Gold GOLD PRO WEEKLY, June 05 - 09, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

Beyond the debt ceil raising, which was able to take big burden off the shoulders of US financial authorities, there is another one event has happened, mostly political sphere, which could be important for gold market in perspective of 8-12 months. The White House was have to make a decision on geopolitical activity - either to stay in Europe and keep fighting with Russia until the last Ukrainian, Polack etc. Or, leave EU battleground for its own and turn to China. By indirect signs it seems that decision has been made...

Market overview

Gold firmed supported by lower Treasury yields but the dollar's strength, with more interest rate hikes in the offing and optimism about a U.S. debt deal kept bullion on course for its first monthly dip in three. It has lost nearly 1.1% this month and over $100 from near-record highs scaled earlier in May.

"We've had kind of a push-pull effect," amid support from lower yields and pressure from the dollar, said David Meger, director of metals trading, High Ridge Futures. With the job's data relatively strong, concerns about the possibility of further rate hikes would obviously have a tendency to pressure gold... and yet on the other side, we have the PMI data pulling in the opposite direction."

Any decision by the Fed to hold its benchmark overnight interest rate steady should not be taken to mean the U.S. central bank is done tightening monetary policy, Fed Governor Philip Jefferson said. Key support around $1,950 could fuel momentum trade to push gold back to $2,000, said Edward Moya, senior market analyst at OANDA.

According to the World Gold Council 2023 Central Bank Gold Reserve survey, 24% of central banks plan to add more gold to their reserves in the next 12 months. According to the WGC, “The planned purchases are chiefly motivated by increased buying of domestic gold production, rebalancing to a more preferred strategic level of gold holdings, and financial market concerns including higher crisis risks and rising inflation. Adding to these concerns is the banking sector crisis in the United States and Europe which began in early 2023.”

Seventy-one percent of central banks surveyed believe the overall level of global reserves will increase in the next 12 months. That was a 10-point increase over last year.

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According to the survey, “Gold’s ‘historical position’ continues to be the top reason for central banks to hold gold, with 77% of respondents saying that it is highly relevant or somewhat relevant. This was followed by gold’s performance during times of crisis (74%), ‘long-term store of value/inflation hedge’ (74%), ‘effective portfolio diversifier” (70%), and ‘no default risk’ (68%).”

Ongoing geopolitical concerns and the resulting impact on inflation, interest rates, and market outlook are certainly front of mind for many central bankers. EMDE central banks in particular have expressed continuing concerns about the impact of geopolitics on their reserve management decisions, with many valuing gold as a way to manage these risks. The future of the international monetary system continues to be in flux, with EMDE central banks also expressing less confidence in the US dollar’s supremacy than their advanced economy counterparts. In the face of these trends and an ever-changing investment environment, central bank gold demand is likely to remain robust.”

After a record-setting 2022, central banks continued to buy gold in the first quarter of 2023, setting a new Q1 record. Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971. It was the 13th straight year of net central bank gold purchases.

As expected, gold has turned in a fairly strong start to the month. It’s below April but is still early in the contract.

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One factor that can drive total delivery volume is mid-month activity. Historically, this has been a tailwind for greater delivery volume. This month, it has started as a headwind. So far, the number of contracts that have cash settled has reached a new record. The House account activity shows more stress in the market. BofA has had to step up and deliver a huge chunk of gold (5k contracts). Starting in 2021, BofA has become much more active and seems to be serving as a backstop to the physical market. Accumulating metal in quieter periods and then delivering out when the market comes under stress.

As mentioned above, BofA was accumulating metal last month (when the price was higher) and the five months prior, only to deliver a large amount this month. Seems strange…
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The physical inventory continues to demonstrate erratic behavior as well. In the last few days, metal actually moved out of Registered. This means as the delivery window approached, vaults reduced the amount of metal available for delivery. This could have been a factor driving cash settlement.

The theory is that right before the delivery period started, the available delivery supply dropped, prompting the need for cash settlement. Supposedly the actual metal available for delivery is much smaller than what is displayed on the daily stocks report.

Concerning recent NFP report, there were few interesting observations been made. First is, in May it is maximum deviation of BLS number from Households survey. The BLS reported that a whopping 339k jobs were added in May. This crushed median estimates of 190k jobs added. The Household Survey tells a very different story though, reporting a loss of 310k.
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Due to the big gap this month of more than 600k jobs, the Household Survey has fallen below the Headline Report YTD 1.47m vs 1.57m. Keep in mind, the Household Survey is still averaging 294k jobs a month which is quite strong.

