

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