Sive Morten
Special Consultant to the FPA
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Fundamentals
As usual, guys, we take two-day review on fundamental background of financial markets. It is more FX-oriented view yesterday, and gold-oriented today, but general view has a lot of common issues. Other words, background for FX market and Gold has more similarities and just few differences, that reflex specific of particular market. This is understandable now because major factors are of general character and are not closed in a circle of specific market - Presidency, vaccination, stimulus, Central Bank policies, interest rates etc.
It was a tough week for the gold as it has lost almost 100$ value per Oz. The multiple announcement of new vaccines from different companies, starting from Pfizer two weeks ago, smooth power shift to J.Biden and rising expectations on economy recovery crushed the gold market and drastically change the short-term sentiment. Now, at first glance, situation looks awful, but is it really stands so? By our opinion, current drop on gold looks overreacted and emotional. Investors psychologically treat desirable events as they already have come. But this is not so yet. We need to take a look at current situation from the point of view of our major factors - real interest rates and potential liquidity dilution. Additionally as a sub-factor that could become a background for both is vaccination timing and efficiency. Because it directly impacts as on interest rates as on stimulus measures.
Yesterday we have made a good job to provide in-depth view on vaccination and its problems in our FX Research. Just to not bore you too much, I would say that most brave expectations that we should get first results somewhere around summer, but more probable - in autumn of 2021. But appearing of results doesn't mean that they match the expectations. And there are a lot barriers to this. First is, 42% of Americans do not want to inoculate, and it makes direct impact on efficiency as it needs approx. 70% population to be vaccinated. Second, as I've said yesterday - between laboratory producing & testing and industry production of the same vaccine is a big difference. It means that reality with big odds will be different compares to expectations and euphoria starts to fade as vaccination delays, or stands not as effective as it was suggested. Thus, current overreaction that we see we probably should treat as positive sign for gold market as it lets us to buy cheaper. For instance, yesterday we already have mentioned most-desired AstraZeneca vaccine. First it was announced with 90+% efficiency, now sounds numbers as 70% or even 62%. The vaccine's effectiveness is now under more rigorous scrutiny, which analysts claim could postpone its regulatory approval. This comes particular from the reason that I've specified - you could get 90% in laboratory but below 70% in massive production. And it is impossible to predict - only real time statistics shows this.
But currently market look at the situation through rose-coloured glasses:
Gold slid to a four-month low on Tuesday as progress on COVID-19 vaccines and hopes fueled by the White House transition prompted investors to flock to riskier assets.
“More optimism in regard to the economy, based on the vaccines has taken some of the safe haven status away from the gold market,” said David Meger, director of metals trading at High Ridge Futures. “Less political concern moving forward” has also reduced the need for safe havens, Meger added.
“The game changer has been the ability of all the vaccines to show good promise,” said George Gero, managing director at RBC Wealth Management, adding it is going to be a long climb back up for gold under these circumstances.
U.S. President-elect Joe Biden moved closer to take the reins of power in January with a formal nod. Also, Biden is expected to nominate former Federal Reserve Chair Janet Yellen as U.S. Treasury secretary, and investors see Yellen as a force for more fiscal action to combat the economic crisis unleashed by the pandemic.
"For the markets, I don't think that changes the perception that there's going to be a vaccine sooner than previously expected," said IG Markets analyst Kyle Rodda.
Investors are starting to buy into the narrative that the economic recovery is going to gather steam in 2021 and that's driving them to liquidate gold holdings, Rodda added.
Gold could reach new highs in 2021 as the U.S. Federal Reserve will likely cap rate rises in the longer end of the yield curve and the dollar will weaken materially, OANDA's Halley added.
"A break below $1,800 an ounce could well see further losses towards $1,760 (agrees with our target as well) as positive sentiment around a possible vaccine continues to weigh on demand for the traditional safe haven asset," said Michael Hewson, chief market analyst at CMC Markets UK.
“As soon as prices touched below the key $1,800 level, it triggered a sell-off. It is probable that prices might test the $1,750 level given we have a strong fundamental reason like the vaccine,” said OANDA analyst Craig Erlam.