Second is - the BLS continues to issue jobs reports that defy reality and expectations. Last month, the jobs report broke a record as having been the 13th consecutive job report where the market underestimated the numbers. This means that for the 14th month in a row, the jobs report has surprised to the upside. How is that possible? How much stock can we put in these numbers? If the Fed is living by the job’s numbers, they could die by the job’s numbers. More likely though, something will break before the jobs data reflects a collapsing economy. That’s when the Fed will rush to step in with liquidity. They already did it on a small scale with SVB. Expect the next one to be much bigger!

Despite all of the mainstream talk about a strong, resilient economy, corporate bankruptcies through the first four months of 2023 came in at the highest level since 2010. Meanwhile, monthly bankruptcy filings have hit numbers last seen during the peak of the pandemic. According to data from S&P Global Market Intelligence, there were 235 corporate bankruptcy filings through April. That’s a 116.5% increase over the same period in 2022.

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There were 70 bankruptcy filings in March alone. The last time we saw numbers that high was at the peak of the pandemic in the summer of 2020. The number of bankruptcy filings dropped to 54 in April, but that was still at levels similar to the pandemic period.

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Meantime, Pimco Says Gold Is Overvalued Now, But Has Long-Term Appeal. Gold still looks too expensive after recent declines, according to a Pimco managing director who says sticky inflation will make it difficult for the Federal Reserve to meaningfully cut rates.

The precious metal fell in May, with prices retreating from just shy of a record early in the month. More losses could be in store, even if it’s well-supported over the longer term, according to Greg Sharenow, who manages a portfolio focused on energy and commodities at Pacific Investment Management Co. Bullion is “modestly over-valued” compared with inflation-linked government bonds, or TIPs, and those are probably better value in multi-asset portfolios for now, he said in an interview. Real bond yields are likely to stay higher for longer, he said, pressuring non-interest bearing gold.
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“The biggest challenge one has right now is to figure out the lagged effects of any credit tightening that is coming from some of the central banks,” said Sharenow. “The uncertainty band still remains fairly wide.”

Mild recessions in developed markets are “more than likely”, but while the Fed may be nearing the end of its tightening cycle, that doesn’t preclude another hike, the Pimco executive said. Central banks could struggle to bring down rates in the face of de-globalization and so-called “greenflation as the world shifts from fossil fuels to renewable energy.

Still, the long-term outlook for gold — which Sharenow calls a 25-year duration asset — looks brighter as central banks look to diversify holdings away from dollar assets. There’s already been a “tremendous amount of interest” from central banks that have helped support bullion at recent levels, he said.

“The safety and security of gold right now has a high currency to them,” he said, “There’s a lot of countries that are questioning their dollar reserves.”

GEOPOLITICAL DECISION

Thus, as we've said, first important solution was to decide - either to tight or release monetary policy. Second one is geopolitical strategy, that no doubts will have economical impact as well. As we've said above - the United States must decide whether to leave Europe as a key region of its control (as a whole, as part of the world) or switch to Southeast Asia. The first option practically guarantees that China will capture Southeast Asia fairly quickly, after which it will become almost impossible to stop it by US forces.

This scenario practically guarantees the withdrawal of the United States not only from the position of a world leader, but also, in the interval of 15-20 years, even from the position of one of 4-5 equal world leaders. In addition, it closes the possibilities of industrialization of AUKUS, which is actually the only scenario for the strategic development of the United States today (after the collapse of the liberal model of globalization). But on the other hand, it allows us to preserve NATO and, perhaps, even close any opportunities for Russia to interact with Western Europe.

In addition, this option is much clearer and more pleasant to the old liberal elites who grew up hating the USSR/Russia and the new liberal elites who are used to interacting (often corrupt) with China.

The second option involves closing costly scenarios in Europe (such as building a "barrier" between Russia and Western Europe, from Finland to Turkey; NATO support; euro support through loans to ECB, etc.) and starting work to limit China's ability to enter world markets. To do this, it is necessary to destroy the statehood of Burma and Laos as much as possible and create a "security arc" from the Philippines to Japan, which will limit the output of Chinese goods to the Pacific Ocean. At the same time, it is also desirable to limit the exit of Chinese ships to the Pacific Ocean through the Sea of Okhotsk, which is controlled by Russia.

