Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
(Reuters) - Gold prices slipped on Friday from the previous day's one-month high as the dollar strengthened on a solid U.S. jobs report, while palladium was on track for its largest weekly gain since March on record high U.S. car sales.
U.S. non-farm payrolls data that showed a slowing in hiring last month but an increase in wages, supported the view that the U.S. Federal Reserve will press ahead with interest rate increases this year, analysts said.
Spot gold was down 0.7 percent at $1,171.70 an ounce by 2:51 p.m. EST (1951 GMT), but up 1.75 percent on the week, its biggest weekly rise in two months.
But with markets uncertain ahead of U.S. President-elect Donald Trump's inauguration on Jan. 20, investors turned cautious after gold reached its highest since Dec. 5 at $1,184.90 on Thursday.
"Any profit that can be booked at this early stage is welcomed by most, so that's why we're seeing a scaling back a bit," said Saxo Bank analyst Ole Hansen.
U.S. gold futures settled down $7.9, or 0.67 percent, at $1,173.4 per ounce. Non-farm payroll data showed that the United States added fewer-than-expected jobs in December, though a rebound in wages pointed to further interest rate rises from the Fed.
Higher interest rates exert downward pressure on the gold price by increasing the opportunity cost of holding non-yielding bullion. Chicago Fed President Charles Evans said the central bank could raise rates three times this year if economic data comes in a bit stronger than he expects, while Richmond Fed President Jeffrey Lacker said it may have to raise interest rates quicker than markets currently predict.
"For 2017, we think we are starting from a clean base, leaving room for seasonal drivers to breathe some life back into the yellow metal," said Christopher Louney, commodity strategist for RBC Capital Markets, in a note. "In fact, in our seasonality analysis we observe both the strongest and most consistent positive price performance during Q1 over the last 11 years."
Among other precious metals, palladium hit a five-week high of $757.70 an ounce before slipping back to
$756.10, up 2.4 percent. The metal used in vehicle catalysts to clean exhaust emissions has risen 11 percent this week, its biggest gain since March, driven by high U.S. sales of new cars and trucks hit a record high in 2016.
COT Report
Last week CFTC and SPDR data brings very important information on current bounce. Shortly speaking, this bounce looks suspicious. Take a look that net long position has dropped slightly while open interest has increased. It means that investors have opened new shorts on gold, while it stands in upside retracement. Amount of positions opened is not large, but fact still exists.
Another important moment in COT report - gold has normalized value of net position. Now it stands in middle area and gold has free space to increase it in any direction either short or long.
On SPDR fund data we see clear divergence between gold price and SPDR storages. As you can see current upside action is not supported by real money inflow in gold fund. We can say even more - SDPR shows outflow. The same behavior was not too far ago - in October, when gold has shown retracement of the same kind.
That's being said, cashflow and sentiment analysis shows that upside action gold market is fragile and not reliable, at least right now. May be situation will change, who knows, but right now it seems that taking any long positions will be accompanied with solid risk.
Technicals
Monthly
Currently gold stands at very fragile basis. One step down further and fragile support will be broken while gold will drop back to 1000$ level. Gold is very specific asset, since it mostly is driven by fundamentals, especially inflation. Physical demand/supply for this commodity mostly fixed and fluctuates around 5000 tones per year +/- 10%. This physical demand/supply includes individual demand for jewelry, coins, dantists, industrial consumption etc... So, it is relatively stable. If you're interested - here is my investigation of physical demand/supply market for 2 decades, based on Reuters Datastream data. Result of my analysis tells that price of gold barely impacted by changes on physical demand/supply for the metal. Major driving factor for gold is fundamentals, especially inflation and interest rates, and - expectations, rumors. "Buy on rumors" proverb is particularly fair for gold market.
But here we come to most difficult moment. Mostly because fundamental background for gold market is very blur. D. Trump victory and uncertainty around its economy policy, massive political turmoil in Europe and affer foreign affairs do not let us to estimate clear fundamental picture by far.
This fundamental uncertainty and indecision also reflects on technical picture. Investors are waiting and keep prices around last major support and around invalidation point of reversal H&S pattern. Step up - and gold will re-establish upside trend, step down - H&S will fail and gold will drop to 1000$. This mostly explains, why current rally is not supported by real money flow.
As we've said technically recent upward action started in Dec 2015 is first one after long term of decreasing and it should be interrupted by deep retracement sometime. Now this retracement stands in place. It is really big chance that gold stands in a stage of big trend changing from bearish into bullish. US economy shows inflation growing. Commodities across the board have turned to growth:
Besides, any Trump protection policy will be accompanied by big spending and expenses, this will lead to grow of inflationary expectations and could lead even to more hawkish Fed policy. Thus, we mostly gravitate to idea that gold now stands not in pause of bear trend, but on the eve of new bull trend. Also we expect big stractural shifts in EU economy, diminishing Brussels governing role, taking direction onconvergence with Russia economy, and through Russia economical infrastructure - with Middle East and Asia.
