Gold Price Outlook:
- Gold costs have rallied sharply, seemingly disconnecting from US yields and the US Dollar.
- However, with gold volatility, fairness volatility, and Treasury volatility surging over the previous 24-hours, traders could also be flocking to gold as a secure haven.
- According to the IG Client Sentiment Index, gold costs have a combined bias within the near-term.
Options Expiry in Play
Gold costs are on the transfer this morning, surging to contemporary month-to-month and yearly highs. While US Treasury yields have backed down and the US Dollar (through the DXY Index) has pulled again, the strikes are minor relative to the sharp uptick in gold costs. But there could also be a motive for this disconnect: as we speak is the choices expiry day for volatility contracts.
Several measures of volatility stay in contango, which implies front-month contracts are buying and selling at decrease costs than contracts expiring additional out in time. As merchants roll their volatility publicity ahead, they’re compelled to purchase increased priced contracts. Accordingly, measures of US fairness volatility and bond volatility – VIX and MOVE, respectively – are buying and selling increased on the day. This has spilled over into valuable metals, the place measures of volatility have spiked as properly.
Gold Volatility and Gold Prices’ Relationship Normalizing
Historically, gold costs have a relationship with volatility in contrast to different asset lessons. While different asset lessons like bonds and shares don’t like elevated volatility – signaling higher uncertainty round money flows, dividends, coupon funds, and so on. – gold have a tendencys to profit during times of upper volatility. Regardless of the rationale for increased volatility – the choices expiry or maybe higher concern round geopolitical tensions in Eastern Europe – gold costs are benefiting.
GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (January 2021 to January 2022) (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 choice chain) was buying and selling at 15.48 on the time this report was written. The relationship between gold costs and gold volatility has been quickly normalizing in latest days. The 5-day correlation between GVZ and gold costs is +0.78 whereas the 20-day correlation is -0.12. One week in the past, on January 12, the 5-day correlation was -0.49 and the 20-day correlation was -0.28.
Gold Price Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 2)
Last week it was famous that “the technical structure points to slowly-but-surely budding technical momentum that could ultimately prevail…a rally into 1835 would likely present a significant selling opportunity, especially as the DXY Index nears a multi-year zone of support/resistance that could stem its sell-off.”
However, with the 1835 hurdle cleared, merchants might wish to look increased earlier than exploring new promoting alternatives. The subsequent cluster of resistance lies round 1860/1870, the place the ascending trendline from the May 2019, March 2020, and March 2021 lows comes into play.
Gold Price Technical Analysis: Weekly Chart (October 2015 to January 2022) (Chart 3)
Nothing modifications on a longer-term perspective: “It’s worth reminding that January is the best month of the year for gold prices according to seasonality studies, so there is a quantitative tailwind helping provide support in the near-term. It also remains the case that the weekly 4-, 8-, and 13-EMA envelope is taking on a positive slope. Alongside weekly MACD turning higher through its signal line, and weekly Slow Stochastics advancing above their median line, bullish momentum has increased in recent weeks, opening the possibility for more gains henceforth before fundamental headwinds curtail the rally.”
IG CLIENT SENTIMENT INDEX: GOLD PRICE FORECAST (January 19, 2022) (Chart 4)
Gold: Retail dealer information reveals 68.37% of merchants are net-long with the ratio of merchants lengthy to brief at 2.16 to 1. The variety of merchants net-long is 0.64% increased than yesterday and three.22% decrease from final week, whereas the variety of merchants net-short is 14.62% increased than yesterday and eight.66% decrease from final week.
We sometimes take a contrarian view to crowd sentiment, and the actual fact merchants are net-long suggests Gold costs might proceed to fall.
Positioning is much less net-long than yesterday however extra net-long from final week. The mixture of present sentiment and up to date modifications offers us an extra combined Gold buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist
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