Gold’s Exciting Boredom

The last few trading days in gold were quite interesting, but overall gold has been a quite boring market in the last couple of months. Gold’s volatility index dropped to new lows as the current back and forth movement is just a small part of the same kind of movement on a broader scale. It’s more of the same. And when gold’s volatility gets very low, interesting things tend to happen next over 80% of the time. In other words, the situation in gold is now so boring that it’s a signal on its own. In today’s analysis, we’ll dig into details.

It’s time for gold’s boring, yet effective signal.

Extracting Value from Boredom

The gold volatility index moved to new lows this year and it is not a one-time event. There were already two moves below the 2017 and 2018 lows and the current move lower is the third attempt to slide even lower. The 50-day moving average is also at the levels that haven’t been seen previously.

What does it mean? It most likely means lower gold prices.

We marked the similar very low-volume cases with vertical dashed lines. The red ones are the ones that were followed by gold’s declines and the green ones are the ones that were followed by upswings in gold. We didn’t pay attention to daily moves, but to bigger moves that one can measure in terms of weeks. It turns out that 16 out of 19 preceding signals (about 84% of them) were followed by gold’s declines. We’re not counting the last 2 signals as they are still “in play”.

The only three bullish cases were actually single spikes lower in volatility. It was not a prolonged boredom, like the one that we saw in late 2012 / early 2013 and it’s not like what we see right now. Consequently, it seems that the above-mentioned 84% is likely understated in terms of the volatility-based probability of declines in gold in the following weeks.

Many goldbugs and other investors will view the lack of volatility as something neutral. After all, gold is not doing much, so why should it have any implications going forward? The point is that it does have implications as almost all low-volatility periods, especially the ones similar to the current one are, were followed by meaningful downtrends.

Naturally, there are also other signals that that need to be considered, but they also support lower gold prices in the following weeks.

Let’s examine the most recent ones.

The previous week started with a geopolitical-news-based rally in gold that quickly became invalidated even though the tensions that made gold rally in the first place, didn’t subside at all. Gold formed a weekly shooting star candlestick and it took place on relatively big volume. At the same time, it happened despite bullish news. This is an extremely bearish combination for the following weeks and a final warning sign that gold price is about to really slide.