Gold GOLD PRO WEEKLY, April 11 - 15, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,092
Fundamentals

Technically, gold market probably has shown the most quiet performance for a very long time, so that on technical side is nothing to discuss, at least on daily and lower time frame. At the same time, the flat price doesn't mean that nothing is going on. The big processes that we've mentioned in few previous week are keep going. So this week as well we've got few disturbing calls.

Market overview

According to Gold Council, the price retreated throughout the month on perceived easing of geopolitical tensions but still finished at US$1,942/oz,5 1.7% higher on the month and 7.6% higher on the quarter.6 The Fed also increased its policy rate by 25bps in March, with dot plots suggesting rate hikes totalling anywhere between 1% and 3% this year, which may include 50bps increases in some meetings. However, despite higher nominal rates, rapidly rising inflation, geopolitics, and market volatility supported gold’s performance.

Global gold ETFs had net inflows of 187.3t (US$11.8bn, 5.3% of AUM) in March, with assets just below the record of US$240.3bn, set in August 2020. March inflows were the strongest since February 2016, despite a significant rebound in equities and a strong US dollar performance. There were positive flows across all regions during the month, but most came from North American and European gold ETFs. March demand brought Q1 inflows to 269t (US$17bn) –the highest quarterly inflows since Q3 2020, as global equities had their worst quarterly performance since Q1 2020.

1649587635126.png


North American inflows of 100.6 t (US$6.3bn, 5.5%) were dominated by larger US funds in absolute terms, but nearly all funds in the region grew. Low-cost gold ETFs rebounded strongly during the month to add approximately 13t or US$800mn, as strategic investors increased positions on the back of inflation concerns, the Russian–NATO war, and the flattening of the US Treasury yield curve which inverted by the end of the month.

Daily trading averages in March shot higher to US$170bn a day, well above the February levels of US$139bn9 and the 2021 average of US$130bn. Net long positioning, via the recent Commitment of Traders (COT) report for COMEX gold futures, initially rose to 1,000t (US$62bn), the highest level since the beginning of the COVID-selloff two years ago, before settling at 865 t (US$54bn), slightly lower than where it finished in February.

2022 inflows of US$16.6bn have far surpassed the 2021 outflows of US$9.1bn; current holdings of 3,835 t, leave total gold ETF holdings 1.8% away or 73t from the all-time month-end high of 3,909 t in October 2020

The geopolitical situation remains an important driver for gold. A prolonged conflict in Ukraine will likely result in sustained investment demand. In contrast, a swift resolution, something which we all hope for, may see some tactical positions in gold unwind, but much like in 2020 we believe significant strategic positions will remain. However, we believe that the opposing forces of inflation and rising rates will likely be the strongest influences on gold in Q2.

The post-COVID economic recovery and supply-side disruptions, which have been exacerbated by the Russia–Ukraine war, will likely keep inflation higher for longer.

Central banks have shown they are prepared to act. The Fed has begun to raise rates, following the Bank of England (BoE) which has now raised rates in the last three meetings. Even the European Central Bank (ECB), which has resisted growing calls to action, indicated a more hawkish stance at its most recent meeting. While our historical analysis shows that gold has typically performed well following the first rate hike in a tightening cycle, we believe gold may come under renewed pressure around the forthcoming Fed and ECB meetings.

But the war is also affecting the global economic recovery. This has recently prompted a number of ratings agencies – such as Fitch – to downgrade their 2022 growth forecasts. Widespread rising inflation expectations, low growth, and falling consumer confidence may further complicate central bankers' policy decisions.

Our analysis shows that during phases of 3-m/10-y curve flattening gold has tended to outperform. Gold’s annualized returns during curve flattening were over 5%, compared to just under 3% when the curve is steepening.

In addition, despite the prospect of higher nominal rates, both nominal and real yields remain historically low. This, combined with the possible shift to a positive co-movement between bonds and equities, will likely continue the shift into alternative assets. It also presents an opportunity for gold, as both an alternative to bonds and a hedge against the greater risk generated by higher allocations to alternative assets.

U.S. Federal Reserve officials on Wednesday will release more details on what's evolving as a three-year plan to trim several trillion dollars from the stash of assets purchased to stabilize financial markets through the coronavirus pandemic, its next step in the move to tighten credit and lower inflation. Rising interest rates on home mortgages, bonds and other longer-term debt are already accounting for the Fed getting rid of perhaps $80 billion to $100 billion of assets per month, economists say, so the immediate market response may be muted. Now it is suggested that it will be 95 Bln per month, including 35 Bln of MBS.

