Gold GOLD PRO WEEKLY, April 05 - 09, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,586
Fundamentals

Gold market was closed on Friday due Easter Holidays, so we do not know what reaction it could have on recent NFP report. Still, we dare to suggest that Monday's open could be with the gap down. NFP numbers confirm economy recovery at good pace. Besides, good numbers make not necessary any new stimulus from the government, that now are treated among major supportive factors for the gold market.


Market overview

Gold prices fell on Monday as the U.S. dollar and global share markets firmed on the back of improving economic outlook, with elevated bond yields putting further
pressure on the metal.

"Yields are the big threat to gold in the near term," said Michael McCarthy, chief market strategist at CMC Markets, adding: "if the sell-off in bonds gathers momentum, gold could fall below $1,700 'very quickly'."

Further weighing on gold, Asian shares inched higher as the chance of yet more trillions in U.S. fiscal spending underpinned the global growth outlook. Annual profits at China's industrial firms surged in the first two months of 2021, highlighting a rebound in the country's manufacturing sector and a broad revival in economic activity.

"While gold is still good for inflation, the problem is, it's not good right now because yields are going higher in concert with inflation," said Stephen Innes, chief global market strategist at financial services firm Axi. "We need those yields to stop going higher, and then you know, once the inflation takes over then gold goes up."

Longer-dated Treasury yields rose as investors banked on vaccine roll-out in the United States and expectations that President Joe Biden's infrastructure initiative could bolster economic growth and debt issuance. The Federal Reserve is "a long way from raising interest rates at this point," Fed Governor Christopher Waller said on Monday, reinforcing hopes that the central bank is ready to remain dovish as long as virus woes linger.

Benchmark U.S. 10-year Treasury yields rose to a 14-month peak, bolstered by hopes of stronger growth and inflation ahead of U.S. President Joe Biden's multitrillion-dollar infrastructure plan.

"The short-term drivers just appear to be becoming very bearish for gold," said Edward Moya, senior market analyst at OANDA, pinning gold's recent weakness on a firmer dollar and higher yields. While gold is likely to see some pressure in the short-term, investors pricing in inflationary concerns could "eventually trigger a frenzy of gold buying," Moya added.

Gold is down over 9% for the quarter and is on track for its worst quarterly performance since end-December 2016.

“As we’ve seen bond yields stabilize and the dollar pull back off its recent highs, we have seen a little move off the lows in the gold market,” said David Meger, director of metals trading at High Ridge Futures.
“The market is watching to see whether or not the $1,680 support level is going to hold,” said Daniel Ghali, TD Securities commodity strategist.


The U.S. dollar will remain strong for at least another month, according to a Reuters poll of foreign exchange strategists, who still forecast that the currency will weaken in the longer term.

"The forces (dollar and U.S. yields) that pressured gold prices lower earlier this week have tapered and we're seeing some buying on dips as well," said Xiao Fu, head of commodities markets strategy at Bank of China International. "After Biden's infrastructure plan details, the market focus has shifted back to this potential inflation prospect. But I wouldn't say it's a big reversal in trend. Gold is still a range-bound market with upside limited by rising 10-year yields."

On Wednesday, Biden announced his long-awaited $2 trillion-plus job plan, including $621 billion to rebuild infrastructure.

"The support zone of $1,675 worked perfectly for gold, generating a solid rebound. However, the main trend has not changed and continues to point lower," ActivTrades chief analyst Carlo Alberto De Casa said in a note. "A climb above $1,720 would be positive for bullion prices, while only a clear recovery above $1,750 would turn around the current bearish outlook."

"This is an upward correction in a structured bear market," said Phillip Streible, chief market strategist at Blue Line Futures in Chicago, adding gold could climb to $1,740 before yields resume its uptrend to push gold back down again.

"A retreat in yields, as inflation pressures recede holds out the possibility of a recovery in gold prices," James Steel, chief precious metals analyst at HSBC wrote in a note.


The dollar and the yield on the benchmark Treasury note edged higher in light trading on Friday after data showing a surge in the hiring of Americans in March pointed to a U.S. economic recovery that is poised to be the strongest in decades.

The U.S. economy added 916,000 jobs in March, more than economists’ forecast of 647,000, and the unemployment rate fell to 6.0% from the previous month’s 6.2%. Jobs numbers for February were revised upwards according to the jobs report.

Despite the strong numbers the data will not alter the Federal Reserve’s stance on monetary policy, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA in New York. The economy’s bouncing back, but it’s not producing the things that are going to change the direction of monetary policy,” Ricchiuto said. “We’re going to test the 1.77% level (in the 10-year Treasury note), but I’m not sure it’s going to break (through) on this number.”

