Sive Morten
Special Consultant to the FPA
- Messages
- 18,675
Fundamentals
As we've said in our FX report - most important event of this week is the Fed meeting, and particularly J. Powell statement on coming rate cut in 2024, that the Fed somewhere on the plateau of the rate policy. Yesterday we've discussed in details recent Fed meeting, explained why the Fed has had to do it and what consequences could follow. Here we also take a look, what impact it could make on Gold market as well.
Market Overview
Gold prices on Tuesday pared gains on news that U.S. consumer prices rose unexpectedly in November. The consumer price index (CPI) rose 3.1% in November on an annual basis, in line with economists' expectations. The CPI edged up 0.1% on a month-on-month basis in November.
Gold prices rose more than 1% on Wednesday after the U.S. Federal Reserve flagged an end to its interest rate hike cycle and indicated possible rate cuts next year. The U.S. central bank held interest rates steady on Wednesday. A near unanimous 17 of 19 Fed officials project the policy rate will be lower by the end of 2024 than it is now, with the median projection showing the rate falling three-quarters of a percentage point from the current 5.25%-5.50%.
Markets are now pricing in around an 77% chance of a rate cut in March from the Fed, according to the CME FedWatch tool. Fed Chair Jerome Powell said inflation has eased without significant rise in unemployment and that full effects of tightening is likely not yet felt. Data showed U.S. producer prices were unexpectedly unchanged in November, indicating inflation at the factory gate continued to subside.
The European Central Bank also left interest rates unchanged as expected on Thursday.
Gold prices touched a 10-day high on Thursday as the U.S. dollar and Treasury yields slipped after the Federal Reserve signalled an end to its monetary policy tightening cycle. The dollar slipped to a four-month low, while the U.S. benchmark 10-year yield dropped to its lowest level since late July. Palladium surged 11% to $1,102.44, set for its best session since March 2020 after hitting a five-year low earlier this month.
View on Gold market
So, recent rally is understandable - market falls in euphoria, the expectation of rate cut and end of the hiking cycle has become massive. We suggest that the Fed has had to do this. Because statistics, at least official one, suggests that the Fed has pretty comfortable situation to keep rate hike for more. Indeed, we have 5% GDP growth, low unemployment, stable positive consumption and payrolls and inflation is not yet at 2% level - what could force the Fed to announce end of hiking cycle and even more - publicly announce rate cut in 2024? Thus, using just common sense tells that the Fed has to do this, maybe by some reasons that are not become public yet. Maybe it relates somehow to started J. Biden impeachment procedure. But, in fact, it doesn't matter... If you have good statistics i.e. economy condition and inflation above the target - why should I start rate cut cycle or announce the rate plateau? Hence, something different stands on the back, or statistics do not reflect real situation properly.
As we've discussed yesterday, this step by the Fed could lead to significantly more complex variety of scenarios, than just market suggests. In fact, inflation could start raising again due to devaluation of US Dollar, and we treat this scenario as very probable. For now, bond market also shows that inflation is dropping slower than expected:
It is huge rush around 1 Oz gold bars in the US, it usually sold out in few hours. A single bar of gold is both expensive enough to be a store of real value and cheap enough that a large proportion of Costco's membership can afford it. The bars usually sell out hours after being posted on the retailer's online store. The retailer sells 1 oz. gold bars for just over $2,000 a pop, with a limit of two bars per Costco membership, per the online store. The company sold $100 million in gold bars in its first quarter ending Nov. 26, Costco CFO Richard Galanti said during an earnings call Thursday.
It seems that many people read our researches
As we call to buy physical gold for the 2nd year.
Meantime, big banks suggest that it is too early to bury the US Dollar. Actually, we also suggest that ECB could be even earlier on 1sttee rate cut. Because EU is falling into recession 10 times faster than the US, loosing ~0.5% of national economy per month. That's why, deflation should accelerate more as well as unemployment, which could force ECB to act quicker.