But the plan will send a powerful signal of officials' intent to make credit steadily more expensive and, by doing so, help lower inflation currently running at more than triple the Fed's 2% target.

The Fed "will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting," Fed Governor and Vice-Chair nominee Lael Brainard said on Tuesday. Referring to the 2017-2019 period when the Fed took a year to reach a pace of $50 billion in monthly reductions of its holdings, Brainard said "I expect the balance sheet to shrink considerably more rapidly" this time.

Shrinking the balance sheet adds even more pressure to credit markets by decreasing demand for the assets that the Fed holds, which adds upward pressure on interest rates. While estimates of the impact vary, Fed Chair Jerome Powell after March's meeting said the reductions might have the same effect as an additional quarter-point increase in the short-term rate the Fed uses as its primary tool.

In response to the 2007-2009 financial crisis, the Fed through several rounds of "quantitative easing" accumulated around $4.2 trillion of assets, the equivalent of around 24% of U.S. gross domestic product. From 2017 to 2019 it reduced those holdings to less than $3.6 trillion, or about 16.5% of GDP.

More is in play this time. The Fed between March 2020 and March 2022 ran its Treasury and mortgage holdings up to $8.5 trillion, roughly 35% of GDP, a level some elected officials worried put the central bank too deeply into financial markets and government finance.

As the Fed begins its withdrawal, economists expect it may end up targeting a balance sheet level equivalent to perhaps 20% of GDP, or around $6 trillion depending on how fast the economy grows and, perhaps more importantly, what level of reserves commercial banks require.

Policymakers have said they do not want to repeat their mistake of 2019, when the balance sheet got so low it drove up the interest banks charge each other to borrow reserves overnight. That forced the Fed to put more cash into the system.

"They want this to operate in the background so they will be very careful about the language they use," said Andrew Patterson, senior international economist for Vanguard. Patterson said he thought the Fed would aim to reduce the balance sheet to around "20ish" percent of GDP, but may take four or five years to get there, a slightly slower pace than Powell flagged to Congress.

Whatever the parameters set, New York Fed President John Williams said Saturday it will likely take a shock to the economy to change course once agreement is reached.

As a result of minutes publication, the interest rates curve has normalized a bit, with the rising longer term rates and reduce the inversion. “We do not see a recession occurring in the near-term,” said Gargi Chaudhuri, head of iShares Investment Strategy, Americas, at BlackRock. “While we are hesitant to say that this time is different, we note that many factors now differ from previous yield curve inversions,” she wrote. Longer-dated yields had been pushed artificially low by investors such as pension funds with improved funding status, contributing to the curve inversion, she said.

BlackRock's Chaudhuri said more hawkish signals by the central bank - increasingly determined to tighten financial conditions through rate hikes and balance-sheet reduction to fight inflation - have contributed to the curve steepening.

"We still see room for longer end interest rates to move modestly higher from here", she said.

This also has led to rising of real interest rates that turn positive again. Although 30 year TIPS stands just 0.21% above the zero, in general rising of real yields one of the major bearish factors for the gold market. Nominal yields are rising as well. Thus, on Friday 10-year yield hits 2.7%

1649589498088.png


At the same time the structural problems in the US and EU economies are accumulating. As we've said, Fed announces more aggressive policy. Speaking shortly, it suggests three major points:

- rates could be increased for 0.5% not only in May meeting, but on every meeting till the end of the 2022.
- As a result rate could hit 2.5-2.75% by the end of 2022;
- Quantitative tightening steps suggest 95 Bln supply of the bonds from Fed Balance sheet to the open market, including 35 Bln in MBS monthly, which is two times faster than in 2017-2019;

Inflation will mean the average U.S. household has to spend an extra $5,200 this year ($433 per month) compared to last year for the same consumption basket, according estimates by Bloomberg Economics. The excess savings built up over the pandemic, and increases in wages, will cushion those costs, and allow spending to expand at a decent pace this year. But accelerated depletion of savings will increase the urgency for those staying on the sidelines to join the labor force, and the resulting increase in labor supply will likely dampen wage growth.

