Gold prices have had a tough start to the New Year, with price action proving haphazard. Volatility hasn’t exploded or collapsed, leaving gold prices adrift, easily succumbing to the cross-currents presented by other asset classes, politics, fiscal stimulus speculation, and monetary policy.
Gold is lacking a compelling narrative right now, and while a ‘blue wave’ presents a fundamentally bullish rationale long-term, the short-term picture is much less clear.
GOLD PRICE TECHNICAL ANALYSIS
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.
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.
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 18.85. The 5-day correlation between GVZ and gold prices is -0.39 while the 20-day correlation is +0.63; one week ago, on January 15, the 5-day correlation was +0.37 and the 20-day correlation was +0.62.
Gold: Retail trader data shows 80.84% of traders are net-long with the ratio of traders long to short at 4.22 to 1. The number of traders net-long is 3.31% lower than yesterday and 10.36% lower from last week, while the number of traders net-short is 5.30% lower than yesterday and 11.67% 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.
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