HSBC, JPMorgan, Morgan Stanley: dollar will rise in 2024. According to large Western banks, Europe and the UK are closer to recession than the USA. The dollar always benefits from any negativity overseas as it becomes a traditional safe haven. Morgan Stanley predicts that the dollar index will rise to 111 by spring from the current level of 102. JPMorgan strategists, in turn, believe that in the first half of 2024 the indicator will increase by 3%.
David Adams, head of foreign exchange strategy at Morgan Stanley, recalled the possible prospect of an earlier and faster easing of policy by the European Central Bank, which would keep the difference in interest rates in favor of the dollar. JPMorgan says geopolitical tensions will support the dollar and the US elections will also be a focus in 2024. The paradox is that the electoral process can destabilize the state, but people will flee to the national currency of the same state.
Indeed, at most negative scenario, EU could fall into Middle Ages. By expert opinion Inflation in the euro area will reach the target 2% only by the end of next year. Although we suggest that it should happen faster...
This will allow governments to borrow freely and the ECB to run the printing press. But if force majeure does not happen. The main risk for the European financial system is weather. In the event of a cold winter and a long spring, gas storage facilities will begin to empty, and energy resources will become more expensive, accelerating production costs further down the chain.
Second risk comes from the South. In particular, the closure of Suez or Hormuz due to the conflict in the Middle East will lead to an oil famine and a sharp rise in the price of diesel and gasoline. This is a new surge in inflation and tough monetary policy. Such shipping giants Maersk and Hapag-Lloyd have ceased sailing their container ships in these waters. Two other major shipping companies followed suit on Saturday. AFP News reported that the Italian-Swiss Mediterranean Shipping Company and France's CMA CGM stopped their container ships from sailing through the Red Sea on Saturday, citing growing risks from Iran-backed Houthi rebels.
The Red Sea accounts for 40% of the world's international trade. Some shipping companies have already changed their routes around the Cape of Good Hope to avoid the conflict zone.
Finally, the third risk is China. If the Taiwanese case worsens, fuel inflation will seem like flowers against the backdrop of an embargo on thousands of mid- and high-value products that will instantly disappear from the market.
Because of the Fed decision, investors start thinking what to do with cash that are stored in money market funds, counted for ~ $6 Trln, and this week the first outflow has happened. It was small, just around $11.5 Bln, but the starting point is set. It means that these assets probably will be re-distributed somehow in more risky assets, probably bonds, but some part could be invested in gold either due to troubled times.
One of the famous gold bugs explains very interestingly why gold should rise to $15,000 by 2026:
As a technical model, we will look at two previous gold bull markets and compare them to the performance of the current bull market. The first bull market in gold lasted from August 1971 to January 1980. The dollar price of gold rose from $35 per ounce to $800 per ounce. This is an increase of 2200% in 9.4 years.
The second gold bull market lasted from August 1999 to August 2011. The dollar price of gold rose from $250 per ounce to $1,900 per ounce. That's a 670% increase in 12 years.
Of course, the period after 1980 was a long bear market that lasted 19 years and resulted in a 68% drop in the dollar price of gold. The period from August 2011 to December 2015 was another 4.3-year bear market, with the dollar price of gold falling 45%. I don't ignore them. It's just that we're in a new gold bull market right now, so the previous bull market performance is the appropriate starting point for predictive analytics.
Another question: why do I start my bull/bear market analysis with 1971? Gold has been money throughout the history of civilization and has been minted as gold coins since at least the sixth century BC. The answer is that before 1971, either gold was money (in which case there was no other "money" to compare it to; gold was valued by weight, not by exchange rate), or the world had a gold standard , under which money the price of gold was fixed (albeit with suspension of convertibility during wars and periodic interruptions due to devaluation).
In a world where gold is money or the value of gold is fixed by law, there are no bull or bear markets, although inflation or deflation may occur.
The third gold bull market began on December 16, 2015, when gold bottomed at $1,050 an ounce at the end of the previous bear market. Since then, gold has risen to around $2,000 an ounce today, a gain of 90%.
