Sive Morten
Special Consultant to the FPA
- Messages
- 18,702
Fundamentals
Now let's take a look over gold. Of course it goes with the major trend but it has its own nuances, mostly comes from political issues and recent FTX accident. I do not know, guys, do you like it or not that we have to consider political background. Explanation is simple here. Changing of economical course depends on Rep domination and their ability to launch their plan of economical reforms. The more radical they will act the more positive impact on gold happens. That's why, things, that on first glance seems politicals only, have a relation to economy situation. FTX collapse also has significantly deeper meaning than it seems.
Market overview
Gold prices steadied near a three-week peak hit in the previous session, buoyed by a weaker dollar, as investors got U.S. inflation data later this week that could influence the size of Federal Reserve rate-hike. The dollar extended losses to a more than one-week low, making gold more attractive for other currency holders.
Data on last Friday showed U.S. employers hired more workers than expected in October, but a rise in the unemployment rate to 3.7% raised hopes that the U.S. central bank would be less aggressive on rate hikes going forward.
That's in general investors' sentiment right now. Yesterday we've taken in-depth view on recent CPI report and big shift in market's expectations, concerning rate change. I wouldn't repeat everything here, shortly speaking, expectations now stand in favor of just 0.5% rate change in December and 0.25% rate change in February 2023. In fact, chances that Fed will not change rate in December at all also stand high now - around 49%. This is of course, not the truth of last resort, but big shift in expectations is visible.
Actually we do not argue on Fed slowdown per se, but we could argue on the reasons for this step. Now the common view is Fed is slowing because inflation is near defeat. As we've shown it yesterday - this is totally an absurd. But that is what supports markets performance now. Our view is rate will be too high for the US economy functioning and doesn't eliminate structural component of inflation. Other words, we get 4.75% rate but inflation remains stable around 6.5-7%. But Fed can't hold 4.75-5.0% rate for years. It means that QE has big chances to be started again in one or other way.
Now is the most interesting stuff - how it relates to Gold and what about political struggle. Well, even without political component, the changes that we see now and what is more important, the reasons why it is going to happen - all stands in favor of gold. Inflation remains, Fed policy eased. Best component.
Political component
So, currently we definitely could say that the "MAGA Red wave" that supposedly should wash everything out has not happened. Reps have taken the Congress but lost the Senate. It is still one vote under question but Dems already have 50 sits.
It will have serious consequences for US economy. First is, Reps will keep dirt to Dems by blocking all initiatives via Congress that will increase instability. Second - the major Reps programme and big shifts and economy reforms now postpone on indefinite term. The main result of this elections is not in political party victory but
in the choice of an economic strategy, with possible option of degradation of the US and the rest of the world. This world is still trying to safe and hold for the Bretton Woods dollar system.
Obviously the Biden team has no positive scenario. And J. Powell definitely said - "Fed doesn't know what to do and when situation will change". We could see this based on Powell's extremely nervous behavior (we discussed this issue in detail in the previous Review), fluctuations in the monetary system, and in the general trend of the American economy. The absence of a positive scenario and political projection by Democratic Party as a whole means that the Democrats' victory in the midterm elections only strengthens the movement of the United States, both economically, socially and politically, into a deep and extremely viscous swamp. Although some individual Democrats, could gain from the chaos.
As for the Republican Party, its economic program could be visible from their leaders' individual statements and various political figures. We also suspect that part of the democratic establishment has joined this program. The core of D. Trump and Reps program to "Make America great again" is restoring the real sector of the US economy. There are two major adjustments have been made since 2020 campagne. The first is the real sector needs to be recovered not only in the United States, but within the AUKUS block, suggesting survival of the dollar currency zone, although it should be narrowed. Second - to guarantee investments delivering to the real sector, it is absolutely necessary to drop out the financial liberal superstructure over economy.
Here we need to make minor off topic. D. Trump has lost elections in 2020 not only because supposed fraud etc., but because the programme that he intends to realize had have no necessary background. There were no crisis in 2020 (except CV limitations), rates were low, and in it was everything "as usual" in economy. It was impossible to start epic changes in a background of Covid and without external factors, which we have now. Now it is a crisis, financial superstructure is deteriorating, showing its inability to provide stability to economy, guarantee progress and prosperity to the people. Now external factors are more or less ready. Step out and questions to liberal system appears everywhere.