At the same time, there is no need to fear a critical strengthening of Russia. Yes, Ukraine in this case will definitely come under the control of Russia, as well as, very likely, the Baltic States and Moldova. But, taking into account the need to industrialize Russia and "digest" these territories, where Russophobic ideology has been actively developing for several decades, even the countries of Eastern Europe will reach Russia's hands only in 20 years. If the US manages to industrialize AUKUS during this time, they will return to Europe, if not, this issue will lose relevance.

From the point of view of indirect signs, there are two signals that the decision has been made, at least at an informal, elite level. This is the refusal of the United States to support the opposition to Erdogan in the second round of elections in Turkey (Erdogan will not close any "barrier" against Russia) and the statement of the hero of the day Henry Kissinger that the confrontation between China and the United States in Southeast Asia will sharply intensify in the near future. If this is the case, then by the end of summer this decision will be legalized in the public sphere, with corresponding consequences.

Indeed, if we take a look at recent headlines, the China direction is becoming evident, here are just few of them:
And you could find more. Tensions between US and China spins up after debt ceil decision. Besides, recently J. Sullivan has made few strange statements at the annual meeting of the Washington Arms Control Association:

  • The United States is ready for a dialogue with the Russian Federation and China on arms control without preconditions;
  • The US is ready to continue to adhere to the quantitative restrictions of the START, if the Russian Federation is ready;
  • The United States is ready to develop agreements with the Russian Federation to replace START for the period after 2026, despite the current contradictions;
  • The United States will continue to notify the Russian Federation about the launches of its ballistic missiles and exercises of strategic forces;
  • China seeks to obtain 1.5 thousand nuclear warheads by 2035 and refuses to have a dialogue on stratability with the United States;
  • The United States believes that it does not need to increase the number of its nuclear warheads in order to successfully deter a potential adversary;
  • The United States is ready for multilateral arms control negotiations, including in the format of the "five" of the UN Security Council;
  • Washington hopes that Moscow, as in the Cold War, will not abandon the dialogue on arms control, despite the differences;
  • The US administration calls on the US Congress to support disarmament agreements on a bipartisan basis.
Based on all these stuff, it seems that our suggestion seems correct. US intends to use EU defense strength to struggle Russia on its own, supporting them technically, while the US itself is focusing on China confrontation because it has more important strategical meaning. As you understand, the confrontation, (and maybe at hot stage) between two largest world powers hardly will bring calm and prosperity to everybody. From this standpoint gold in a perspective of 8-12 months could get feasible support....
 
Conclusion:

So, what do we have? Market starts getting doubts concerning reliability of statistics, as rising NFP numbers contradicts to unemployment, participation rate, bankruptcies raising and lay-offs amount. Confidence to the Fed is dropping.
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Lack of physical metal for delivery is becoming more evident, as BofA has to accumulate it for a few months to guarantee delivery executions. It is becoming unclear - why central banks sweep out gold, if Pimco tells that it is overvalued and everything is OK. Do you have some cognitive dissonance when you're reading it? I do. That's if not to mention some crisis statistics data that we've considered yesterday. Our suggestion that Treasury will try to combine all possible tools that it has to accumulate necessary funds around $1.5-2 Trln until the end of 2023.

Unwinding reverse Repo with commercial banks, using commercial bank reserves in the Fed and replace them by new US bonds issues and additional placement of new issues on open market, selling it to non-banking buyers. This should let them to achieve few targets - to get necessary amount of funding, and to not pour markets with liquidity, speeding up inflation. Participation of the Fed, as printing machine considers as force-major scenario and will be used only if other ways will not work.

J. Yellen plan sounds great but there are few nuances. Amount of bond issues are too high and US government is too hungry. To attract banks they have to offer yield premium to existed levels, pushing interest rates higher. Trades already start preparation to this. Speculators have been building up a “historically massive” short position in U.S. Treasury futures ahead of what could be $1 trillion of new debt issuance on the heels of a debt-ceiling resolution, according to Macquarie’s sales and trading global macro strategy desk. Right on the next week we get "first test" with ~$170 Bln bonds auctions.

Ironically, however, few (including Kashkari, Bullard, Powell or just about any economic midget in the House of Representatives) are recognizing the additional paradox that greater deficits only add to (rather than “combat”) the inflation problem, as deficit spending (an economy on debt respirator) keeps artificial demand (and hence) prices rising rather than falling.

Furthermore, these deficits will ultimately be paid for with more fiat fake money created out of thin air at the Eccles building, a policy which is inherently (and by definition): INFLATIONARY. In short, and as even Warren B. Mosler recently tweeted, “the Fed is chasing its own tail.” You can't pay out 110%+ GDP budget deficit in no way except money emission.