The dollar also weakened on improving risk aversion from COVID-19 vaccine optimism and prospects for an easier transition to a Biden administration, limiting losses in gold.
"The concern right now is that dissipated central bank buying and outflows in ETFs," said independent analyst Ross Norman. Looking at gold right now, it is still bearish in the short-term and might go down further, but in the longer-term it can't look any better given the ultra low interest rates and prospects of more stimulus in the economy."
So, gradually we're coming to major question - Have coronavirus vaccines killed the gold rally?
While some analysts now believe the rally has peaked, others say prices may still have room to rise, at least for a while. Those purchases pushed prices from $1,500 an ounce in January to an all-time high of $2,072 in August, and forecasters including Bank of America said it could soon reach $3,000. But the announcement of several highly effective coronavirus vaccines this month has cemented expectations for an economic rebound, pressuring gold down to $1,800.
“The gold and silver markets are running out of air,” said Julius Baer analyst Carsten Menke. “As we expect a continued improvement of the economic environment next year, safe-haven demand should fade.”
Investors pulled a record $4 billion from gold funds in the week to Nov. 18, said Bank of America. The bank has abandoned its $3,000 price target. Here is our SPDR Fund chart as well:
The change in outlook is shown by gold’s value relative to copper, an industrial metal that thrives on economic growth. In April, gold was 11,000 pricier than copper. While still far above its long term average, that ratio has plunged to 8,000.
U.S. 10-year yields have edged higher as investors sell bonds, another ‘safe-haven’ asset. This can reduce the appeal of gold, as it offers no yield and is more popular when bonds offer no return either.
Even when adjusted for inflation, bond yields are likely to rise further, said analysts at Macquarie, predicting gold at $1,550 an ounce by the end of 2021. Gold prices have already peaked,” they said in a note.
Even so, many analysts think the rally still has scope to move higher.
Bank of America, while tempering its forecasts, has not turned totally bearish. It still expects prices to rise above $2,000 next year, before falling back to around $1,900-$1,950 through 2022-2025.
Citibank analysts say they expect gold to average $2,100 an ounce next year and $2,200 in 2022.
Central banks are likely to keep interest rates low, capping bond yields, said Saxo Bank analyst Ole Hansen, and have pumped money into the financial system, raising the threat of inflation, against which gold can be a buffer.
“The vaccine can kill the virus, but it can’t kill the mountain of debt,” he said. He predicts that the dollar will weaken as the global economy improves, making gold cheaper for buyers outside the United States.
So, it sounds too disperse to make some strict conclusion, right? As we have contradicted opinions. How it would be better to deal with it? We suggest that we should be pragmatic and do not give ourselves too much credit that we really could make sharp long-term forecast. Let's focus on short-term - here I mean perspective of 3-4 months. My personal opinion is gold has not bad perspective to bounce up. I'm not talking about new rally or rising through the sky, but solid pullback somewhere to 1900+ area is possible. Here is my view. From the stimulus point of view - everything goes well for the gold. J. Biden victory promises to provide more support to economy, especially if J. Yellen becomes the Secretary of Treasury. We think that euphoria around vaccine will start to fade as it is still long time till first test and first results. As stimulus pack will be announced and it has chances to be above expectations - Gold should get the support.
Second - interest rates. They are not rising yet strongly, mostly they stand flat, and another drop could happen before reversal as some signs of bearish dynamic pressure exists on weekly chart:
Indeed, in nearest few months economy statistics will show poor numbers with depressed inflation. Besides, when interest rates start rising, Fed holds the nominal rate until inflation hits 2+%. It should make real interest rates to fall.
Finally - vaccination. Mostly we've said everything above. We expect that euphoria should start fading as first difficulties appear on horizon. Besides, by technical view, gold has strong upside momentum that has to be quelled before downside reversal. Particular the rest of this momentum should push gold higher for the last time, on a background of our factors.