1649590400046.png

Mortgage applications are falling for the 4th month in a row. As we've said last week, just one Fed hike makes households to spend 20% of family budgets to serve the debt. Adding here rising expenses on utilities services, gas etc., burden is rising significantly. While real wage still stands negative and mortgage rates are rising, reaching the new highs since 2018

United States MBA Mortgage Applications

1649590154168.png


CFTC data

As geopolitical tensions gradually becoming the weekly routine and the US economy looks in general good, at least if we look at popular numbers, such as NFP, the demand for th gold has eased a bit. Recent data shows that speculators have opened short positions this week, although open interest has dropped. It means that current action should be treated as retracement still and not turns yet to the trend:

1649590810720.png


Conclusion:

Currently, guys, we do not see any deviation from our long-term plan. As we've suggested in our previous reports, we split foreseeable time in two periods - nearest 3-6 months and following time. In nearest few months, definitely until the summer, the gold market should remain under pressure by few reasons. Mostly they are external US economy support by EU capitals flow, and hawkish Fed policy. The former disguises problems in EU economy, while the latter leads to rising of the US Dollar and demand for dollar-denominated assets. Together they could keep inflation stable, albeit high level, support consumption and demand for the US assets. This situation hardly change in April in May. Summer is vacation time, and gold seasonally is most quiet period.
But, closer to the end of the summer and closer to November elections by our expectations we should start see US economy problems that come on the surface and start reflecting in statistics. The nature of current crisis in the US is based on over-crediting of personal consumption, when spendings exceed households ability to spend. With rising rates by the Fed - they just accelerate problems and accelerate slowdown of the economy. When real GDP is already stand negative, rising of the rates make money more expensive and significantly reduce consumption power of the households. Inability to refinance existed loans with lower interest rates should lead to chain effect, starting from drop in personal spending, with making impact on industrial production on a later stages. Thus, we will not be surprised, if Fed turns to easing in the spring of 2023. We sceptically treat the common opinion (and Fed position) that they intend to tight rates until early 2024. Economy collapse comes earlier.
Despite that gold reminds under pressure these dates, in general it resists well to the headwinds as geopolitical piking renew the headlines every day, supporting tensions at high level. We treat that massive capital outflow from the gold as impossible now, which brings good chances that current action remains just retracement in a longer term bullish trend. Sanctions imposed just month ago. It needs at least 1-2 months more to sign the effect in statistics. But whatever it will be - the major burden, as usual, will be on the shoulders of the common people, final consumers.

Technicals
Monthly

Well, it is difficult to find some topic for discussion of technicals this week, as market was absolutely dead. Monthly trend remains bullish, while price is coiling around YPR1. Recent pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. In fact, the grabber failure here is a reasonable result, as its appearing in current conditions could be looking curious. With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
April starts negative, but this week it shows positive dynamic, and market stands tight near YPR1. While on weekly chart price performance could be treated as the butterfly, here we have "222" Sell, and gold already has completed minimal target in a way of 3/8 retracement:
gold_m_11_04_22.png


Weekly

Trend stands bullish here as well and market has completed the minimal reaction on the butterfly pattern, showing 3/8 pullback as well. Last time we've discussed large "Evening star" pattern, that suggests compounded shape of the retracement, which means a kind of AB-CD shape on lower time frame, and deeper target. But, as market stands flat for the 4th week in a row, it seems downturn postpones. Despite multiple cross-market bearish signs, such as rising interest yields and USD performance, gold has enough power to hold above major support area.

Meantime MACDP line is coming closer to the price action. Appearing of bullish grabber here might become a decisive point and harbinger of big shift on geopolitical arena. For long-term investing, it seems that patience now overvalues any attempts to anticipate reversal and get the better entry price.

gold_w_11_04_22.png


Daily

The major thing here, on daily chart is the turning of the trend into bullish mode. As higher time frames trends are bullish as well - this might be the sign that gold is able to hold above K-area and prepares for upward action. Thus, we could get higher retracement, at least.

gold_d_11_04_22.png


Intraday

On the intraday performance market has erased existed bearish patterns and it seems that it has chosen direction for the short term. To be honest, with the performance of other markets that are not friendly to the gold, it is a bit not very comfortable to consider long entry. But, nevertheless technical factors mostly stand on the bullish side. On 4H chart our consolidation finally is broken up, and, with the divergence in place, 1965-1972 area looks as a reasonable target.
gold_4h_11_04_22.png


It means that we could try to consider long entry on 1H chart. 1935 support area looks interesting for the stop placement.
gold_1h_11_04_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Greetings everybody,

So, gold has hit the resistance area that we've discussed in weekend. Now we have a bit unique situation when gold is rising together with the interest rates, that a bit irrational and could happen only either because of geopolitical situation or when rising yields reflect negative processes in the US economy that increases demand for the safe haven. Let's see how long gold could keep this pace.