But our technical "deep" retracement still could be difference. Currently, as market stands at the edge of 1170 Fib support, we could talk on H&S pattern. Besides the shape itself, some features here that in general typical for H&S. For example, relation between head and shoulders - 1.618. Butterfly... very often first part of H&S takes the shape of butterfly pattern...
That's being said gold stands at the area where the bottom of right shoulder should be formed. Thus, our first step on this long-term time frame has been completed - "we suggest further drop on gold, at least to 1160-1180 area."
As we've said almost month ago - we're coming to second step how we've specified it - "watch for validity of H&S pattern." Right now there is an issue exists that we do not like. This is too fast drop. Actually right shoulder is an area where bulls should gradually take control over the market and fast drop here is not a good sign. Still, our task here is relatively simple - just to watch for reversal patterns on daily that confirm bullish reversal and monthly H&S pattern. If we will not get any - then we will not go long, and it will mean that this H&S could fail. The failure of this pattern will lead price below the head, i.e. under 1000$ level.
Here we come to idea of another reversal pattern. If retracement will be too deep, back to 1000$, gold still will keep chances to reverse up, but by another reversal pattern - Double Bottom.
So, as you can see here we've got big journey ahead while we will estimate what we really have - either H&S or Double Bottom. It means that we should be extra careful to patterns that will be formed on daily chart.
Weekly
Here, as on monthly chart trend stands bearish, price is not at OB/OS. Unforunately we do not have here any clear patterns for immediate trading guys, but still we have a lot of other issues to discuss here.
First, drop slightly inside channel could be due existing of 1.618 AB-CD target, but not real price return inside the channel. Although we initially thought that gold has turned to bearish action to 1000$, but now it seems that probably this conclusion was made too early.
Market now stands above MPP and has tested MPR1. It will be especially important to watch for MPR1. Because if price will break it up - it will mean higher retracement, at least to YPP around 1196 area. While if price will turn down again - it will mean that this is just a retracement in bear trend, reaction of AB-CD target.
On weekly chart we could specify bullish crucial point. This is obviously 1130 lows. Logic is simple here. From perspective of H&S pattern - gold has completed all necessary targets to form right shoulder - downward AB-CD 1.618 extension has been completed and also price has reached 5/8 major Fib support. It means that if gold will drop below this level - it will mean that H&S has failed.
At the same time, even bounce to 1196 area will mean nothing important, since market could form deep retracement up as it has formed downward reversal swing on weekly chart. We need to get clear signs of relation between price action and investors position in SPDR fund and CFTC data. Only if upside rally will be supported by real money flows we could rely on it. Right now, as we've estimated above current rally looks suspicious and not reliable.
Daily
Trend is bullish here, market has reached OB area right at MPR1 and Fib resistance. On daily chart we have backround for momentum trade. We would not call it as B&B "Sell", since it doesn't match to strict DiNapoli rules, as we have too much bars above 3x3 DMA. But the nature of this setup is the same. After long-term drop, market shows upside retracement. Upward action is rather gradual, thus, some deep retracement should happen here, at least 5/8.
Now is major question from where it could start - right now, or gold will try to climb slightly higher, to 1200 area and touch YPP.
That's being said - first step that we will watch for is backward action as retracement up will be over.
Second step is more interesting, but it mostly has relation to farer perspective. We need to understand whether market will form any pattern here. Thus, if we will get, say, Butterfly "Buy" pattern. This will be supportive to idea of monthly H&S and significantly increase chances on new upside rally on gold market.
Intraday
On 4-hour chart, after channel has been broken, gold has completed some multiple upside targets. Here we have DeMark trend line breakout target (completed), AB=CD target (completed). Also on hourly chart you could find completed 1.618 AB-CD.
Besides, these targets stand around rather strong resistance area - MPR1, daily OB and Fib level. This combination significantly increases odds of pullback right now. Especially as we do not see any purshaces in SDPR and CFTC stats.
On a way down we have two major support areas - K-area around 1160 and 5/8 Fib support roughly around 1145. Still, if you would like to take short position - try to get some reversal pattern on the top, watching 30-60 min charts.
Conclusion:
As market has completed first step of our long term analysis - dropped to 1170 area, now we're turning to second step - estimating of validity of monthly H&S pattern. Currently we still think that gold has fundamental background to start long-term bullish trend and two patterns could be formed. Either H&S or Double bottom. Currently we're working with H&S.