Taking it all together, indeed, in perspective of 1-2 years gold perspective looks bearish, but within nearest 1-3 months we suggest that last upside swing happens and agree with the opinion of big banks.
Technicals
Monthly
Gold has serious fundamental background to start dropping and this makes us to consider deeper stand targets. Here we suggest that 1685 level could be reached and it looks attractive for position taking as it is accompanied by monthly oversold as well. In fact, we have few areas where "last bounce" could start, and on monthly chart this is 1685 area.
Weekly
Here we need to consider another level, that looks minor but it could become decisive moment for position taking. Take a look that additionally to monthly K-support area, we have the level at 1733. It is important because it is from reaction point when upside action take the most active stage. And particular this level makes Agreement with OP downside target. Together it might be interesting trading setup - considering long entry at 1733-1737 with stops below 1680 K-area. Currently it difficult to say when we get this setup, as price stands at oversold, but its potential looks attractive.
Daily
Daily chart stands bearish. In fact here is nothing interesting but next XOP target that makes Agreement with daily/weekly/monthly K-area of 1682-1689. K-support was broken and OP target was passed as "Pfizer collapse" extension seems more important to the market. That's why price directly drops to "Pfizer" OP target on 4H chart.
Intraday
Here is the OP at 1783 level. Also take a look - this is 1.618 extension of butterfly pattern here. Now we already see some minor reaction. Again - it is not for taking long position. If it would be more or less meaningful, we could get nice chance for short entry and moving to 1740 major target on weekly chart. "Pfizer" XOP stands within the same weekly K-support around 1712 and doesn't contradict to the weekly scenario:
On 1H chart obviously we have the major resistance around 1840-1850 - because of K-area and because of former lows that have been broken. But currently it is really big odds that pullback will be minimal, in the range of Friday's drop. So maybe some minor "222" Sell will be formed, or something of that sort, as market is not ready yet for major pullback that we're watching for. Bearish sentiment still stands high. Still, if pullback somehow will be stronger - we intend to keep an eye on the patterns, preliminary with stops above 1850, as gold should stay below it to keep good bearish context.
As usual, guys, we take two-day review on fundamental background of financial markets. It is more FX-oriented view yesterday, and gold-oriented today, but general view has a lot of common issues. Other words, background for FX market and Gold has more similarities and just few differences, that reflex specific of particular market. This is understandable now because major factors are of general character and are not closed in a circle of specific market - Presidency, vaccination, stimulus, Central Bank policies, interest rates etc.
It was a tough week for the gold as it has lost almost 100$ value per Oz. The multiple announcement of new vaccines from different companies, starting from Pfizer two weeks ago, smooth power shift to J.Biden and rising expectations on economy recovery crushed the gold market and drastically change the short-term sentiment. Now, at first glance, situation looks awful, but is it really stands so? By our opinion, current drop on gold looks overreacted and emotional. Investors psychologically treat desirable events as they already have come. But this is not so yet. We need to take a look at current situation from the point of view of our major factors - real interest rates and potential liquidity dilution. Additionally as a sub-factor that could become a background for both is vaccination timing and efficiency. Because it directly impacts as on interest rates as on stimulus measures.
Yesterday we have made a good job to provide in-depth view on vaccination and its problems in our FX Research. Just to not bore you too much, I would say that most brave expectations that we should get first results somewhere around summer, but more probable - in autumn of 2021. But appearing of results doesn't mean that they match the expectations. And there are a lot barriers to this. First is, 42% of Americans do not want to inoculate, and it makes direct impact on efficiency as it needs approx. 70% population to be vaccinated. Second, as I've said yesterday - between laboratory producing & testing and industry production of the same vaccine is a big difference. It means that reality with big odds will be different compares to expectations and euphoria starts to fade as vaccination delays, or stands not as effective as it was suggested. Thus, current overreaction that we see we probably should treat as positive sign for gold market as it lets us to buy cheaper. For instance, yesterday we already have mentioned most-desired AstraZeneca vaccine. First it was announced with 90+% efficiency, now sounds numbers as 70% or even 62%. The vaccine's effectiveness is now under more rigorous scrutiny, which analysts claim could postpone its regulatory approval. This comes particular from the reason that I've specified - you could get 90% in laboratory but below 70% in massive production. And it is impossible to predict - only real time statistics shows this.