Actually, I already talked about it, but still many people do not understand how Democratic liberal "financial superstructure" prevents progress of real economy. In general it happens because financial sector, banks stop executing functions that they have been built for. Particular speaking - providing investments to real sector and supports it's healthy growth. Here is a simple example. Any heavy industry or, actually any industry business needs money to make capital investments. They need it for a long time, 5 years at least, but usually for longer, and they need it with relatively low rates, because the industry return has limitations that has fundamental background. Expenses have direct relation to revenues and final price of a goods based on competition, which creates operational margin, increasing interest rates payments over debt, companies decreases the profitability. So they could pay, but at some definite rates.
Now, what banks do. Whether they provide loans to industry? Why? They would better put all liquidity to Fed deposit account and get 4% return daily with no risk. So, the investments can't reach the real sector because financial superstructure cheating the economy processes. Instead of industry support it gains for itself. That's what D. Trump would like to break. Even when rates were low - banks put money into stocks and buybacks, triggering more equity growth, but not in real sector. As a result here is the real conditions of the US economy for now:
This is terrible numbers, guys for the #1 worlds' economy. The share of the manufacturing industry in the US economy in the IIIQ of 2016 was 11.6%, it's drifted for 6 years and by Q2 2022 the share is 11.3% compared to 13.5% before the 2008 crisis.
There is a more pronounced trend in the share of industrial production, excluding the production of computers and components. In Q3 2016, this share in GDP was 10%, now 9.5%, before the crisis of 2008 – 12.3% at the maximum. The trend has been steadily descending for the last 15 years.
Agriculture, fishing, forestry generates only 1% of GDP.
Mining generates 1.84% of GDP.
Utilities (electricity, water supply, sewerage) have a share of 1.4% of GDP.
Thus, the "real" manufacturing economy forms only 15.6% of the US economy, and excluding the production of computers and components – 13.8%
Accelerated decline began from Q3 2020 and continues to the current moment on the trajectory of expansion of the digital economy. The USA is a typical post–industrial model of the economy in the terminal stage. Resources are spent not on creating real-material added value within the United States, but on controlling and creating technologies, supply chains, financial flows and production capacities around the world.
To create an industry inside the United States, Americans need to compete with Asian workers in terms of income and labor productivity, which is impossible. Technology and imperial status make it possible to create a society, when a small part of the population creates technology and control over the expansion of technology, and the bulk of society enjoys the benefits of civilization.
Therefore, the United States will not give up the power of the dollar and its dominance, because this will mean the death of the former construction of the world order. The refusal can only be force from the third side.
The so-called "service" sector doesn't create the real value added. It doesn't create the GDP, although modern method of calculation includes services, but this is self-deceiving. If somebody works on the car factory and gets it wage - that's create additional GDP value, because his wage is a part of the cost of final product. But when it share the part of his wage with another person who washes his dishes or clean the house - this is just re-distribution of existed GDP but not the added one. So, the real US GDP is 2-2.5 times smaller than it stands, but the money supply is significantly greater. That's the problem. But, this is the off-topic a bit.
Back to our question, If real sector is only 15.6% of the US economy, where does the major part of GDP come from? Financial superstructure, guys and other classic utilities. Other words speaking, they use national money, people money, not to increase the real sector but to turnover it and get the profit. In fact, good example we could get in Muslim's bank. The religion forbids to get the interest on the money. When Muslim bank provides the loan - it doesn't get the interest, it becomes a partner and take a part in redistribution of company performance in the share of provided loan. This is fair approach. In fact, bank as intermediates between investors and real sector should get only 1-2% just to cover their expenses. Investors (people) money should come directly to the real sector and people get results via real sector performance in a way of bonuses, wage rising etc. Here is everything broken. Banks take money, use them on the markets and provides loans with significantly higher interest rate margin. So, only small part of investments comes to real sector. You could dig this question more if you want.
Now, why it is about the gold? Of course most hot scenario could happen if Reps take the Senate. In this case, if they start their reforms, mentioned above markets probably drops as reforms would mean bad times for financials. Now can't pretend on so drastic shifts, but still suggest that entropy will keep rising as Reps hardly miss chance to dirt Dems in any startup. For the example - the nearest issue is a rising of national debt's ceil. J. Yellen is already worry that Reps could block it and do the dirt to Dems. All in all this will have bad effect for the country and for economy as diarchy hardly leads to success. Investors should start paying more attention to safe haven assets, such as gold. Hardly we should mention cryptocurrencies here.