Treasury yields have spiked on the economic outlook, spurred by U.S. President Joe Biden’s plans for $2.3 trillion in infrastructure spending and the accelerating rollout of COVID-19 vaccines.

The March labor market report is the first of what are likely to be several very strong jobs reports over the next few months, said Russell Price, chief economist at Ameriprise Financial Services Inc in Troy, Michigan. The outlook looks very good,” Price said. But “in my mind the biggest constraint could be the ability of the supply side of the economy to fulfill consumer wishes.”

The yield on the benchmark 10-year U.S. Treasury rose by about 80 basis points in the first quarter - the third-largest gain over a 3-month period over the past decade - as investors sold bonds in anticipation of a U.S. economic recovery and higher inflation.

Many investors believe the move will continue - Goldman Sachs sees the yield at 1.9% by the end of 2021, while TD Securities expects yields to rise to 2%.



The move “is happening, we believe, for the right reasons,” said Gargi Pal Chaudhuri, head of iShares investment strategy, Americas at BlackRock. Chaudhuri believes further upside in yields is unlikely to derail a rally that took the S&P 500 to a fresh record on Wednesday, as yields are rising from “very, very low levels.”

Others are less certain. Forty-three percent of investors in the most recent BofA Global Research fund manager survey said 2% on the 10-year could trigger a selloff in stocks.

Rising yields have helped lift the dollar to its highest level in nearly 17 months, and some investors have positioned for more dollar strength ahead: net bets on a weaker dollar in futures markets stood at $10.3 billion, about a third of their mid-January value, the latest data from the CFTC showed.

A strengthening dollar could weigh on the profits of U.S. multinational companies and spell bad news for the recent commodities rally that has pushed up prices for everything from oil to copper and iron ore.

Although inflation has consistently averaged below the Federal Reserve’s 2% target in the last decade, trillions of dollars in government spending have revived discussions of its return. One measure of inflation, which tracks the expected average rate over the five-year period starting five years from now, is at 2.16%, the highest since December 2018.

The latest survey by BofA Global Research, meanwhile, showed fund managers see a rise in inflation - which could weigh on the dollar and erode demand for longer-dated bonds - as the market’s biggest “tail risk.”

There is “a little bit of a bid in the long end as we look towards extensions and rebalancing. Overall it has been a fairly quiet day. Even this stronger data has had a minimal impact,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald.

Yields were little moved by reports earlier that U.S. private employers hired the most workers in six months in March as more Americans got vaccinated against COVID-19, pushing the economy toward a broader reopening.

The dip in yields comes ahead of Biden’s infrastructure announcement later Wednesday in Pittsburgh. The plan could have a price tag as high as $4 trillion to pay for traditional roads and bridges while also addressing climate change and income equality. Such a plan would require an increase in debt issuance that would drive Treasury prices lower and yields higher.

“The Biden thing is definitely important. I do believe that we could continue to see higher rates,” said Lederer. “If the economy continues to show that it is gaining momentum, and inflation picks up, with all this money in the system, I think that higher rates is where we should be going.”

Gold as inflation's hedge

Although classic approach suggests that gold should be good hedging asset against inflation, BlackRock manager shows that this is not quite so right now, as gold's role is gradually changing with appearing of cryptocurrencies and different disbalances in economy and fiscal policy of central banks.

BlackRock executive Russ Koesterich says gold is failing as an equity hedge amid massive outflows from bullion ETFs into assets like Bitcoin. With the price of gold down more than 11% over the last six months, some investment managers are questioning its status as a hedge asset.

According to Bloomberg, Russ Koesterich, portfolio manager at BlackRock’s Global Allocation Fund, gold is currently failing to prove its effectiveness as a viable hedge against inflation. Indeed, Koesterich countered the popular hedge asset narrative for gold, stating, “Gold’s ability to hedge against inflation has been somewhat exaggerated. While it is a reasonable store of value over the very long-term — think centuries — it is less reliable across most investment horizons.”

The current investment horizon appears to be one dominated by the fallout of the coronavirus pandemic and the various responses by governments by way of economic stimulus packages. Inflation fears are currently palpable amid massive stimulus spending to trigger economic recovery.

Since setting a new all-time high of $2,100 per ounce back in the summer of 2020, gold has been on the decline and is currently trading above $1,700 as of the time of writing. Gold’s price decline has also seen significant outflows from gold ETFs with some market analysts stating that investors are pivoting to Bitcoin (BTC). In November 2020, Chinese banks began suspending the creation of new precious metal trading accounts due to rising price volatility for the likes of gold.