If we take a simple average of the price gains and duration of the previous two gold bull markets, we get a gain of 1,435% over a period of 10.7 years. Applying this gain and duration to the $1,050/oz baseline starting in December 2015 results in a profit forecast for this bull market of $15,070/oz by August 2026.
True, then he makes a reservation that “this is not certain.” In principle, as always with any forecasts. Honestly, I don’t really trust forecasts based on “this has already happened on the chart before.” It is much better when the analysis is based on an analysis of the range of fundamental reasons, when it becomes clear from the current situation where the price can go and under what conditions. But I haven’t seen a single normal, full-fledged analysis yet. You have to believe.
It is interesting logic with this conclusion, but we prefer to keep in focus more realistic and closer stand targets. Other analysts set long-term goals around $3200-4100, while the nearest target holds around $2100.
Conclusion:
Taking together our yesterday analysis of the Fed statement and Gold market perspectives, it seems that there are not too many negative scenarios for Gold market. Because if inflation is defeated indeed (although we do not think so yet), then the Fed will start cutting rate, making US dollar less attractive and supporting Gold. If even we suggest that real rates will not change too much and remain in positive area - tricky geopolitical situation and other driving factors should support gold market. So, there should not be any strong collapse.
Otherwise, if inflation will start to grow again, and we suggest that this is unavoidable, this will be even stronger boost. As we've estimated yesterday, the inflation drop in the US mostly is driven by cheaper oil and food as it stands stubborn in services and other goods. Once dollar will turn down again, the goods should start going up and inflation will return, and it is no matter how strong it will be. As we've said - the Fed had has to finish upward rate cycle. It means that if even inflation start raising, the Fed will be limited in its ability to raise rate. Maybe we could get 1-2 rate hikes but with 5.5% economy already stands at the edge. Taking in consideration outstanding national debt - this is checkmate situation for the Fed with no exit. For gold market it means that if even the Fed will raise rate more - the real rates will start dropping as inflation will be faster. All these moments will be supportive for the gold market. Besides, sentiment will change drastically and markets could turn into frustration, if not to say panic, running into safety. If we would add foreign affairs and US domestic political showdown, that will make very healthy background for upside gold performance.
All these conclusions make us consider any more or less significant deep on gold market as a chance to increase position for long term perspective. Here we speak not about short-term speculations but about investing, preferably in a way of physical metal, or at least, if you're dealing with futures market for position without a leverage.
Technicals
Monthly
On long term chart trend remains bullish, but first attempt to break the top has failed. Now price is consolidating around the top and YPR1. The fact that gold doesn't drop too deep out of the top is a good sign for the bulls. For now we do not have any new clues from monthly chart. It would nice for bulls, if price will be able to hold in December range. So, in nearest few weeks most important will be performance on daily and intraday charts probably:
Weekly
Context remains bullish here as well, showing healthy upside acceleration. Overbought is gone, reaction on COP target seems proper. But we still have engulfing pattern. So, on weekly chart gold is not out of the woods yet and keeps theoretical chances on deeper retracement. To identify the failure of the bearish scenario, probably we do not need to wait for action above 2150$ top, but to keep an eye on daily market performance to get early bullish signs.
Daily
The same thing we could say about daily chart. Despite solid rally and no grabbers (at least for now), trend remains bearish. Price action is still just a retracement of previous downside action. And many things depend on gold market performance in nearest few sessions. If trend turns bullish and market start moving higher, this increases chances for failure of weekly bearish scenario. Otherwise, it keeps possible 2nd downside leg of weekly retracement. Currently daily chart brings not very comfortable picture - the combination of bearish MACD with strong upside action.
Intraday
So, taking it all together, weekly and daily charts bring no clarity by far, keeping opposite signals valid. That's why, we could start next week with mentioned H&S pattern by two reasons. First is, it has good shape and hopefully will be suitable as indicator for longer-term perspective as a separate pattern for direct trading. Second - because this is the only pattern that we have by far... Supposedly 2000-2005$ area should become the signal one. If H&S fails, chances on deeper downside action will increase. Otherwise it is possible to use it for scalp long position, as usually we do.
