Gold has retraced from its November high of $1,516, but it is still up more than 18% year-to-date. The important element to note here is that the price is still trading well above the $1,500 mark—a critical level that gives hope to bulls.
Gold Price Neglects Equity Markets Strength
Despite the new record highs of the S&P 500 (on October 28, the S&P 500 reached 3,637), the gold price has been moving higher. Usually, a risk-on trade—meaning when the equity markets start to move higher—is associated with a risk-off trade; the gold price usually moves lower. But this textbook trade has failed to materialize. This shows that the bulls do have some force behind them.
Economic Docket Isn't Good
It is important to keep in mind that the overall US economic docket paints a pessimistic picture. The recent US ISM manufacturing number released on Friday (actual 48.3 against the forecast of 49) shows that the manufacturing sector is feeling the pain caused by the trade war. However, the US GDP and US labor data are improving from a relative perspective—the US non-farm employment came in at 128K while the US GDP q/q growth stood at 1.9%. If manufacturing continues to suffer it would take down the labor market and the only solution to this problem is a ceasefire between the US and China.
Gold Volatility and Earning Estimates
Another lens that we can use to measure the momentum of the gold price is by looking at the gold volatility. The GVXX index, which shows the volatility for gold, has dropped substantially. This has happened as the Citi ERI global index that measures the global equity upgrade and downgrade revisions by analysts improved considerably. The current reading of this index is -0.17. Once again, investors are still betting on the gold price to move higher despite the fact that the underlying fundamentals of the equity markets have improved. It shows investors do not feel comfortable keeping too much risk on their books and they like to have a hedge in place—a phenomenon which is common when the US equity markets are near record highs.
Price Action Says It All
From a technical price action perspective, we have formed a bullish price pattern—ascending triangle—on the daily time frame. The projection of this triangle could easily push the price well above $1,650.
To conclude, the momentum of the gold price is strong, even though traders know that the trade deal could be happening any day. Investors do not feel fully comfortable placing their eggs in one basket—the equity markets—and this is keeping the gold price higher.
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