Gold GOLD PRO WEEKLY, April 25 - 29, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,092
Fundamentals

Most interesting thing of this week is surprisingly strong gold response on supposedly bearish factors. J. Powell statement was strong and hawkish, suggesting 1.5-2 times more aggressive policy, with 3.5-4% supposed terminal rate within two years. Despite this moment - gold stands flat, showing no solid sell-off. Maybe investors see different reasons but for us it is clear sign of reflection of real crisis events in the US economy. Geopolitical situation also remains difficult, which plays in favor of gold in the long term

Market overview

Gold rose to a one-month high on Monday, just shy of the $2,000 an ounce level, as concerns around the Russia-NATO conflict in Ukraine and rising inflationary pressures increased safe-haven bids for the precious metal. Gold's advance was curbed late in the session by a jump in benchmark 10-year U.S. Treasury yields and further gains in the dollar, which dulls the appetite for gold among overseas buyers.

"The little step-up in tension due the war with inflationary pressures across the board boosts safe-haven demand for gold," said David Meger, director of metals trading at High Ridge Futures. Concerns over the economic hit from COVID-led restrictions in China also supported the metal, Meger said. The epitome of concerns for palladium and platinum is about supply disruptions due to the war," High Ridge's Meger said.

Although concerns of soaring inflation boost gold's safe-haven appeal, interest rate hikes to temper higher prices could hurt demand for the metal because of the higher opportunity cost of holding non-yielding bullion. The U.S. Federal Reserve is expected to accelerate its pace of policy tightening when it meets next, with a rise of 50 basis points expected in the May and June meetings.

Fed Chair Jerome Powell said on Thursday a half-percentage-point interest rate increase "will be on the table" when the U.S. central bank meets in May, suggesting it may use aggressive actions to tame soaring inflation.

"From a technical perspective, spot gold may face little resistance once it goes north of $2,000... However, gold's ability to keep its head above $2,000 may be strained once real yields break into positive territory," Han Tan, chief market analyst at Exinity, said.

Gold fell 1% on Friday and was set for its biggest weekly decline since mid-March as signs of faster policy tightening by the Federal Reserve lifted Treasury yields and the dollar.

"The safe-haven metals need a fresh fundamental spark to heighten investor and trader concern, and it's just not happening. The sideways grind that we've seen ... has invited some chart-based selling," Kitco senior analyst Jim Wycoff said.

"Despite its recent lackluster price performance, gold nevertheless continues to attract demand from asset managers seeking protection against rising inflation, lower growth, geopolitical uncertainties, as well as elevated volatility in stocks and not least bonds," Saxo Bank analyst Ole Hansen said in a note.

In the physical bullion market, gold dealers in India reduced discounts this week as demand picked up slightly after prices eased, while activity in top consumer China was still muted by COVID-induced curbs.

Inflation has continued to soar across much of the world and is significantly above central bank targets in most advanced economies. In the US, UK and euro area it is at its highest level in decades, raising concerns about a return to the ‘Great Inflation’ of the 1970s. In Fathom’s central scenario (70% probability), inflation returns to central bank targets next year. However, we assign a 30% probability to a ‘Back to the 70s’ scenario, where inflation expectations become unanchored, wage-price spirals re-emerge, and inflation dynamics briefly mirror those of the 1970s.
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US inflation rose above 12% in 1974 and peaked at almost 15% in 1980 (chart below), nearly double its current rate. Inflation rose by much less in Germany than most other countries, however, remaining below 8%. Germany’s superior performance reflected the independent Bundesbank’s aggressive policy tightening in response to inflation shocks, which resulted in a sharp rise in real interest rates. This sent a very strong signal to wage- and price-setters that the central bank was determined to keep inflation under control. In contrast, the US Federal Reserve’s unwillingness to tighten policy aggressively, reflected in highly negative real interest rates, meant that inflation shocks became self-fulfilling with subsequent wage and price gains reinforcing each other.

On a number of metrics, the current inflation backdrop looks like the 1970s. Fiscal policy has been very easy and monetary policy remains extraordinary loose in advanced economies, with US real interest rates deeply in negative territory. Moreover, short-term inflation expectations had risen sharply even before the global economy was hit by an energy price shock amid recent events in Eastern Europe. Labour markets are also very tight in a number of countries, particularly the US, where wage gains are running at their fastest pace since 1984.

