Bounce Remains Unconvincing Ahead of Fed from wisepowder's blog
Gold prices have rallied over the past week after reaching a
make-or-break level of technical support at the start of March.
Coinciding with global bond yields pulling back from their yearly highs,
there has been a substantive reason for gold prices to bounce.To get
more news about WikiFX, you can visit wikifx.com official website.
But not all is sanguine. The technical damage wrought in recent weeks and months has not been undone, and the fundamental outlook has been damaged thanks, in part, to the rise in real US yields. As the inflation/reflation thematic back-and-forth takes center stage with the March Fed meeting tomorrow, meaning that another spike in global bond yields could hurt gold prices down the road.
LONG-TERM FUNDAMENTALS MATTER, BUT…
Its important to view recent price action across asset classes through the lens of asset allocation and risk-adjusted returns. Gold, like other precious metals, does not have a dividend, yield, or coupon (as noted earlier), thus a jump in both US nominal and real yields presents a problem. Moreover, rising US Treasury yields, narrowing the gap with key metrics like US S&P 500 dividend yield (and above that, the earnings yield), are provoking reallocation not just in commodities, but equities and FX as well.
Bond markets are the ‘tail that wags the dog,’and while longer-term fundamentals matter, a rapid advance in yields can provoke short-term havoc that runs counter to longer-term expectations (in this case, which is a steady erosion in real yields due to the combination of loose monetary policy and expansionary fiscal policy).
Gold Prices, Gold Volatility Out of Sync
Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks dont 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 continued to pullback from its early-March peak, approaching its lowest closing level since November 2020. Gold volatility (as measured by the Cboes gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) is trading at 17.89, far below the yearly high set during the first week of February at 24.03. The 5-day correlation between GVZ and gold prices is -0.04 while the 20-day correlation is -0.35. One week ago, on March 9, the 5-day correlation was -0.33 and the 20-day correlation was +0.48.
In the last gold price forecast update, it was noted that “if gold prices are going to find a bottom, this may be an ideal place from a technical perspective.” Indeed, gold prices rallied from key confluence: the 38.2% Fibonacci retracement of the 2015 low/2020 high range at 1682.27; the 61.8% Fibonacci retracement of the 2020 low/high range at 1689.74; and longer-term bull flag support (as measured from the August 2020 and January 2021 highs measured against the November 2020 low).
But gold prices have yet to make a meaningful technical rebound. Still below the 50% Fibonacci retracement of the 2020 low/high range, gold prices are enmeshed in their daily EMA envelope, which is attempting to shift from bearish to neutral positioning. Daily Slow Stochastics have risen back to their median line, but daily MACD remains well-below its signal line.
But not all is sanguine. The technical damage wrought in recent weeks and months has not been undone, and the fundamental outlook has been damaged thanks, in part, to the rise in real US yields. As the inflation/reflation thematic back-and-forth takes center stage with the March Fed meeting tomorrow, meaning that another spike in global bond yields could hurt gold prices down the road.
LONG-TERM FUNDAMENTALS MATTER, BUT…
Its important to view recent price action across asset classes through the lens of asset allocation and risk-adjusted returns. Gold, like other precious metals, does not have a dividend, yield, or coupon (as noted earlier), thus a jump in both US nominal and real yields presents a problem. Moreover, rising US Treasury yields, narrowing the gap with key metrics like US S&P 500 dividend yield (and above that, the earnings yield), are provoking reallocation not just in commodities, but equities and FX as well.
Bond markets are the ‘tail that wags the dog,’and while longer-term fundamentals matter, a rapid advance in yields can provoke short-term havoc that runs counter to longer-term expectations (in this case, which is a steady erosion in real yields due to the combination of loose monetary policy and expansionary fiscal policy).
Gold Prices, Gold Volatility Out of Sync
Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks dont 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 continued to pullback from its early-March peak, approaching its lowest closing level since November 2020. Gold volatility (as measured by the Cboes gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) is trading at 17.89, far below the yearly high set during the first week of February at 24.03. The 5-day correlation between GVZ and gold prices is -0.04 while the 20-day correlation is -0.35. One week ago, on March 9, the 5-day correlation was -0.33 and the 20-day correlation was +0.48.
In the last gold price forecast update, it was noted that “if gold prices are going to find a bottom, this may be an ideal place from a technical perspective.” Indeed, gold prices rallied from key confluence: the 38.2% Fibonacci retracement of the 2015 low/2020 high range at 1682.27; the 61.8% Fibonacci retracement of the 2020 low/high range at 1689.74; and longer-term bull flag support (as measured from the August 2020 and January 2021 highs measured against the November 2020 low).
But gold prices have yet to make a meaningful technical rebound. Still below the 50% Fibonacci retracement of the 2020 low/high range, gold prices are enmeshed in their daily EMA envelope, which is attempting to shift from bearish to neutral positioning. Daily Slow Stochastics have risen back to their median line, but daily MACD remains well-below its signal line.
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