By the way, this is topic for our November BTC fundamental report, but, in two words, the crush of FTX opens underwater criminal corruption schemes, that might involve high-ranking persons, such as a SEC G. Gensler. Where this road could lead - nobody knows, but it definitely doesn't add stability. Besides, pure technical effect could support gold in a way of cash flows out from cryptocurrencies sector.
In fact, The United States is at a stage when either influential corrupt officials begin to go to the jail, or powerful corrupt officials begin to arrest honest Americans who want to take back their country. We are at a turning point. And as you understand, this is too big tension now and tough situation doesn't promise any calm right now. So, we could say that it is more or less positive environment for the gold market, although events are not funny by themselves.
So, today we have very special view on gold market, it is a bit sophisticated but now you better understand the real depth of the question.
Technicals
Monthly
It seems that our monthly support holds and this is great. Besides, we get the chance to see the reversal month that engulfs the two previous ones. Although gold remains under pressure by far, but its action could be different compares to EUR where we still expect reaching of our major 0.9 target. Gold now is getting more independence from US Dollar performance as additional risk factors are involving, mentioned above. That's why, if any negative effect will happen, it still could be muted or damped a bit. Trend still stands bearish here, but market is not at overbought and clear bullish long-term context is yet to be formed here. But first signs looks inspiring...
Weekly
Here we have very similar picture to EUR, where market breaks the K-resistance area. But gold is not at overbought here. It means it could proceed slightly higher to 1770-1775 area, maybe not immediately but in near term.
Daily
Daily gold is strongly overbought, so it is possible to hold existent position but it is mentally difficult to buy the new one here. In fact, here I'm mostly interested with big H&S pattern, because it could become an important part of our long-term plan. Besides, neckline agrees with the nearest XOP target around 1800$. So, bears could get the chance to make some trades on intraday charts:
Intraday
So, on 1H chart market finally hits our 1770 XOP. So, together with daily overbought it gives chances for the pullback, but as major 1800$ daily target is not reached yet, once again, the pullback hardly will be too strong. Besides, currently we can't make any conclusions as the pullback has not started yet at all. Most probable levels are 1730 and 1746.
Take a look at strong bullish dynamic pressure as MACD and the prices move in opposite directions. This also could be a sign of upside acceleration. We at overbought, but who knows, at least overbought was not a problem within recent week at all. But anyway, for any short position we need patterns - bears have no choice but wait.
Now let's take a look over gold. Of course it goes with the major trend but it has its own nuances, mostly comes from political issues and recent FTX accident. I do not know, guys, do you like it or not that we have to consider political background. Explanation is simple here. Changing of economical course depends on Rep domination and their ability to launch their plan of economical reforms. The more radical they will act the more positive impact on gold happens. That's why, things, that on first glance seems politicals only, have a relation to economy situation. FTX collapse also has significantly deeper meaning than it seems.
Market overview
Gold prices steadied near a three-week peak hit in the previous session, buoyed by a weaker dollar, as investors got U.S. inflation data later this week that could influence the size of Federal Reserve rate-hike. The dollar extended losses to a more than one-week low, making gold more attractive for other currency holders.
Data on last Friday showed U.S. employers hired more workers than expected in October, but a rise in the unemployment rate to 3.7% raised hopes that the U.S. central bank would be less aggressive on rate hikes going forward.
That's in general investors' sentiment right now. Yesterday we've taken in-depth view on recent CPI report and big shift in market's expectations, concerning rate change. I wouldn't repeat everything here, shortly speaking, expectations now stand in favor of just 0.5% rate change in December and 0.25% rate change in February 2023. In fact, chances that Fed will not change rate in December at all also stand high now - around 49%. This is of course, not the truth of last resort, but big shift in expectations is visible.
Actually we do not argue on Fed slowdown per se, but we could argue on the reasons for this step. Now the common view is Fed is slowing because inflation is near defeat. As we've shown it yesterday - this is totally an absurd. But that is what supports markets performance now. Our view is rate will be too high for the US economy functioning and doesn't eliminate structural component of inflation. Other words, we get 4.75% rate but inflation remains stable around 6.5-7%. But Fed can't hold 4.75-5.0% rate for years. It means that QE has big chances to be started again in one or other way.
Now is the most interesting stuff - how it relates to Gold and what about political struggle. Well, even without political component, the changes that we see now and what is more important, the reasons why it is going to happen - all stands in favor of gold. Inflation remains, Fed policy eased. Best component.
Political component
So, currently we definitely could say that the "MAGA Red wave" that supposedly should wash everything out has not happened. Reps have taken the Congress but lost the Senate. It is still one vote under question but Dems already have 50 sits.
