Gold GOLD PRO WEEKLY, 24 - 28, May 2021

Sive Morten

Special Consultant to the FPA
Messages
15,313
Fundamentals

This week all markets were in the shadow of cryptocurrencies collapse and have shown moderate activity, mostly coiling around achieved levels. Currently it is a pleasure to make analysis on gold market as it is related tightly with FX one, and dollar in particular. In fact our long-term economy model, suggesting soon upward dollar reversal, involves gold market as well.

From that standpoint, the same driving factors were moving gold market this week. The major one is Fed minutes release that we've discussed yesterday. The FOMC members' opinion concerning inflation splits, and despite that majority still support the "accommodative policy", there are two members who start talking that tapering could start earlier. From that standpoint inflation remains the primary topic and driving factors for all markets.

Market overview

Gold prices hit a 3-1/2 month high on Monday as a dip in U.S. Treasury yields and persistent inflation worries in the bullion market burnished its appeal.

“Higher than expected (U.S.) consumer price inflation and weaker retail sales was really the potent combination for gold,” said Ole Hansen, head of commodity strategy at Saxo Bank. Higher inflation has been the key source of inspiration for renewed demand that we have seen in gold, especially during the last couple of weeks.”

U.S. economic readings last week showed April U.S. retail sales unexpectedly stalled and a bigger-than-expected rise in consumer prices. The Fed sought to ease market concerns about rising inflation after the data, keeping a lid on U.S. Treasury yields.

The narrative is clearly shifting towards inflation ... but perhaps more critically, you have got the U.S. dollar weakness, which is probably the key and prime driver,” said independent analyst Ross Norman. Fed will not be tempted to rock the boat in terms of the recovery which is gathering some momentum. Raising rates or discussion on tapering would probably be counterproductive at this stage,” Norman said.

The dollar index fell to a near three-month low, making gold cheaper for other currency holders.

“Between $1,870 and $1,875 we’re seeing quite an important resistance zone... As long as it remains above $1,840 the trend is still bullish for bullion,” said Carlo Alberto De Casa, chief analyst ActivTrades.

Minutes of the U.S. central bank's April 27-28 meeting said a number of policymakers thought if the U.S. economy continued rapid progress, it would be appropriate "at some point" to discuss tightening its accommodative policy.

British inflation more than doubled in April, the start of a likely climb in prices this year as rich economies recover from pandemic lockdowns, but one that the Bank of England hopes will prove temporary. Britain's economy will grow much faster than expected this year as a fast-moving coronavirus vaccine programme allows
businesses to re-open and lifts confidence, a Reuters poll found.

The surge in euro zone inflation is temporary and consumer prices should fall sharply next year, European Central Bank board member Isabel Schnabel told German broadcaster ARD on Wednesday.

Gold edged up on Friday en route to a third straight weekly gain, supported by a subdued U.S. dollar and Treasury yields as concern receded over tapering by the U.S.
Federal Reserve.

"Overall, investors are not too worried about (monetary) tightening at the moment. And we've seen the U.S. bond yields come down a little bit and that has allowed gold to remain near recent highs," said Think Markets analyst Fawad Razaqzada. On the technical front, "The path of least resistance is to the upside and $1,900 is the next logical target."

Gold has steadied after minutes from the Fed's April meeting mentioned possible future discussions on paring stimulus, prompting speculation over potential increases to interest rates.

Recent data showing a rise in commodities prices globally have intensified concerns over inflation, lifting gold's appeal as an inflation hedge, analysts said. Indicative of sentiment, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.6% to 1,037.09 tonnes on Thursday.

"Capital flows to where investors can get higher returns and at this moment gold is benefiting from the cryptocurrency crash too," said Brian Lan, managing director at dealer GoldSilver Central.

Investors directed $793 million to precious metal funds, marking their biggest net buying in 15 weeks as gold prices surged above a four-month high in the week

Data showed U.S. factory activity gathered speed in early May amid strong domestic demand.

“Strong economic data like the PMI does potentially have the opportunity to cause some short-term ripples in the gold market, based on the premise that the Federal Reserve could potentially reduce bond buying quicker than anticipated,” said David Meger, director of metals trading at High Ridge Futures.

“The bond markets show that they are leaning towards believing the Fed is going to be a lot slower in removing accommodation,” said Edward Moya, senior market analyst at OANDA.

“We believe gold may trudge higher as the negative impact of the Fed minutes wears off. That said, gold faces quite stiff resistance at $1,900/oz,” HSBC said in a note.


Inflation

Most large-scale macroeconomic models in use by major central banks use a so-called New Keynesian Phillips Curve (NKPC). It relates current inflation to expected future inflation and the cost pressures faced by firms, which in turn is related to the current level of output relative to potential — in other words, the degree of economic slack. So how useful is the concept of economic slack in explaining inflation in practice?

Fathom uses the output gap framework to argue that, as economies reopen in full, aggregate demand relative to potential is likely to rise sufficiently far to put significant upward pressure on inflation. Why? There are two reasons.

