Gold Price Forecast: Lower Highs, Lower Lows Continue – Levels for XAU/USD

While October has been an historically bullish month for gold prices thanks in part to reduced risk appetite elsewhere, October 2021 has brought a mix of fears of a US default as well as a potential slowdown in China’s property market thanks to Evergrande. But rising inflation pressures seem to be the more prominent factor in holding back gold prices, insofar as long-end US Treasury yields continue to rise, reducing the appeal for precious metals.

While US debt ceiling breach concerns may percolate for a few more weeks, it doesn’t seem like they will remain a potent catalyst for a significant period of time. After all, even in 2011 – when the US was stripped of one of its ‘AAA’ ratings – the gold price rally lasted but one month before the all-time high was reached and not revisited for nearly another decade.

The fact remains that as the FOMC continues to offer clear signals that tapering is arriving soon, gold prices continue to trade into fundamental headwinds that are unlikely to break in their favor.

Gold Volatility and Gold Prices’ Abnormal Relationship

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. The persistent negative correlations suggest gold prices may stills see difficult trading conditions.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2020 to October 2021) (Chart 1)

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) was trading at 16.52. The relationship between gold prices and gold volatility continues to evolve in a fundamentally atypical manner. The 5-day correlation between GVZ and gold prices is -0.70 while the 20-day correlation is -0.84. One week ago, on September 28, the 5-day correlation was -0.47 and the 20-day correlation was -0.84.

Gold Price Rate Technical Analysis: Daily Chart (July 2020 to October 2021) (Chart 2)

Gold prices established a series of ‘lower lows’ throughout September, and the rebound thus far in October has not broken that trend. The recent rebound has found itself pausing at a confluence of technical resistance: the 50% Fibonacci retracement of the 2020 low/2021 high range at 1763.36; and the daily 21-EMA. Daily MACD remains below its signal line, though daily Slow Stochastics have returned to their median line. It remains the case that “a drop below 1700 in the next few weeks – particularly if the US debt ceiling deadline passes without issue – is very much on the table.”

Gold Price Technical Analysis: Weekly Chart (October 2015 to October 2021) (Chart 3)

Gold prices’ technical structure on the weekly timeframe remains weak in spite of the recent rebound on lower timeframes. The weekly 4-, 13-, and 26-EMA envelope’s negative slope remains in place, while weekly MACD continues to drop further below its signal line. Weekly Slow Stochastics are holding at the median line, however. For now, the outlook persists that “selling the rally may be the modus operandi henceforth.”

IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (October 5, 2021) (CHART 4)

Gold: Retail trader data shows 72.86% of traders are net-long with the ratio of traders long to short at 2.68 to 1. The number of traders net-long is 1.13% higher than yesterday and 3.67% lower from last week, while the number of traders net-short is 7.84% lower than yesterday and 4.88% higher 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.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Gold trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist