Gold has gone through considerable pain this year- down almost 9% year-to-date. After being aggressively bullish gold for the majority of last year, we pivoted to bearish this year. Our rationale, while multi-factorial, can be boiled down to us expecting risk assets to rally as reflation continued. This move indeed played out as we expected, and gold is now down significantly from its all-time highs from last year. The question we find we’re asking ourselves today is how long this environment can continue? To answer this question, we offer our cyclical model for gold, a reliable signal for future gold trends over a long time. While gold will eventually turn upwards, there looks to be some downside left:

As we can see, our cyclical model has indeed been a strong predictor of gold trends, and we don’t expect this to continue. According to our estimates, gold will likely continue to fall as long as the US equity market continues to rally. We think that focusing on this fact, rather than a specific date as a turning point, is a superior approach. To get a better sense of market timing, we look at gold through our risk measures:

Recall:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in terms of volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

Longer-term indicators are pointing to lower gold. Further, the recent spike in gold prices has compressed volatility to a level that looks inconsistent with recent history. However, we do need to be careful as price momentum over the last momentum has turned positive. Overall, there seems to be further downside left until the reflation narrative tops out.