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Over the past several months, US treasury yields have moved significantly higher as the Federal Reserve has shifted its policy stance. Against a backdrop of high inflation and aggressive monetary tightening, we remain cautious on risk assets and favour continued exposure to inflation-sensitive assets. If inflation expectations were to slip their anchor, as in the 1970s, this would prompt an even more aggressive policy-tightening cycle, and a major recession. Risk assets would be hit extremely hard. Indeed, US real yields have just approached positive territory, leaving significant upside in such a scenario.
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Big Hype around interest rates

A hawkish turn by the Federal Reserve is eroding a key support for U.S. stocks, as real yields climb into positive territory for the first time in two years. Yields on the 10-year Treasury Inflation-Protected Securities (TIPS) - also known as real yields because they subtract projected inflation from the nominal yield on Treasury securities - had been in negative territory since March 2020, when the Federal Reserve slashed interest rates to near zero. That changed on Tuesday, when real yields ticked above zero.

Negative real yields have meant that an investor would have lost money on an annualized basis when buying a 10-year Treasury note, adjusted for inflation. That dynamic has helped divert money from U.S. government bonds and into a broad spectrum of comparatively riskier assets, including stocks, helping the S&P 500 more than double from its post-pandemic low. Anticipation of tighter monetary policy, however, is pushing yields higher and may dent the luster of stocks in comparison to Treasuries, which are viewed as much less risky since they are backed by the U.S. government.

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One key factor influenced by yields is the equity risk premium, which measures how much investors expect to be compensated for owning stocks over government bonds. Rising yields have helped result in the measure standing at its lowest level since 2010, Truist Advisory Services said in a note last week.
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Lofty valuations also make stocks vulnerable if yields continue rising. Though the tumble in stocks has moderated valuations this year, the S&P 500 still trades at about 19 times forward earnings estimates, compared with a long-term average of 15.5, according to Refinitiv Datastream. Some other banks, such as JP Morgan, suggests that real rates now are too low to make impact on equities attractiveness, as they need to reach around 2% to become a real vital to S&P dividend yield.

Although whether real rates now are real dangerous to stocks or not might be arguable, but we need to take a look at this question from a bit different angle, which seems more interesting to us. The capitalization of the US issuers (all public companies) to GDP decreased from 244% in December 2021 to 217% on April 22, 2022. There was almost 59 trillion in money in December and 51.5 trillion now. But the worst is yet to come.

Current 217% of capitalization to GDP is 27% higher than the dotcom bubble in 2001, 66% higher than 2007 and 60% higher than the 2010-2019 average. After 2020, the market switched to the "lapse of reason" mode, completely losing any borders of rationality and risk assessment.

The market has traditionally completely underestimated the risks of tightening the Fed policy and the collapse of the Junk bonds bubble, that is reached a historic high in 2021 on the wave of speculative madness. The market underestimates the inflationary factor and the problems associated with them in the debt market, which will drag everything to the bottom with it – this is an all-consuming black hole. The market underestimates the scale of the economic crisis and the crushing impact on the operational performance of companies. As it was with the "sub prime" collapse in 2008 - current crisis era could start with " junk bond" bubble explosion.

In fact, according to the Taylor rule, a rough-and-ready guide to help central bankers meet their inflation targets, the U.S. Federal Reserve’s target interest rate should be closer to 11% than its current level of 0.3%. Monetarists like the economist Tim Congdon, pointing to strong growth in the money supply, predict that prices will soon be rising at double-digit rates. Former U.S. Treasury Secretary Larry Summers warns that, thanks to America’s tight labour market, the Fed will have to hike rates sharply, probably inducing a recession.

Why is the Fed so far behind the curve? Leaving aside the question of whether its economic models are flawed, two answers suggest themselves. First, central bankers are aware that any sudden monetary tightening could unleash another financial crisis. Second, rising prices are generally a sign of deep-seated social conflicts. History suggests that policymakers are incapable of resisting inflation until the underlying structural forces that encouraged it have dissipated.

Last year, U.S. government debt reached a post-war high of more than 120% of GDP, according to the Bank for International Settlements. Debt owed by American companies is at more than 80% of annual economic output, close to a record. U.S. stocks trade at close to peak valuations. Home prices are also at an all-time high, according to the S&P/Case-Shiller U.S. National Home Price Index. Household wealth tells the same story.