On coming week we will expect deep downward drop, at least to 1146 area, but it is still unclear whether it will start right on Monday, or, gold will try to reach 1200 area, and touch YPP first.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - Gold prices slipped on Friday from the previous day's one-month high as the dollar strengthened on a solid U.S. jobs report, while palladium was on track for its largest weekly gain since March on record high U.S. car sales.
U.S. non-farm payrolls data that showed a slowing in hiring last month but an increase in wages, supported the view that the U.S. Federal Reserve will press ahead with interest rate increases this year, analysts said.
Spot gold was down 0.7 percent at $1,171.70 an ounce by 2:51 p.m. EST (1951 GMT), but up 1.75 percent on the week, its biggest weekly rise in two months.
But with markets uncertain ahead of U.S. President-elect Donald Trump's inauguration on Jan. 20, investors turned cautious after gold reached its highest since Dec. 5 at $1,184.90 on Thursday.
"Any profit that can be booked at this early stage is welcomed by most, so that's why we're seeing a scaling back a bit," said Saxo Bank analyst Ole Hansen.
U.S. gold futures settled down $7.9, or 0.67 percent, at $1,173.4 per ounce. Non-farm payroll data showed that the United States added fewer-than-expected jobs in December, though a rebound in wages pointed to further interest rate rises from the Fed.
Higher interest rates exert downward pressure on the gold price by increasing the opportunity cost of holding non-yielding bullion. Chicago Fed President Charles Evans said the central bank could raise rates three times this year if economic data comes in a bit stronger than he expects, while Richmond Fed President Jeffrey Lacker said it may have to raise interest rates quicker than markets currently predict.
"For 2017, we think we are starting from a clean base, leaving room for seasonal drivers to breathe some life back into the yellow metal," said Christopher Louney, commodity strategist for RBC Capital Markets, in a note. "In fact, in our seasonality analysis we observe both the strongest and most consistent positive price performance during Q1 over the last 11 years."
Among other precious metals, palladium hit a five-week high of $757.70 an ounce before slipping back to
$756.10, up 2.4 percent. The metal used in vehicle catalysts to clean exhaust emissions has risen 11 percent this week, its biggest gain since March, driven by high U.S. sales of new cars and trucks hit a record high in 2016.
COT Report
Last week CFTC and SPDR data brings very important information on current bounce. Shortly speaking, this bounce looks suspicious. Take a look that net long position has dropped slightly while open interest has increased. It means that investors have opened new shorts on gold, while it stands in upside retracement. Amount of positions opened is not large, but fact still exists.
Another important moment in COT report - gold has normalized value of net position. Now it stands in middle area and gold has free space to increase it in any direction either short or long.
On SPDR fund data we see clear divergence between gold price and SPDR storages. As you can see current upside action is not supported by real money inflow in gold fund. We can say even more - SDPR shows outflow. The same behavior was not too far ago - in October, when gold has shown retracement of the same kind.
That's being said, cashflow and sentiment analysis shows that upside action gold market is fragile and not reliable, at least right now. May be situation will change, who knows, but right now it seems that taking any long positions will be accompanied with solid risk.
Technicals
Monthly
Currently gold stands at very fragile basis. One step down further and fragile support will be broken while gold will drop back to 1000$ level. Gold is very specific asset, since it mostly is driven by fundamentals, especially inflation. Physical demand/supply for this commodity mostly fixed and fluctuates around 5000 tones per year +/- 10%. This physical demand/supply includes individual demand for jewelry, coins, dantists, industrial consumption etc... So, it is relatively stable. If you're interested - here is my investigation of physical demand/supply market for 2 decades, based on Reuters Datastream data. Result of my analysis tells that price of gold barely impacted by changes on physical demand/supply for the metal. Major driving factor for gold is fundamentals, especially inflation and interest rates, and - expectations, rumors. "Buy on rumors" proverb is particularly fair for gold market.
But here we come to most difficult moment. Mostly because fundamental background for gold market is very blur. D. Trump victory and uncertainty around its economy policy, massive political turmoil in Europe and affer foreign affairs do not let us to estimate clear fundamental picture by far.
This fundamental uncertainty and indecision also reflects on technical picture. Investors are waiting and keep prices around last major support and around invalidation point of reversal H&S pattern. Step up - and gold will re-establish upside trend, step down - H&S will fail and gold will drop to 1000$. This mostly explains, why current rally is not supported by real money flow.
As we've said technically recent upward action started in Dec 2015 is first one after long term of decreasing and it should be interrupted by deep retracement sometime. Now this retracement stands in place. It is really big chance that gold stands in a stage of big trend changing from bearish into bullish. US economy shows inflation growing. Commodities across the board have turned to growth:
Besides, any Trump protection policy will be accompanied by big spending and expenses, this will lead to grow of inflationary expectations and could lead even to more hawkish Fed policy. Thus, we mostly gravitate to idea that gold now stands not in pause of bear trend, but on the eve of new bull trend. Also we expect big stractural shifts in EU economy, diminishing Brussels governing role, taking direction onconvergence with Russia economy, and through Russia economical infrastructure - with Middle East and Asia.