But currently market look at the situation through rose-coloured glasses:
Gold slid to a four-month low on Tuesday as progress on COVID-19 vaccines and hopes fueled by the White House transition prompted investors to flock to riskier assets.
“More optimism in regard to the economy, based on the vaccines has taken some of the safe haven status away from the gold market,” said David Meger, director of metals trading at High Ridge Futures. “Less political concern moving forward” has also reduced the need for safe havens, Meger added.
“The game changer has been the ability of all the vaccines to show good promise,” said George Gero, managing director at RBC Wealth Management, adding it is going to be a long climb back up for gold under these circumstances.
U.S. President-elect Joe Biden moved closer to take the reins of power in January with a formal nod. Also, Biden is expected to nominate former Federal Reserve Chair Janet Yellen as U.S. Treasury secretary, and investors see Yellen as a force for more fiscal action to combat the economic crisis unleashed by the pandemic.
"For the markets, I don't think that changes the perception that there's going to be a vaccine sooner than previously expected," said IG Markets analyst Kyle Rodda.
Investors are starting to buy into the narrative that the economic recovery is going to gather steam in 2021 and that's driving them to liquidate gold holdings, Rodda added.
Gold could reach new highs in 2021 as the U.S. Federal Reserve will likely cap rate rises in the longer end of the yield curve and the dollar will weaken materially, OANDA's Halley added.
"A break below $1,800 an ounce could well see further losses towards $1,760 (agrees with our target as well) as positive sentiment around a possible vaccine continues to weigh on demand for the traditional safe haven asset," said Michael Hewson, chief market analyst at CMC Markets UK.
“As soon as prices touched below the key $1,800 level, it triggered a sell-off. It is probable that prices might test the $1,750 level given we have a strong fundamental reason like the vaccine,” said OANDA analyst Craig Erlam.
The dollar also weakened on improving risk aversion from COVID-19 vaccine optimism and prospects for an easier transition to a Biden administration, limiting losses in gold.
"The concern right now is that dissipated central bank buying and outflows in ETFs," said independent analyst Ross Norman. Looking at gold right now, it is still bearish in the short-term and might go down further, but in the longer-term it can't look any better given the ultra low interest rates and prospects of more stimulus in the economy."
So, gradually we're coming to major question - Have coronavirus vaccines killed the gold rally?
While some analysts now believe the rally has peaked, others say prices may still have room to rise, at least for a while. Those purchases pushed prices from $1,500 an ounce in January to an all-time high of $2,072 in August, and forecasters including Bank of America said it could soon reach $3,000. But the announcement of several highly effective coronavirus vaccines this month has cemented expectations for an economic rebound, pressuring gold down to $1,800.
“The gold and silver markets are running out of air,” said Julius Baer analyst Carsten Menke. “As we expect a continued improvement of the economic environment next year, safe-haven demand should fade.”
Investors pulled a record $4 billion from gold funds in the week to Nov. 18, said Bank of America. The bank has abandoned its $3,000 price target. Here is our SPDR Fund chart as well:
The change in outlook is shown by gold’s value relative to copper, an industrial metal that thrives on economic growth. In April, gold was 11,000 pricier than copper. While still far above its long term average, that ratio has plunged to 8,000.
U.S. 10-year yields have edged higher as investors sell bonds, another ‘safe-haven’ asset. This can reduce the appeal of gold, as it offers no yield and is more popular when bonds offer no return either.
Even when adjusted for inflation, bond yields are likely to rise further, said analysts at Macquarie, predicting gold at $1,550 an ounce by the end of 2021. Gold prices have already peaked,” they said in a note.
Even so, many analysts think the rally still has scope to move higher.
Bank of America, while tempering its forecasts, has not turned totally bearish. It still expects prices to rise above $2,000 next year, before falling back to around $1,900-$1,950 through 2022-2025.