In contrast to gold’s spot price performance, Bitcoin is up almost 90% year-to-date as the largest crypto by market capitalization continues on its positive price run since October 2020. As previously reported by Cointelegraph, senior Bloomberg strategist Mike McGlone has said BTC is "pushing aside" gold as a store of value asset.

Koesterich’s warnings about holding gold as a hedge in the current investment horizon come on the heels of somewhat positive comments by BlackRock about Bitcoin. The world’s largest asset management company previously identified Bitcoin derivatives as a possible investment foray in filings with the United States Securities and Exchange Commission at the start of the year. Back in November 2020, Rick Rieder, chief investment officer at BlackRock Financial Management stated that Bitcoin could displace gold to a large extent.

COT Report

At the first glance net long position still stands bullish and dropped not too strong since last update. But, if we take a look at numbers - open interest has dropped for 46K contracts, that is around 7% of total positions, suggesting that investors run out of the gold. Speculators have added 9K shorts, while hedgers have closed big amount of positions against gold's rally. Taking it all together creates bearish sentiment on the market:

1617532991040.png


Despite that net chart still shows relatively solid net long position:

1617533059336.png

Source: cftc.gov
Charting by Investing.com



So, taking together analysis above with comments of big bank and investment companies and things that we've discussed yesterday - situation remains difficult for gold. It seems that gold has not got the deadly hit, as markets and gold rivals are going higher due better macro economic data and anticipation of global recovery, but not because of real inflation hazard.

Still, forecasts are quite optimistic right now and it seems that gold are entering difficult times. By opinions that we've provided yesterday in our EUR research -
Economists expect job growth will average about 700,000 per month in the second and third quarters. That, combined with the fiscal stimulus and about $19 trillion in excess savings accumulated by households during the pandemic, is expected to unleash a powerful wave of pent-up demand. First-quarter gross domestic product estimates are as high as an annualized rate of 10.0%. Growth this year could top 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, the worst performance in 74 years.

At the same time investors tell that "The hiring spree has officially started in the US and Wall Street knows that it will take several months of monstrous job gains to trigger the taper tantrum, OANDA said. “The economy is booming,” said Chris Low, chief economist at FHN Financial in New York. “If vaccines result in low enough COVID numbers to allow significant further service-sector reopening, the Fed will have to start discussing a taper, and update its guidance, before the end of this year.”

BlackRock expects even earlier reaction of the Fed on new economy reality. At the same time, in nearest couple of month inflationary pressure could fade a bit by few reasons. First is - good statistics and a lot of personal savings suggest no new stimulus needed. Second -recent statistics shows drop in wage inflation, suggesting that a lot of hiring stand for the jobs with recently low wage. Due these reasons gold could stay on the surface for 1-2 months more, maybe showing bounce from our crucial 1650$ support area.

But, as soon as Fed announces contracting of long-term bond monthly purchases (i.e. taper tantrum) and change rhetoric to prepare markets for coming rate hike - collapse on gold market accelerates. It means that gold is not suitable right now for long-term investing, while short-term buying are still possible from strong support areas with speculative purposes.

Technicals

Monthly

Context on monthly chart remains bearish due multiple factors - MACD trend stands bearish, price is below YPP and downside action shows acceleration on CD leg. Still, as price shows the first touch of strong support area - we're in tactical bounce environment. As we've said gold keeps ability of propriate reaction on meaningful technical conditions by far, such as strong K-areas on long-term charts.

Almost in the same area, around 1655$ we have an OP target of monthly AB-CD pattern that has not been hit yet. This is the reason why we do not exclude chance that gold could drop to the new lows before major upside reaction starts. But anyway this price behavior has to be reflected on lower time frames in a way of some pattern.

Speaking in relation to monthly time scale - we could say that 1650-1685 is an area to consider bullish positions on daily time frame, but preferably after OP will be hit.
gold_m_05_04_21.png


Weekly

Overall upside reaction stands weak. MACD is bearish as well, and the bullish Stretch pattern that we've discussed previously is done already, as DOSC indicator returns to zero level. Appearing of minor hammer pattern provides few points to the bulls, but it has been formed before NFP data and we do not know yet how market reacts on them. We should see it on Monday. Our suggestion is gap down.