As we've said in our FX report - most important event of this week is the Fed meeting, and particularly J. Powell statement on coming rate cut in 2024, that the Fed somewhere on the plateau of the rate policy. Yesterday we've discussed in details recent Fed meeting, explained why the Fed has had to do it and what consequences could follow. Here we also take a look, what impact it could make on Gold market as well.
Market Overview
Gold prices on Tuesday pared gains on news that U.S. consumer prices rose unexpectedly in November. The consumer price index (CPI) rose 3.1% in November on an annual basis, in line with economists' expectations. The CPI edged up 0.1% on a month-on-month basis in November.
Gold prices rose more than 1% on Wednesday after the U.S. Federal Reserve flagged an end to its interest rate hike cycle and indicated possible rate cuts next year. The U.S. central bank held interest rates steady on Wednesday. A near unanimous 17 of 19 Fed officials project the policy rate will be lower by the end of 2024 than it is now, with the median projection showing the rate falling three-quarters of a percentage point from the current 5.25%-5.50%.
Markets are now pricing in around an 77% chance of a rate cut in March from the Fed, according to the CME FedWatch tool. Fed Chair Jerome Powell said inflation has eased without significant rise in unemployment and that full effects of tightening is likely not yet felt. Data showed U.S. producer prices were unexpectedly unchanged in November, indicating inflation at the factory gate continued to subside.
The European Central Bank also left interest rates unchanged as expected on Thursday.
Gold prices touched a 10-day high on Thursday as the U.S. dollar and Treasury yields slipped after the Federal Reserve signalled an end to its monetary policy tightening cycle. The dollar slipped to a four-month low, while the U.S. benchmark 10-year yield dropped to its lowest level since late July. Palladium surged 11% to $1,102.44, set for its best session since March 2020 after hitting a five-year low earlier this month.
View on Gold market
So, recent rally is understandable - market falls in euphoria, the expectation of rate cut and end of the hiking cycle has become massive. We suggest that the Fed has had to do this. Because statistics, at least official one, suggests that the Fed has pretty comfortable situation to keep rate hike for more. Indeed, we have 5% GDP growth, low unemployment, stable positive consumption and payrolls and inflation is not yet at 2% level - what could force the Fed to announce end of hiking cycle and even more - publicly announce rate cut in 2024? Thus, using just common sense tells that the Fed has to do this, maybe by some reasons that are not become public yet. Maybe it relates somehow to started J. Biden impeachment procedure. But, in fact, it doesn't matter... If you have good statistics i.e. economy condition and inflation above the target - why should I start rate cut cycle or announce the rate plateau? Hence, something different stands on the back, or statistics do not reflect real situation properly.
As we've discussed yesterday, this step by the Fed could lead to significantly more complex variety of scenarios, than just market suggests. In fact, inflation could start raising again due to devaluation of US Dollar, and we treat this scenario as very probable. For now, bond market also shows that inflation is dropping slower than expected:
It is huge rush around 1 Oz gold bars in the US, it usually sold out in few hours. A single bar of gold is both expensive enough to be a store of real value and cheap enough that a large proportion of Costco's membership can afford it. The bars usually sell out hours after being posted on the retailer's online store. The retailer sells 1 oz. gold bars for just over $2,000 a pop, with a limit of two bars per Costco membership, per the online store. The company sold $100 million in gold bars in its first quarter ending Nov. 26, Costco CFO Richard Galanti said during an earnings call Thursday.
It seems that many people read our researches
As we call to buy physical gold for the 2nd year.Meantime, big banks suggest that it is too early to bury the US Dollar. Actually, we also suggest that ECB could be even earlier on 1st
HSBC, JPMorgan, Morgan Stanley: dollar will rise in 2024. According to large Western banks, Europe and the UK are closer to recession than the USA. The dollar always benefits from any negativity overseas as it becomes a traditional safe haven. Morgan Stanley predicts that the dollar index will rise to 111 by spring from the current level of 102. JPMorgan strategists, in turn, believe that in the first half of 2024 the indicator will increase by 3%.