But our technical "deep" retracement still could be difference. Currently, as market stands at the edge of 1170 Fib support, we could talk on H&S pattern. Besides the shape itself, some features here that in general typical for H&S. For example, relation between head and shoulders - 1.618. Butterfly... very often first part of H&S takes the shape of butterfly pattern...
That's being said gold stands at the area where the bottom of right shoulder should be formed. Thus, our first step on this long-term time frame has been completed - "we suggest further drop on gold, at least to 1160-1180 area."
As we've said almost month ago - we're coming to second step how we've specified it - "watch for validity of H&S pattern." Right now there is an issue exists that we do not like. This is too fast drop. Actually right shoulder is an area where bulls should gradually take control over the market and fast drop here is not a good sign. Still, our task here is relatively simple - just to watch for reversal patterns on daily that confirm bullish reversal and monthly H&S pattern. If we will not get any - then we will not go long, and it will mean that this H&S could fail. The failure of this pattern will lead price below the head, i.e. under 1000$ level.
Here we come to idea of another reversal pattern. If retracement will be too deep, back to 1000$, gold still will keep chances to reverse up, but by another reversal pattern - Double Bottom.
So, as you can see here we've got big journey ahead while we will estimate what we really have - either H&S or Double Bottom. It means that we should be extra careful to patterns that will be formed on daily chart.
Weekly
Here, as on monthly chart trend stands bearish, price is not at OB/OS. Unforunately we do not have here any clear patterns for immediate trading guys, but still we have a lot of other issues to discuss here.
First, drop slightly inside channel could be due existing of 1.618 AB-CD target, but not real price return inside the channel. Although we initially thought that gold has turned to bearish action to 1000$, but now it seems that probably this conclusion was made too early.
Market now stands above MPP and has tested MPR1. It will be especially important to watch for MPR1. Because if price will break it up - it will mean higher retracement, at least to YPP around 1196 area. While if price will turn down again - it will mean that this is just a retracement in bear trend, reaction of AB-CD target.
On weekly chart we could specify bullish crucial point. This is obviously 1130 lows. Logic is simple here. From perspective of H&S pattern - gold has completed all necessary targets to form right shoulder - downward AB-CD 1.618 extension has been completed and also price has reached 5/8 major Fib support. It means that if gold will drop below this level - it will mean that H&S has failed.
At the same time, even bounce to 1196 area will mean nothing important, since market could form deep retracement up as it has formed downward reversal swing on weekly chart. We need to get clear signs of relation between price action and investors position in SPDR fund and CFTC data. Only if upside rally will be supported by real money flows we could rely on it. Right now, as we've estimated above current rally looks suspicious and not reliable.
Daily
Trend is bullish here, market has reached OB area right at MPR1 and Fib resistance. On daily chart we have backround for momentum trade. We would not call it as B&B "Sell", since it doesn't match to strict DiNapoli rules, as we have too much bars above 3x3 DMA. But the nature of this setup is the same. After long-term drop, market shows upside retracement. Upward action is rather gradual, thus, some deep retracement should happen here, at least 5/8.
Now is major question from where it could start - right now, or gold will try to climb slightly higher, to 1200 area and touch YPP.
That's being said - first step that we will watch for is backward action as retracement up will be over.
Second step is more interesting, but it mostly has relation to farer perspective. We need to understand whether market will form any pattern here. Thus, if we will get, say, Butterfly "Buy" pattern. This will be supportive to idea of monthly H&S and significantly increase chances on new upside rally on gold market.
Intraday
On 4-hour chart, after channel has been broken, gold has completed some multiple upside targets. Here we have DeMark trend line breakout target (completed), AB=CD target (completed). Also on hourly chart you could find completed 1.618 AB-CD.
Besides, these targets stand around rather strong resistance area - MPR1, daily OB and Fib level. This combination significantly increases odds of pullback right now. Especially as we do not see any purshaces in SDPR and CFTC stats.
On a way down we have two major support areas - K-area around 1160 and 5/8 Fib support roughly around 1145. Still, if you would like to take short position - try to get some reversal pattern on the top, watching 30-60 min charts.
Conclusion:
As market has completed first step of our long term analysis - dropped to 1170 area, now we're turning to second step - estimating of validity of monthly H&S pattern. Currently we still think that gold has fundamental background to start long-term bullish trend and two patterns could be formed. Either H&S or Double bottom. Currently we're working with H&S.
On coming week we will expect deep downward drop, at least to 1146 area, but it is still unclear whether it will start right on Monday, or, gold will try to reach 1200 area, and touch YPP first.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