On 4H chart our AB-CD pattern is mostly done:
gold_4h_12_04_22.png


Thus, for long entry we need to wait either for tight consolidation under the resistance, commonly in a way of triangle, or the pullback to one of the hourly support areas:
gold_1h_12_04_22.png


Bears could consider tactical short entry, but be aware of the OP target that has not been hit yet. Either wait when it will be completed, say, by upside butterfly. Or, place stop in advance of it.
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Greetings everybody,

So, today we could say only that the Gold market has completed the setup that we've talked about yesterday - upside OP is hit by the fast action and butterfly has been formed. This was the reason actually why yesterday we called to either place stops in advance of this action, above OP or just wait for this action before position taking. This is 1H futures price, and gold action here much better response to the targets, than on FX Retail broker.
1649834414739.png

On 4H chart market has broken our K-area, but it could happen because of OP existence. Other words speaking - the pullback is still possible:
gold_4h_13_04_22.png


As we also have MACD divergence on 1H chart - for long entry we first will be looking for 1940 K-area. For short entry, those who would like to - you could use the butterfly as well. But initially it would be better to place stop above its 1.618 target. Although chances are not too high, but CPI action was relatively fast, and it still could try to hit it
gold_1h_13_04_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Greetings everybody,

As we're coming to the Easter holidays and with more or less but stable inflation, traders gradually start booking results of recent two weeks. Indeed, rally on interest rates and dollar index is impressive. Thus, on the gold we also see some pause.
Currently, on daily chart it is difficult to say whether we have continuation of the long term bullish trend or this is just a pullback after the drop. As shape of the action is not too strong, and choppy a bit, we're not sure yet that this is direct upside continuation by far.
This is the reason why we still keep on the table potential downside AB-CD pattern. In fact, 2000-2013$ area should become the one that gives us clarity.
gold_d_14_04_22.png


This level is decisive, because there we have Agreement resistance of XOP and major 5/8 level. If currently we have a retracement - market should not break it up. This is also nearest upside target for those who have long position or intend to take it:
gold_4h_14_04_22.png


On 1H chart market was coiling around OP and butterfly's top. So, those who have taken short positions - could keep it, just move stops to breakeven before weekend. If downside pullback will be more extended - gold could form here minor H&S on top, or larger H&S withe neckline around 1940$. So, for long entry is nothing to do by far - we intend to keep an eye on 1956$ and 1940 areas correspondingly. While bears could watch for bearish patterns that we've mentioned.
gold_1h_14_04_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Good morning, and Happy coming Easter to everybody,

So, as we've decided - to keep gold analysis to weekend, lets take a look at Aussie dollar. First is, we have long-term setup here, second - it still has some relation to the gold.

As AUD starts to show solid upside action in recent month, many traders wonder whether this is starting of long-term upside trend that we're watching for. Indeed, AUD statistics was not bad and BoA gives hints on possible rate change as well. But we think that it seems that Australia just getting the piece of EU assets cake. Although the US is getting the major part, Australia also is getting some.

Still, on the monthly chart, if no new top will be formed in April - we could get bearish grabber that is consistent with our longer-term view. We suggest that downside action should last a bit more. Perfectly if it takes the AB-CD shape. In this case we get "222" Buy around 0.66-0.67 area. But whatever it will be - current April's top becomes vital point for trading on lower time frames:
aud_m_15_04_22.png


On weekly chart supposedly we could get this one:
aud_w_15_04_22.png


That's why on daily, while market holds intact the top, which is actually 5/8 Agreement resistance, daily traders could consider short positions with stops above it. Current setup might be broken only if AUD climbs higher. In this case we get no monthly grabber and overall tendency start changing.
aud_d_15_04_22.png
 
Top