First, the starting point. During the pandemic, governments ordered whole industries to cease production, while simultaneously requiring their citizens to stop buying the products of those industries. Output and potential output shifted down in parallel by government decree. Hence, the output gap in the UK is unlikely to have changed much, at least in terms of what such a concept might tell us about the degree of inflationary pressure. This stands in contrast to many official estimates. The OECD, for example, suggest that the UK economy was operating at 8.8% below potential last year, having operated at 3.7% above potential in 2019.

Second, demand and supply will rise swiftly in parallel as economies reopen, which is where the dramatic response of both monetary and fiscal policy during the pandemic comes into play. The chart below compares UK GDP and UK factor incomes through the pandemic, with their behavior through the global financial crisis of 2008/09.

The outcome of a government policy that provides households with incomes close to pre-pandemic levels, while simultaneously forbidding those households from purchasing many of the goods and services that they would normally purchase, is a substantial build up in savings.

1621768217296.png


Economic activity and inflation across the major economies will depend on how rapidly those excess savings pots are spent. In its February Monetary Policy Report, the Bank of England assumed that just 5% of excess savings built up by UK households is spent over the next three years. But it seems likely that households will spend more, since the savings are a rational, endogenous response to a very difficult set of circumstances. In Fathom’s latest forcasts, it is therefore assumed in the central case that some 10% of the excess savings pots were spent in the first two years of the forecast.

1621768251756.png


Because of this more bullish view of the propensity of households to spend their excess savings, Fathom’s forecasts for economic growth are stronger than those of most official forecasters. And with expenditure likely to be skewed towards more traditional forms of economic activity with clear capacity constraints — such as hospitality, travel and tourism — output gap approaches to the analysis of inflationary pressures are likely to bear fruit.

1621768289562.png


With the balance between aggregate demand and aggregate supply little changed during the pandemic, it is likely that cyclical factors will put upward pressure on inflation. What then? With high levels of debt, and asset prices supported by an expectation of near-zero interest rates more or less indefinitely, policymakers would be bold to tighten aggresively if inflation rose above target. It is more likely they will look through any inflation overshoot, relying on hard-won credibility to keep inflation expectations on track. The risk is that this gamble fails, ushering in a sustained period of higher inflation.

COT Report

We second week in a row trying to get results of macro statistics on speculative positions. Last week this was NFP impact, while today we could see CPI results. And, to the Horner of the gold market, we could say that jump in CPI inflation has brought no negative results to the sentiment. Take a look we see strong jump, more than 5% in open interest and 10K+ positive changes in bullish conditions. SPDR Fund also shows positive performance, as it was mentioned above.
At the same time, the longer term perspective is not as obvious and we have the same picture among the hedgers as on EUR. They have mixed possession, suggesting that upward perspectives could be short-term and keep significant positions against gold's drop.


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So, tactically, in short-term, we do not have any reasons to deny upward continuation. Gold shows good performance, with very small retracements on intraday charts. So, as we've said - 1875$ and next of 1925$ areas are could be reached. Still, again and again we're turning to our long term view, that suggests coming upside reversal on the dollar.
Yesterday we've talked a lot about tricky FOMC minutes reports. Where under cover of the statement we see starting argue concerning tapering. It means that Fed is not as calm as it wants to show. This factor in conjunction of great statistics support our long-term view that we stand somewhere near major upside reversal on the dollar, which means the end of bullish trend for the Gold. I already showed you this picture. Take a look what has happened to the gold in previous cycle when downside AB-CD recession was over - now we have absolutely the same pattern. Just compare the rectangles of 2012 and now, and the moment when they are forming. Everything coincides accurately:


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Thus, our view stands the same. In short-term, gold could keep going higher a bit, but this is the peak of bullish trend and downside reversal stands not too far.


Technicals

Monthly

Monthly picture fits well to our long term view. Despite great May performance, trend here still stands bearish, suggesting that it is more propriate to treat this move as a retracement.

Since price was able to pass through 1850$ resistance area and hits 1875$ daily AB-CD target as well, it is logical to suggest that next target is 5/8 major Fib resistance here that stand around 1925$ area.
gold_m_24_05_21.png


Weekly

Weekly context is bullish - MACD trend is up, price is above monthly pivot. With upward breakout of K-resistance area, here we do not see strong barriers for upside continuation, as overbought level stands rather far from here. So, mostly weekly picture confirms ability to hit 1922-1925$ area that includes major Fib level and MPR1.

gold_w_24_05_21.png


Daily

Since gold stand in tight range the whole week, it is difficult to add something new to the daily picture. Overall context stands bullish, but market is at resistance and odds suggest the pullback. Thus, it is reasonable to wait for better price to buy. Additionally, it is possible to consider using of Stop "Buy" order above 1888 top to jump in if sudden upside breakout happens.