Citibank analysts say they expect gold to average $2,100 an ounce next year and $2,200 in 2022.
Central banks are likely to keep interest rates low, capping bond yields, said Saxo Bank analyst Ole Hansen, and have pumped money into the financial system, raising the threat of inflation, against which gold can be a buffer.
“The vaccine can kill the virus, but it can’t kill the mountain of debt,” he said. He predicts that the dollar will weaken as the global economy improves, making gold cheaper for buyers outside the United States.
So, it sounds too disperse to make some strict conclusion, right? As we have contradicted opinions. How it would be better to deal with it? We suggest that we should be pragmatic and do not give ourselves too much credit that we really could make sharp long-term forecast. Let's focus on short-term - here I mean perspective of 3-4 months. My personal opinion is gold has not bad perspective to bounce up. I'm not talking about new rally or rising through the sky, but solid pullback somewhere to 1900+ area is possible. Here is my view. From the stimulus point of view - everything goes well for the gold. J. Biden victory promises to provide more support to economy, especially if J. Yellen becomes the Secretary of Treasury. We think that euphoria around vaccine will start to fade as it is still long time till first test and first results. As stimulus pack will be announced and it has chances to be above expectations - Gold should get the support.
Second - interest rates. They are not rising yet strongly, mostly they stand flat, and another drop could happen before reversal as some signs of bearish dynamic pressure exists on weekly chart:
Indeed, in nearest few months economy statistics will show poor numbers with depressed inflation. Besides, when interest rates start rising, Fed holds the nominal rate until inflation hits 2+%. It should make real interest rates to fall.
Finally - vaccination. Mostly we've said everything above. We expect that euphoria should start fading as first difficulties appear on horizon. Besides, by technical view, gold has strong upside momentum that has to be quelled before downside reversal. Particular the rest of this momentum should push gold higher for the last time, on a background of our factors.
Taking it all together, indeed, in perspective of 1-2 years gold perspective looks bearish, but within nearest 1-3 months we suggest that last upside swing happens and agree with the opinion of big banks.
Technicals
Monthly
Gold has serious fundamental background to start dropping and this makes us to consider deeper stand targets. Here we suggest that 1685 level could be reached and it looks attractive for position taking as it is accompanied by monthly oversold as well. In fact, we have few areas where "last bounce" could start, and on monthly chart this is 1685 area.
Weekly
Here we need to consider another level, that looks minor but it could become decisive moment for position taking. Take a look that additionally to monthly K-support area, we have the level at 1733. It is important because it is from reaction point when upside action take the most active stage. And particular this level makes Agreement with OP downside target. Together it might be interesting trading setup - considering long entry at 1733-1737 with stops below 1680 K-area. Currently it difficult to say when we get this setup, as price stands at oversold, but its potential looks attractive.
Daily
Daily chart stands bearish. In fact here is nothing interesting but next XOP target that makes Agreement with daily/weekly/monthly K-area of 1682-1689. K-support was broken and OP target was passed as "Pfizer collapse" extension seems more important to the market. That's why price directly drops to "Pfizer" OP target on 4H chart.
Intraday
Here is the OP at 1783 level. Also take a look - this is 1.618 extension of butterfly pattern here. Now we already see some minor reaction. Again - it is not for taking long position. If it would be more or less meaningful, we could get nice chance for short entry and moving to 1740 major target on weekly chart. "Pfizer" XOP stands within the same weekly K-support around 1712 and doesn't contradict to the weekly scenario:
On 1H chart obviously we have the major resistance around 1840-1850 - because of K-area and because of former lows that have been broken. But currently it is really big odds that pullback will be minimal, in the range of Friday's drop. So maybe some minor "222" Sell will be formed, or something of that sort, as market is not ready yet for major pullback that we're watching for. Bearish sentiment still stands high. Still, if pullback somehow will be stronger - we intend to keep an eye on the patterns, preliminary with stops above 1850, as gold should stay below it to keep good bearish context.