Inflation, in other words, is not only here to stay, the Fed’s “anti-inflationary” rate hike policies are actually making it worse. Indeed, rising interest rates you increase interest expenses that are already around $1 Trln, which is the same as rising of budget deficit. To paid it out, you have to print borrow more, pushing inflation higher once again. Even party-line economists are forecasting higher core inflation this year. Michigan 5-year inflationary expectations are around 3.5% at highest level in decade.

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In fact, the only way to truly dis-inflate the inflation problem is to raise rates high enough to destroy the bond market and the economy. After all, major recessions/depressions do “beat” inflation—along with just about everything and everyone else. The current Fed’s answer to combating the inflation problem is in many ways the equivalent of combating a kitchen rodent problem by placing dynamite in the sink. And that, folks, is the paradox, conundrum, corner or trap in which our central planners have placed us and themselves. It might be either a depression or an inflation crisis. Ultimately, Powell’s rate hikes, having already murdered bonds, stocks and banks, will also murder the economy.

So they have to decide which is worthing saving: The “system” or the currency? The answer is simple - system. And debt ceil raising once again confirms this. Otherwise they could use it for managed default to resolve debt burden problem. Ultimately, and not too far off in our horizon, the central planners will “save” the system (bonds and TBTF banks) by mouse-clicking trillions of more USDs.

This simply means that the deflationary recession ahead will be followed by a hyper-inflationary “solution.” Again, and worth repeating, history confirms in debt crisis after debt crisis, and failed regime after failed regime, that the last bubble to “pop” is always the currency.

And markets are preparing. In the interim, the markets are slowly catching on to the fact that protecting purchasing power is now more of a priority than looking for safety in grossly and un-naturally inflated “fixed income” or “risk-free-return” bonds. Why? Because those bonds are now (thanks to Uncle Fed) empirically and mathematically nothing more than “no-income” and “return-free-risk.”

Meanwhile, hedge funds are building their net short positions in S&P futures at levels not seen since 2007 for the simple reason that they foresee a Powell-induced market implosion off the American bow. Once that foreseeable implosion occurs, get ready for the Fed’s only pathetic tools left: Lower rates and trillions of instant liquidity—the kind that kills a currency.

For the truth sake, Like all debt-soaked and failing regimes, the Fed secretly wants inflation to outpace rates (i.e., it wants “negative real rates”) in order to inflate away some of that aforementioned and embarrassing debt. But admitting that is akin to political suicide, and the Fed is political, not “independent.” Thus, the Fed will seek inflation while simultaneously mis/under-reporting CPI inflation by at least 50% as we've mentioned it many times.

All that said, inflation, which was supposed to be transitory, is clearly sticky, and even its under-reported 6% range has the experts in a tizzy of comical proportions.
Neel Kashkari, for example, is thinking the US may need to get rates to at least 6% to “beat” inflation. James Bullard is asking for more rate hikes too. But what these “go higher, longer” folks are failing to mention is that rate hikes make Uncle Sam’s bar tab (i.e., debt) even more expensive, a fact which deepens rather than alleviates the US deficit nightmare, as we've shown above.

As you could see our suggestion that we've made two weeks ago about "gold under pressure" due debt ceil solution and massive demand for US Dollar of huge US Treasury and government appetite stands under way. In nearest few months we do not expect relief, although prices could stabilize a bit. Just because J. Yellen just begins the hunt, while Fed by our view is not at pivot yet and could easily raise rate two times more. By the information that we have now (as economical as political), the breakeven point should come closer to the end of the year. Because US Treasury should stop drying liquidity, Fed probably will turn to standby mode, and US China confrontation supposedly will become more evident. This combination, together with stubborn inflation, more negative statistics and negative real interest rates seems as healthy background for next upside motion. Right now we do not expect gold reversal, except some extraordinary driving factor surprisingly involves.

Technicals
Monthly

May candle has not become a reversal one. Nevertheless, W&R, inability to break YPR1 and multiple "shooting stars" on top suggest compounded retracement on lower time frames. Despite that sell-off seemed to be strong on Friday - here, as you can see, nothing has happened. June is still inside month, and market doesn't show yet even 3/8 pullback. Even drop back to YPP should not treated as something negative. Currently action should be treated as retracement within bullish tendency, although it really could be big on daily chart:
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Weekly

Performance of last week we should treat as a bearish, as price has tried to move higher but close come near the bottom. Since we do not have any meaningful support until 1900 area - it seems as nearest downside destination point:

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Daily

Our B&B has worked perfect here, tail close suggests downside continuation and drop under the lows...
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Intraday

Recall guys, what I told you about untouched XOP - this is potential risk factor for our reverse H&S pattern. Now it becomes clear that H&S is near to fail - right arm downside action is too strong for bullish market:
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Thus, it seems that we could focus on short positions here. Gold has formed bearish reversal swing. It is a question whether we get any bounce, but if we will - B&B "Sell" is possible here, and minor pullback to 1955-1960$ could be considered for short entry.