It will have serious consequences for US economy. First is, Reps will keep dirt to Dems by blocking all initiatives via Congress that will increase instability. Second - the major Reps programme and big shifts and economy reforms now postpone on indefinite term. The main result of this elections is not in political party victory but
in the choice of an economic strategy, with possible option of degradation of the US and the rest of the world. This world is still trying to safe and hold for the Bretton Woods dollar system.
Obviously the Biden team has no positive scenario. And J. Powell definitely said - "Fed doesn't know what to do and when situation will change". We could see this based on Powell's extremely nervous behavior (we discussed this issue in detail in the previous Review), fluctuations in the monetary system, and in the general trend of the American economy. The absence of a positive scenario and political projection by Democratic Party as a whole means that the Democrats' victory in the midterm elections only strengthens the movement of the United States, both economically, socially and politically, into a deep and extremely viscous swamp. Although some individual Democrats, could gain from the chaos.
As for the Republican Party, its economic program could be visible from their leaders' individual statements and various political figures. We also suspect that part of the democratic establishment has joined this program. The core of D. Trump and Reps program to "Make America great again" is restoring the real sector of the US economy. There are two major adjustments have been made since 2020 campagne. The first is the real sector needs to be recovered not only in the United States, but within the AUKUS block, suggesting survival of the dollar currency zone, although it should be narrowed. Second - to guarantee investments delivering to the real sector, it is absolutely necessary to drop out the financial liberal superstructure over economy.
Here we need to make minor off topic. D. Trump has lost elections in 2020 not only because supposed fraud etc., but because the programme that he intends to realize had have no necessary background. There were no crisis in 2020 (except CV limitations), rates were low, and in it was everything "as usual" in economy. It was impossible to start epic changes in a background of Covid and without external factors, which we have now. Now it is a crisis, financial superstructure is deteriorating, showing its inability to provide stability to economy, guarantee progress and prosperity to the people. Now external factors are more or less ready. Step out and questions to liberal system appears everywhere.
Actually, I already talked about it, but still many people do not understand how Democratic liberal "financial superstructure" prevents progress of real economy. In general it happens because financial sector, banks stop executing functions that they have been built for. Particular speaking - providing investments to real sector and supports it's healthy growth. Here is a simple example. Any heavy industry or, actually any industry business needs money to make capital investments. They need it for a long time, 5 years at least, but usually for longer, and they need it with relatively low rates, because the industry return has limitations that has fundamental background. Expenses have direct relation to revenues and final price of a goods based on competition, which creates operational margin, increasing interest rates payments over debt, companies decreases the profitability. So they could pay, but at some definite rates.
Now, what banks do. Whether they provide loans to industry? Why? They would better put all liquidity to Fed deposit account and get 4% return daily with no risk. So, the investments can't reach the real sector because financial superstructure cheating the economy processes. Instead of industry support it gains for itself. That's what D. Trump would like to break. Even when rates were low - banks put money into stocks and buybacks, triggering more equity growth, but not in real sector. As a result here is the real conditions of the US economy for now:
This is terrible numbers, guys for the #1 worlds' economy. The share of the manufacturing industry in the US economy in the IIIQ of 2016 was 11.6%, it's drifted for 6 years and by Q2 2022 the share is 11.3% compared to 13.5% before the 2008 crisis.
There is a more pronounced trend in the share of industrial production, excluding the production of computers and components. In Q3 2016, this share in GDP was 10%, now 9.5%, before the crisis of 2008 – 12.3% at the maximum. The trend has been steadily descending for the last 15 years.
Agriculture, fishing, forestry generates only 1% of GDP. Mining generates 1.84% of GDP. Utilities (electricity, water supply, sewerage) have a share of 1.4% of GDP.Thus, the "real" manufacturing economy forms only 15.6% of the US economy, and excluding the production of computers and components – 13.8%
Accelerated decline began from Q3 2020 and continues to the current moment on the trajectory of expansion of the digital economy. The USA is a typical post–industrial model of the economy in the terminal stage. Resources are spent not on creating real-material added value within the United States, but on controlling and creating technologies, supply chains, financial flows and production capacities around the world.
To create an industry inside the United States, Americans need to compete with Asian workers in terms of income and labor productivity, which is impossible. Technology and imperial status make it possible to create a society, when a small part of the population creates technology and control over the expansion of technology, and the bulk of society enjoys the benefits of civilization.