David Adams, head of foreign exchange strategy at Morgan Stanley, recalled the possible prospect of an earlier and faster easing of policy by the European Central Bank, which would keep the difference in interest rates in favor of the dollar. JPMorgan says geopolitical tensions will support the dollar and the US elections will also be a focus in 2024. The paradox is that the electoral process can destabilize the state, but people will flee to the national currency of the same state.
Indeed, at most negative scenario, EU could fall into Middle Ages. By expert opinion Inflation in the euro area will reach the target 2% only by the end of next year. Although we suggest that it should happen faster...
This will allow governments to borrow freely and the ECB to run the printing press. But if force majeure does not happen. The main risk for the European financial system is weather. In the event of a cold winter and a long spring, gas storage facilities will begin to empty, and energy resources will become more expensive, accelerating production costs further down the chain.
Second risk comes from the South. In particular, the closure of Suez or Hormuz due to the conflict in the Middle East will lead to an oil famine and a sharp rise in the price of diesel and gasoline. This is a new surge in inflation and tough monetary policy. Such shipping giants Maersk and Hapag-Lloyd have ceased sailing their container ships in these waters. Two other major shipping companies followed suit on Saturday. AFP News reported that the Italian-Swiss Mediterranean Shipping Company and France's CMA CGM stopped their container ships from sailing through the Red Sea on Saturday, citing growing risks from Iran-backed Houthi rebels.
The Red Sea accounts for 40% of the world's international trade. Some shipping companies have already changed their routes around the Cape of Good Hope to avoid the conflict zone.
Finally, the third risk is China. If the Taiwanese case worsens, fuel inflation will seem like flowers against the backdrop of an embargo on thousands of mid- and high-value products that will instantly disappear from the market.
Because of the Fed decision, investors start thinking what to do with cash that are stored in money market funds, counted for ~ $6 Trln, and this week the first outflow has happened. It was small, just around $11.5 Bln, but the starting point is set. It means that these assets probably will be re-distributed somehow in more risky assets, probably bonds, but some part could be invested in gold either due to troubled times.
One of the famous gold bugs explains very interestingly why gold should rise to $15,000 by 2026:
As a technical model, we will look at two previous gold bull markets and compare them to the performance of the current bull market. The first bull market in gold lasted from August 1971 to January 1980. The dollar price of gold rose from $35 per ounce to $800 per ounce. This is an increase of 2200% in 9.4 years.
The second gold bull market lasted from August 1999 to August 2011. The dollar price of gold rose from $250 per ounce to $1,900 per ounce. That's a 670% increase in 12 years.
Of course, the period after 1980 was a long bear market that lasted 19 years and resulted in a 68% drop in the dollar price of gold. The period from August 2011 to December 2015 was another 4.3-year bear market, with the dollar price of gold falling 45%. I don't ignore them. It's just that we're in a new gold bull market right now, so the previous bull market performance is the appropriate starting point for predictive analytics.
Another question: why do I start my bull/bear market analysis with 1971? Gold has been money throughout the history of civilization and has been minted as gold coins since at least the sixth century BC. The answer is that before 1971, either gold was money (in which case there was no other "money" to compare it to; gold was valued by weight, not by exchange rate), or the world had a gold standard , under which money the price of gold was fixed (albeit with suspension of convertibility during wars and periodic interruptions due to devaluation).
In a world where gold is money or the value of gold is fixed by law, there are no bull or bear markets, although inflation or deflation may occur.
The third gold bull market began on December 16, 2015, when gold bottomed at $1,050 an ounce at the end of the previous bear market. Since then, gold has risen to around $2,000 an ounce today, a gain of 90%.
If we take a simple average of the price gains and duration of the previous two gold bull markets, we get a gain of 1,435% over a period of 10.7 years. Applying this gain and duration to the $1,050/oz baseline starting in December 2015 results in a profit forecast for this bull market of $15,070/oz by August 2026.
