Gold Price Talking Points:
– Gold prices completed their bullish falling wedge breakout move earlier today, hitting the wedge base target of 1346.61.
– Now that the bullish pattern has played out, and that gold prices are more than 2% above their daily 21-EMA, the odds of a pause in the rally are increasing.
– Even if the gold rally pauses for a few days, changes in retail trader positioning suggest that gold prices can still trade higher.
The start of June has rewarded precious metal bugs handsomely, with gold prices trading to a fresh 2019 high earlier today. Following the release of the May US nonfarm payrolls report, gold prices briefly eclipsed the February 2019 high of 1346.61, reaching 1348.13 on their way to their highest level since April 2018. Thanks to US Treasury yields diving to fresh yearly lows as well (and more US yield curve inversion raising fears of a recession), gold prices have proved well-supported by the increasingly friendly fundamental backdrop.
Gold Volatility Continues to Push Higher
One of the more important facets of the recent gold price rally has been how gold volatility has surged alongside prices. Whereas other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility as uncertainty allows gold and silver to glitter as safe havens.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (June 2018 to June 2019) (Chart 1)
After hitting an all-time closing low on May 29, 2019, 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 jumped back to its highest level since the first week of January 2019. No longer in a downtrend, gold volatility appears to have put in a base, and structurally, moving forward, should stay elevated for the foreseeable future.
Gold Price Rally is Long in the Tooth
With gold volatility looking like it is set to stay elevated over the immediate future, coupled with falling US Treasury yields and the immense topping potential for the US Dollar (via the DXY Index), the fundamental backdrop for gold prices is the most bullish it has been all year long.
Gold Price Technical Analysis: Daily Chart (April 2018 to June 2019) (Chart 2)
But the fact of the matter is that the predominant pattern governing gold price action over the past several weeks was believed to be a bullish falling wedge. Wedges, regardless of the bullish or bearish variety, call for a return to the base of the pattern; in this case, the falling bullish wedge in gold prices called for a return back to the February 2019 (and yearly) high of 1346.61.
Indeed, after the weak US jobs report earlier today, gold prices were able to fulfill the move up the base of the bullish falling wedge; the move has exhausted itself. Traders should be cautioned the fulfilment of this pattern may mean that the gold price rally is due for a breather. As discussed earlier this week, the current technical environment for gold prices is similar to other times when rallies were cut short.
Gold Price Rally has Paused When This Happens
At the end of January 2019, we noted that gold prices had been beginning to behave in a manner that was indicative of previous short-term topping efforts. “Since the bottoming effort in gold began at the end of Q3’18, there have been three instances in which Gold prices have peaked in excess of +2% higher than its daily 21-EMA: October 3, 2018; January 3, 2019; and [January 31].”Another instance occurred since then, on February 19.
While considering the extremely small sample size – only four observations in total since the bottoming effort in gold prices began in Q3’18 – the one-week returns for gold after price moved in excess of 2% of the daily 21-EMA were +0.12%, -0.59%, -0.59%, -0.90%, or -0.49% on average, for the respective periods listed above. As of Wednesday, June 5, gold prices had moved in excess of 2% of the daily 21-EMA once again. It still holds that the risk for exhaustion setting in again soon and cutting the rally short is increasing.
IG Client Sentiment Index: Spot Gold Price Forecast (June 7, 2019) (Chart 3)
Spot gold: Retail trader data shows 52.7% of traders are net-long with the ratio of traders long to short at 1.12 to 1. The number of traders net-long is 9.9% lower than yesterday and 26.2% lower from last week, while the number of traders net-short is 13.9% higher than yesterday and 90.9% 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current spot gold price trend may soon reverse higher despite the fact traders remain net-long.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at firstname.lastname@example.org
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