For perfect positioning we prefer you to take care on OP target and place stop order below it. Because reaching of OP doesn't mean the breakout of K-area and failure of the retracement scenario. Very often with major OP's just below the K-areas market could form short-term spike to hit it. And every time when we see this, we have to take it in consideration. For conservative approach it would be better to consider long entry only when OP will be reached. If you apply scale-in or intend to buy right now - you have to hide stop below OP level to place it properly.

gold_w_05_04_21.png


Daily

MACD trend has turned bullish here and due recent rally we return to discussion of possible patterns around support area. People were asking me about possible Double Bottom or cap reversal patterns, why they can't be formed here. So, my answer was - they could, but odds stand in favor of another drop before major upside reaction starts. Just because of important targets, standing around 1670 and 1640 areas.

With these targets in mind, I believe more in appearing of small butterfly "Buy" pattern, instead of Double Bottom or the Cap. Of course you could act according to your own outlook and vision, but for me it is too expensive to buy gold around 1735 and place stop 100$ lower. It is too much for daily time scale. I would better miss the trade than loose my capital.
gold_d_05_04_21.png


Intraday

On intraday charts we do not have something really new as market was closed in recent few sessions. Recent rally means nothing to us, because of uncertain reaction on NFP numbers that yet to be formed. The only thing that might be possible to consider is scalp DiNapoli patterns on 1H chart due solid upside thrust. But I'm ready to bet that gold market erases any bullish opportunities on Monday's open.

gold_4h_05_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,586
Greetings everybody,

So, gold market is going with our plan by far, as price is stuck around 1735 area. In fact, this is the point for decision concerning short entry. Price stands very close to invalidation point of short-term bearish scenario, which is above the minor butterfly's top. And here potential loss of the trade is minimal. Target stands around 1650$. Upward action will continue only if price destroys butterfly, moving above its top.
gold_d_06_04_21.png



On 4H chart the half of DRPO "Sell" pattern stands in place and we see good market mechanics, as gold has tried to proceed higher yesterday, but failed and dropped back. This is good for DRPO pattern. Still, it is not confirmed yes as we do not have yet 2nd close below 3x3 DMA (green line).
gold_4h_06_04_21.png


Once DRPO will be formed - we have few options for trading. First is to stick directly with DRPO aiming on its minimal target around 1700. Stop also should be placed based on DRPO rules. Second - we could try to use DRPO as entry pattern, but possessing on daily butterfly and its target of 1650. In this case stop might be placed as above butterfly's top as on DRPO rules as well.
 

Sive Morten

Special Consultant to the FPA
Messages
14,586
Greetings everybody,

Daily chart barely has changed. Price has moved slightly higher, but not dramatically, and has not broken existed bearish context yet:
gold_d_07_04_21.png


Recent upward action mostly stands on background of interest rates dynamic, and despite that they have dropped a bit - potentially bonds are forming bullish pattern, suggesting that rates might go up again soon.
gold_4h_07_04_21.png


At the same time, gold is showing signs of weakness, such as MACD divergence and potential H&S shape but setup is not formed yet.
gold_1h_07_04_21.png


Thus, currently we do not consider any long positions. For short entry we still need a bit more patience and wait when & if bearish setup will be ready for trading.
 

Sive Morten

Special Consultant to the FPA
Messages
14,586
Greetings everybody,

Overall performance of gold market is shy by far, with no changes on daily picture. On 4H chart we still control 1755 area as crucial one. While gold stands below this level - it keeps chances to drop to 1650 major daily target cluster. Upside breakout means further upward action, supposedly to 1800 first:
gold_4h_08_04_21.png


Meantime on 1H chart gold shows not very strong performance, forming MACD divergence and flirting around 1.618 butterfly target. Potentially we could get here H&S pattern.
gold_1h_08_04_21.png


Thus, as you could see - although we have few different hints here and there, but nothing evident yet. For short position we need clear bearish pattern on 1H chart, for long entry (if somebody want) upside breakout.
 

Sive Morten

Special Consultant to the FPA
Messages
14,586
Greetings everybody,

So, gold still was able to erase minor daily butterfly pattern. Although our long-term 1650-1670 targets still stand intact.
gold_d_09_04_21.png


In short-term we have few possible trading setups. Today, as gold has completed flat upside AB-CD and hits Agreement resistance on 4H chart - downside retracement could start due "222" Sell pattern. Commonly, it should be around 30%, or ~1725$ area.
gold_4h_09_04_21.png


Another question is whether gold will turn to XOP later or not. Here situation mostly depends on Interest rates and key level is 10 year 1.6% support area. If H&S or Double Top will be formed and yield breaks 1.6% support - gold could go to XOP.
Conversely , flat standing in the range above 1.6% decrease chances on upward action on the gold and supports idea of deeper reaction with current "222" Sell. In fact, 10 year yield has long-term 1.98% target and it could proceed action at any moment. But, this is mostly the story for the next week.
 
Top