Daily picture suggests no shorts, but they are possible on intraday charts as price stands at Agreement resistance. This choice is up to you whether to sell or not, but in current environment I feel uncomfortable to sell gold as it stands in "buy on the deeps" mode.

gold_d_24_05_21.png


Intraday

Currently I feel comfortable as sideways watcher over the situation that we have on the market. Indeed, on Friday we've got upside spike, but it has not broken the top. All in all - everything depends on the breakout direction of the big candle range, which is also HW pattern on daily chart. Here, on 4H chart it seems that bullish dynamic pressure is growing as price keeps forming higher lows with bearish MACD:
gold_4h_24_05_21.png


At the same time, on 1H chart the recent spike and return has reversal bar and shows a rejection of price level that market is trying to break. As attempt was unsuccessful, gold could drift slightly lower, back to the lower bottom of HW range, at least to 1860$ area to complete bearish engulfing target. As you understand, in current environment it is doubtful pleasure to open any position:

gold_1h_24_05_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,313
Greetings everybody,

So, in weekend we've discussed chances on upward breakout on gold market. In general, as sentiment stands positive it is the question of time when market proceeds to next 1925$ target. Within 1-2 sessions we also could get bullish grabber on daily. Now price is consolidating near the top of HW pattern, which also could be treated as bullish sign:
gold_d_25_05_21.png


On 4H chart market has shown downside reaction on reversal pattern, forming "222" Buy pattern, but at the same time gold is forming higher lows inside the rectangle which is bullish, as bears can't push back to the same lows and becoming weaker.
gold_4h_25_05_21.png


Overall strategy remains the same by far. It is possible try to catch patterns, like "222" on Monday inside the consolidation, or use Stop "Buy" entry order above daily HW top:
gold_1h_25_05_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,313
Greetings everybody,

So, as we've suggested yesterday, upward breakout is more probable, based on the price action that we saw on intraday charts. Now price stands out of HW daily pattern and has no barriers to proceed to 1923-1925 area. Our next target and support, that includes Fib level, MPR1 and daily overbought.
gold_d_26_05_21.png


At the same time, HW has the special feature that price has to stay outside of its range. It means that if minor pullback happens that actually we're counted on, gold anyway has to stay above 1888 area. Here we also see the Fib level that could consider:
gold_4h_26_05_21.png


On 1H chart price has completed the butterfly and at least 1890-1892 pullback should happen. Thus, 1888-1892 an area where theoretically we should get chance to take long position. Stop is possible to set below 1870 K-area.
gold_1h_26_05_21.png
 

JOELIBOK

Private, 1st Class
Messages
41
Greetings everybody,

So, as we've suggested yesterday, upward breakout is more probable, based on the price action that we saw on intraday charts. Now price stands out of HW daily pattern and has no barriers to proceed to 1923-1925 area. Our next target and support, that includes Fib level, MPR1 and daily overbought.
View attachment 65265

At the same time, HW has the special feature that price has to stay outside of its range. It means that if minor pullback happens that actually we're counted on, gold anyway has to stay above 1888 area. Here we also see the Fib level that could consider:
View attachment 65269

On 1H chart price has completed the butterfly and at least 1890-1892 pullback should happen. Thus, 1888-1892 an area where theoretically we should get chance to take long position. Stop is possible to set below 1870 K-area.
View attachment 65270
Always great analysis Sir Sive!
 

Sive Morten

Special Consultant to the FPA
Messages
15,313
Greetings everybody,

So, yesterday we've discussed in details market's break out of HW range and its continuation to next 1923-1925 target. So, on daily chart nothing has changed yet, but we have few details on intraday charts.
gold_d_27_05_21.png


As we've said market should stay outside daily HW range. Otherwise, deeper downside action could start. Now price has reached the first level that we've specified yesterday and it is the first area for long entry. We treat that bullish context stands intact until price holds above 1873-1875 K area.

At the same time, as we have reversal bar on top, it means that price still could show a bit deeper drop:
gold_4h_27_05_21.png


On 1H chart price has formed "222" Sell that could also trigger deeper retracement, but not necessary. As we have here potential downside AB-CD - be aware of OP that stands below our 1st entry level. Reaching of OP doesn't mean breaking of bullish context. Thus, it means that it would be better to keep stops below 1873-1875, but at least below 1880 OP target.

If OP indeed will be hit, this might be good area to consider another long entry. If we do not get black nasty drop of course.
gold_1h_27_05_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,313
Greetings everybody,

So, as gold is trying to drop a bit more - we still watching for action around major support areas on intraday charts and stay aside for awhile. Besides, on daily chart the bullish grabber might be formed today, and it would be great if we get it. This another reason to wait, at least till Monday.
gold_d_28_05_21.png


On 4H chart market is still coiling around 1st K-support area that we've specified, keeping bullish trend intact:
gold_4h_28_05_21.png


But, at the same time, as we've said yesterday, we have downside targets that stands slightly below this level. Our major invalidation point is 1870-1875 K-area that market should not brake at any case. At the same time OP target stands between major levels and it might be hit.

gold_1h_28_05_21.png


If you have bearish position, it would be better to use OP from A* point that stands around 1886 as a target. It has more chances to be hit and it stands right under the K-area. 1881 target might not been reached.

That's being said - bulls wait for bullish patterns around 1880-1890 and daily grabber pattern, while bears should care about profit booking.
 
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