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Greetings everybody,

So, As EUR as Gold have shown tactic bounce yesterday. EUR jumped on C. Lagarde speech, concerning rate change, while gold on a background of SEC lawsuit against Binance. Despite that rally was relatively strong, as usual on unexpected news, we should keep separate tactical action and fundamental background. The former still has some momentum while the latter suggest not friendly environment and points that upside potential is limited:
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Besides, some technical issues remind us that gold still under pressure. First is, on 4H chart, XOP is still intact and I wouldn't be surprised if we get the same downside butterfly as on EUR:
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Take a look that on 1H chart, we've got perfect DRPO "Buy", but its target is done already. Yes, momentum is solid and gold could try to creep slightly higher, but, personally, I would treat it as chance to get better short entry. We do not have now any signs that gold has to move higher. Reaction was due the headline, but has no relation to fundamental background change and gold valuation. So, it could stop as fast as it has started. Thus, watching for bearish patterns as around current Fib level as around 1980 area seems logical.
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Greetings everybody,

Sorry, guys for yesterday's video, it was occasionally corrupted on conversion to mp4. Still, gold shows not many changes. This week is a kind of silence before the storm. As soon as next week we get inflation data and two central banks meetings.

Speaking on daily chart, the fact that after drop from 1987 level market can't return back and mostly coiling around, hints on lack of power of bulls. This is not pure bearish sign, but it still shows that bulls are not strong enough now, or do not want to take risk due some factors, such as US Treasury activity on the bond market and chance of Fed rate change.
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On 4H chart butterfly is still valid but we haven't got any upside continuation and "222" Sell pattern. Still, MACDP line stands close, and if we get grabber here - gold could form more extended right wing, even to reach 1980 area:
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That's why, despite that on 1H we obviously are getting H&S pattern around 5/8 resistance area - be aware of 4H grabber. Once H&S will be completed, and we get no grabbers, it is possible to try short entry. Conversely, with the grabber on the back - don't be short, as Gold could move slightly higher, to COP around 1970 or even OP around 1980 - butterfly still remains valid, but entry point will change significantly.
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Greetings everybody,

So, gold performance is more evident than on EUR, and it has more direct pressure from rising of US yields. In general, everything goes with our plan. We suggest that nearest target is around 1890-1905 weekly K-support area:
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Yesterday's trading plan was a bit sophisticated and demanded as skills as luck, but it works. We keep our butterfly and still watching for 1918-1922 nearest downside destination point:

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Here is how it has happened - no grabbers has been formed on 4H chart, but market has accelerated to 1970 (COP that we've mentioned yesterday) and that was a tricky moment, then it has collapsed.
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Now, we do not see clear patterns here, and for position taking you have to go on compromise. Stop placement above 4H butterfly is irrational due risk/reward ratio. Placement it above 1970 (or even 1960 Fib level) seems logic, but it is not vital point for the butterfly. That's the riddle that you have to decide if you want to go short. Speaking on long positions - currently I do not see any attractive setups.
 
Good morning,

So, Gold follows the same direction, supposedly due poor Initial claims data, although I suppose that for the gold is more important this one factor. Anyway, despite that rally we suspect that it is short-term because US Treasury policy should remain a dominant holding factor, supporting demand for US Dollar. Thus, pullback, is mostly attempt to make bet on Fed's meeting dovish results. Whether this bet has some reasons just based on Initial claims report - is a different question.

Anyway, we have daily bullish context, so do not consider new bearish positions by far. Appearing of bullish engulfing pattern suggests possible two leg upside action on intraday charts:
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Still, take a look, at some circumstances, despite possible AB-CD up, butterfly could remain valid and we could return back to trading it later:
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Today let's focus on engulfing and its reverse H&S shape on 1H chart. Now it seems that 1951-1955 level will be as vital for short-term bullish scenario as an area for long entry. Correspondingly bears could watch for the same level failure as a subject for short entry. Otherwise it needs to be waited until upside AB-CD will be completed:
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That's being said - now we're watching for 1951-1955 support area and consider possible long entry there.
 
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