Therefore, the United States will not give up the power of the dollar and its dominance, because this will mean the death of the former construction of the world order. The refusal can only be force from the third side.
The so-called "service" sector doesn't create the real value added. It doesn't create the GDP, although modern method of calculation includes services, but this is self-deceiving. If somebody works on the car factory and gets it wage - that's create additional GDP value, because his wage is a part of the cost of final product. But when it share the part of his wage with another person who washes his dishes or clean the house - this is just re-distribution of existed GDP but not the added one. So, the real US GDP is 2-2.5 times smaller than it stands, but the money supply is significantly greater. That's the problem. But, this is the off-topic a bit.
Back to our question, If real sector is only 15.6% of the US economy, where does the major part of GDP come from? Financial superstructure, guys and other classic utilities. Other words speaking, they use national money, people money, not to increase the real sector but to turnover it and get the profit. In fact, good example we could get in Muslim's bank. The religion forbids to get the interest on the money. When Muslim bank provides the loan - it doesn't get the interest, it becomes a partner and take a part in redistribution of company performance in the share of provided loan. This is fair approach. In fact, bank as intermediates between investors and real sector should get only 1-2% just to cover their expenses. Investors (people) money should come directly to the real sector and people get results via real sector performance in a way of bonuses, wage rising etc. Here is everything broken. Banks take money, use them on the markets and provides loans with significantly higher interest rate margin. So, only small part of investments comes to real sector. You could dig this question more if you want.
Now, why it is about the gold? Of course most hot scenario could happen if Reps take the Senate. In this case, if they start their reforms, mentioned above markets probably drops as reforms would mean bad times for financials. Now can't pretend on so drastic shifts, but still suggest that entropy will keep rising as Reps hardly miss chance to dirt Dems in any startup. For the example - the nearest issue is a rising of national debt's ceil. J. Yellen is already worry that Reps could block it and do the dirt to Dems. All in all this will have bad effect for the country and for economy as diarchy hardly leads to success. Investors should start paying more attention to safe haven assets, such as gold. Hardly we should mention cryptocurrencies here.
By the way, this is topic for our November BTC fundamental report, but, in two words, the crush of FTX opens underwater criminal corruption schemes, that might involve high-ranking persons, such as a SEC G. Gensler. Where this road could lead - nobody knows, but it definitely doesn't add stability. Besides, pure technical effect could support gold in a way of cash flows out from cryptocurrencies sector.
In fact, The United States is at a stage when either influential corrupt officials begin to go to the jail, or powerful corrupt officials begin to arrest honest Americans who want to take back their country. We are at a turning point. And as you understand, this is too big tension now and tough situation doesn't promise any calm right now. So, we could say that it is more or less positive environment for the gold market, although events are not funny by themselves.
So, today we have very special view on gold market, it is a bit sophisticated but now you better understand the real depth of the question.
Technicals
Monthly
It seems that our monthly support holds and this is great. Besides, we get the chance to see the reversal month that engulfs the two previous ones. Although gold remains under pressure by far, but its action could be different compares to EUR where we still expect reaching of our major 0.9 target. Gold now is getting more independence from US Dollar performance as additional risk factors are involving, mentioned above. That's why, if any negative effect will happen, it still could be muted or damped a bit. Trend still stands bearish here, but market is not at overbought and clear bullish long-term context is yet to be formed here. But first signs looks inspiring...
Weekly
Here we have very similar picture to EUR, where market breaks the K-resistance area. But gold is not at overbought here. It means it could proceed slightly higher to 1770-1775 area, maybe not immediately but in near term.
Daily
Daily gold is strongly overbought, so it is possible to hold existent position but it is mentally difficult to buy the new one here. In fact, here I'm mostly interested with big H&S pattern, because it could become an important part of our long-term plan. Besides, neckline agrees with the nearest XOP target around 1800$. So, bears could get the chance to make some trades on intraday charts:
Intraday
So, on 1H chart market finally hits our 1770 XOP. So, together with daily overbought it gives chances for the pullback, but as major 1800$ daily target is not reached yet, once again, the pullback hardly will be too strong. Besides, currently we can't make any conclusions as the pullback has not started yet at all. Most probable levels are 1730 and 1746.
Take a look at strong bullish dynamic pressure as MACD and the prices move in opposite directions. This also could be a sign of upside acceleration. We at overbought, but who knows, at least overbought was not a problem within recent week at all. But anyway, for any short position we need patterns - bears have no choice but wait.