If the Fed acts aggressively to control inflation, bloated debt levels would become harder to sustain and inflated market valuations would likely crash, as they did during the financial crisis which started in 2007. There’s another problem to consider. Foreign creditors have availed themselves of some $13 trillion worth of cheap dollar-denominated loans, according to the BIS. Much of this is owed by borrowers in emerging markets.

States print too much money when they cannot cover their expenses with taxes or long-term debt. Rapidly rising prices undermine the status quo and bring about a redistribution of wealth.

Now consider the situation in the United States today. The country is emerging from its “war” on Covid-19, which, like many previous conflicts, was financed with borrowing and money-printing. American society is nowhere near as discordant as Weimar Germany but is split by political divisions and distributional conflicts between the haves and the have-nots. U.S. industry has become more concentrated. Political gridlock ensures that most of the time no single party simultaneously controls the White House and both houses of Congress. This makes raising taxes difficult.

The simple explanation is that the Fed wants to avoid another financial crisis. At a deeper level, central bankers are constrained by vested interests. Inflation is the path of least resistance. As has occurred elsewhere, rising prices will redistribute income and wealth, which in time will ameliorate existing social conflicts, as well as creating new ones. Only when there is a general agreement in society that the damage wrought by inflation outweighs any apparent benefits will central bankers be empowered to bring it to an end.

Yesterday, guys, we also have prepared in-depth analysis of Fed policy, and explained why traditional explanation of inflationary factors and possible solutions hardly will bring positive result this time. In two words speaking, we suppose that Fed efforts to control inflation bring no result, until solid dollar devaluation to its real purchase power which should be at least two times lower. It means that all goods and services should become two times more expensive on average. The background of global economy deterioration by crushing existed logistics and trading links, difficult geopolitical situation should accelerate inflationary process in the US and Europe. In fact, we agree with K. Georgieva opinion, IMF Director. Recently she said that "we print too much money, not caring on consequences and now we do not know what to do with it. And we're too late to do something". This statement perfectly reflects our view as well.
Negative processes should accelerate closer to the US elections in November. The inner political struggle could significantly hurt the economy recovery. By autumn, major cashflows from EU should be over and the US economy problems should become more evident that increase pressure on Democrats' administration, including J. Biden. We do not exclude scenario with massive unrests in most disadvantaged groups of population.
Speaking on geopolitics, we treat chances on more escalation as high. Finland intention to join NATO by summer drastically changes the power balance in the region. Thus, NATO ships could present in 12-km Finland zone in the Finland gulf. With modern missiles range of 1.5-2K km, they could reach Moscow and almost the whole European part of the Russia. While massive deployment of troops in Eastern Europe, especially in Poland and Romania suggest big chances of NATO (Poland and others) intruding in the conflict to prevent Russia to achieve 2nd stage of its military operation that has been announced already - take under control the southern Ukraine, major Black sea ports and establish land way to Transnistria, that now has no direct link with Russian territory. South blocking has special strategic meaning as it close any munitioning by sea and from Moldova and Romania. Also Russia starts controlling major export powers from both largest ports. We are not military experts but using just common sense we see big risks of escalation on this direction and closer to the summer in Baltic and north regions. As modern wars are mostly hybrid, we suggest that we already stand in the beginning of the WW III, although this statement is arguable and not crucial for our analysis.

Taking in consideration as financial as geopolitical factors it becomes visible that investors mostly try to analyze the US difficulties using "traditional" common approach that was working nice for decades. We suggest that they look the core in the wrong place, which should become evident closer to the end of the summer, when gold also ends its cyclical bearish trend. This makes us to be bullish on the gold (and silver in particular as we think that it is undervalued compares to gold) and suggest that current levels in general are suitable for long-term accumulation of the metal, preferably in way of physical gold, such as coins and bullions.