True, then he makes a reservation that “this is not certain.” In principle, as always with any forecasts. Honestly, I don’t really trust forecasts based on “this has already happened on the chart before.” It is much better when the analysis is based on an analysis of the range of fundamental reasons, when it becomes clear from the current situation where the price can go and under what conditions. But I haven’t seen a single normal, full-fledged analysis yet. You have to believe.
It is interesting logic with this conclusion, but we prefer to keep in focus more realistic and closer stand targets. Other analysts set long-term goals around $3200-4100, while the nearest target holds around $2100.
Conclusion:
Taking together our yesterday analysis of the Fed statement and Gold market perspectives, it seems that there are not too many negative scenarios for Gold market. Because if inflation is defeated indeed (although we do not think so yet), then the Fed will start cutting rate, making US dollar less attractive and supporting Gold. If even we suggest that real rates will not change too much and remain in positive area - tricky geopolitical situation and other driving factors should support gold market. So, there should not be any strong collapse.
Otherwise, if inflation will start to grow again, and we suggest that this is unavoidable, this will be even stronger boost. As we've estimated yesterday, the inflation drop in the US mostly is driven by cheaper oil and food as it stands stubborn in services and other goods. Once dollar will turn down again, the goods should start going up and inflation will return, and it is no matter how strong it will be. As we've said - the Fed had has to finish upward rate cycle. It means that if even inflation start raising, the Fed will be limited in its ability to raise rate. Maybe we could get 1-2 rate hikes but with 5.5% economy already stands at the edge. Taking in consideration outstanding national debt - this is checkmate situation for the Fed with no exit. For gold market it means that if even the Fed will raise rate more - the real rates will start dropping as inflation will be faster. All these moments will be supportive for the gold market. Besides, sentiment will change drastically and markets could turn into frustration, if not to say panic, running into safety. If we would add foreign affairs and US domestic political showdown, that will make very healthy background for upside gold performance.
All these conclusions make us consider any more or less significant deep on gold market as a chance to increase position for long term perspective. Here we speak not about short-term speculations but about investing, preferably in a way of physical metal, or at least, if you're dealing with futures market for position without a leverage.
Technicals
Monthly
On long term chart trend remains bullish, but first attempt to break the top has failed. Now price is consolidating around the top and YPR1. The fact that gold doesn't drop too deep out of the top is a good sign for the bulls. For now we do not have any new clues from monthly chart. It would nice for bulls, if price will be able to hold in December range. So, in nearest few weeks most important will be performance on daily and intraday charts probably:
Weekly
Context remains bullish here as well, showing healthy upside acceleration. Overbought is gone, reaction on COP target seems proper. But we still have engulfing pattern. So, on weekly chart gold is not out of the woods yet and keeps theoretical chances on deeper retracement. To identify the failure of the bearish scenario, probably we do not need to wait for action above 2150$ top, but to keep an eye on daily market performance to get early bullish signs.
Daily
The same thing we could say about daily chart. Despite solid rally and no grabbers (at least for now), trend remains bearish. Price action is still just a retracement of previous downside action. And many things depend on gold market performance in nearest few sessions. If trend turns bullish and market start moving higher, this increases chances for failure of weekly bearish scenario. Otherwise, it keeps possible 2nd downside leg of weekly retracement. Currently daily chart brings not very comfortable picture - the combination of bearish MACD with strong upside action.
Intraday
So, taking it all together, weekly and daily charts bring no clarity by far, keeping opposite signals valid. That's why, we could start next week with mentioned H&S pattern by two reasons. First is, it has good shape and hopefully will be suitable as indicator for longer-term perspective as a separate pattern for direct trading. Second - because this is the only pattern that we have by far... Supposedly 2000-2005$ area should become the signal one. If H&S fails, chances on deeper downside action will increase. Otherwise it is possible to use it for scalp long position, as usually we do.
