Gold’s correction is now in the rearview mirror; record prices are on the horizon
NEW YORK (November 10) The gold market is seeing new momentum at the start of the week, with prices pushing above $4,100 an ounce.
Although gold has broken key near-term resistance points, it still has significant ground to cover to regain last month’s all-time highs above $4,360 an ounce. Spot gold last traded at $4,108.90 an ounce, up nearly 3% on the day but still down roughly 6% from its record highs.
According to one market analyst, however, the new momentum — as gold market volatility remains elevated — could signal an end to the precious metal’s short correction. In a report Friday, Tim Hayes, Chief Global Strategist at Ned Davis Research, said he remains bullish on gold and that lower prices could represent a buying opportunity for investors.
“The macro environment supporting gold is not significantly different than it was before the sell-off, which can be considered a bout of profit-taking,” he said. “With the selling behind us, gold is well-positioned to continue rising on its way to another round of record highs. We remain with our bullish position maintained for the past two years.”
Hayes said that while the gold market continues to enjoy robust fundamental support, he is specifically looking at its volatility as a signal that the two-week correction has ended.
“For stock investors, thoughts of rising volatility evoke negative memories. After the VIX has spiked above 28.5, the global equity benchmark has had a median drawdown of -20%,” he said in his note. “But for gold investors, rising volatility has tended to be a positive development. When our 150-day Gold Volatility Index has been more than 15% above its one-year average, gold has risen at a double-digit per annum rate. The last two years of gold strength have taken place as the volatility index has trended higher.”
Along with positive volatility metrics, Hayes said an aggregate of NDR’s Gold Watch indicators is decisively bullish, at readings above 70%.
One particular bearish holdout in the firm’s gold price models is the new bullish momentum in the U.S. dollar. The greenback has attracted renewed attention following the Federal Open Market Committee meeting, when Fed Chair Jerome Powell warned markets that a December rate hike was not a foregone conclusion.
However, despite Powell’s comments, markets still see a 60% chance of a rate cut next month.
“It’s doubtful that the dollar will continue to appreciate, considering the long-term composite’s bearish reading intact since March, interest rate differential trends that are dollar negative, and the indications of excessive optimism,” he said.
Hayes also noted that the positive technical indicators come as gold’s two-week selloff has significantly cooled the market and shaken out speculative traders. He said that his short-term indicators in the gold market show sentiment shifting from excessively optimistic to excessively pessimistic.
“As the long-term model also remains bullish, we will be watching for the short-term model to flip back from bearish to bullish, agreeing with the longer-term models and confirming that the gold advance has resumed,” he said.
As for further downside risks for gold, Hayes said he continues to watch elevated real yields. He noted that real yields above 3.5% would be particularly worrisome.
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