Technicals

Monthly

Monthly trend remains bullish, while price is coiling around YPR1. Market really shows some difficulties with upside breakout as 2nd challenge to pass through 2000K is also unsuccessful by far. But we do not see any tragedy here. In fact, the pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
In general, everything goes with our timing, as we suggest that gold remains under pressure until the mid summer or slightly longer. A the same time, gold shows good resistance to different headwinds of rising interest rates and dollar in particular. Our suggestion is confirmed by Saxo Bank comments above that investors still accumulating gold, forming the financial cushion.
Thus, although downside action likely to be more extended - it doesn't break the bullish long-term picture.
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Weekly

Price performance here brings two major moments that might become vital for day-by-day trading. Although weekly trend remains bullish by far, but recent week has become the bearish reversal one, that suggests deeper downside action, according to our mid term view.
Second moment is mostly theoretical by far. Still, next week, potentially, we could get the bullish grabber, although there are more chances that it will not be formed.
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Recent weekly data shows contraction of net long position, which also creates moderately bearish short-term sentiment:

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Daily

So, on Friday gold price has confirmed the grabber failure totally, trend has turned bearish as well. This makes us to consider the downside direction only. Probably it makes sense to set the target floor around $1900 area, because of COP, K-support and daily oversold combination:
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Intraday

4H time frame shows that price stands at major $1930 5/8 Fib support, that we've discussed many times, - the pullback could happen that should let us to consider areas for short entry

As market just has started downside action, it should not be too strong upside pullback. On 1H chart it seems that 1946-1948 K-area is suitable to consider the short entry with stops above the next K-area of 1948-1953K. This is the approximate plan that we go with. Also pay attention to all divergences that were forming here - all of them have been erased...

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Georget@

Private
Messages
24
WOW! All this time I was hoping that Sive would not recommend to buy bullions. This is huge because we have to take into consideration that purchasing of bullions involves a 20% instant loss (the cost of purchase and resell). It is like buying XAU at 2.400. This is not an easy decision. And these are not easy times that we are living. Only if the 70s return this makes sense (see historic chart).
 

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Sive Morten

Special Consultant to the FPA
Messages
16,092
WOW! All this time I was hoping that Sive would not recommend to buy bullions. This is huge because we have to take into consideration that purchasing of bullions involves a 20% instant loss (the cost of purchase and resell). It is like buying XAU at 2.400. This is not an easy decision. And these are not easy times that we are living. Only if the 70s return this makes sense (see historic chart).

Hi Georgeta,
yes it involves some discomfort in a way of big bid/ask spread, but it seems the conditions of bullion purchasing is quite different in many countries, and depends on the size of bullion as well. For example we have traded 1kg bullions via big banks (total portfolio was around 50 kg) on over-the-counter market (bank-to-bank) and there were no big spreads at all. Probably it mostly relates to the public retail offers.
Consider coins - maybe it give better bid/ask spread conditions...

In general, using futures instead of physical gold/silver looks better at first glance. But what you gonna do if exchanges will be closed for few weeks, or transactions will be frozen because of big price moves? For example, in Russia when known events started - stock/futures exchanges were closed for the 2 weeks and different limitations were set, forbidding short selling etc. Just imagine that you have position but you do not know how and when you will be able to close it. It is not needed to talk that stop orders that you have set could not work because of possible huge gaps opening. This the risk that we also need to consider. Of course, bullions are not for speculation, they are for safety. That's why just manage your total assets wise and decide what part of them you could put into precious metals. Just use the common sense. And don't hurry up, take it gradually. As we've said - we should get few months more, before situation starts showing first signs of change.
 

jianean

Private, 1st Class
Messages
50
Hi Georgeta,
yes it involves some discomfort in a way of big bid/ask spread, but it seems the conditions of bullion purchasing is quite different in many countries, and depends on the size of bullion as well. For example we have traded 1kg bullions via big banks (total portfolio was around 50 kg) on over-the-counter market (bank-to-bank) and there were no big spreads at all. Probably it mostly relates to the public retail offers.
Consider coins - maybe it give better bid/ask spread conditions...

In general, using futures instead of physical gold/silver looks better at first glance. But what you gonna do if exchanges will be closed for few weeks, or transactions will be frozen because of big price moves? For example, in Russia when known events started - stock/futures exchanges were closed for the 2 weeks and different limitations were set, forbidding short selling etc. Just imagine that you have position but you do not know how and when you will be able to close it. It is not needed to talk that stop orders that you have set could not work because of possible huge gaps opening. This the risk that we also need to consider. Of course, bullions are not for speculation, they are for safety. That's why just manage your total assets wise and decide what part of them you could put into precious metals. Just use the common sense. And don't hurry up, take it gradually. As we've said - we should get few months more, before situation starts showing first signs of change.
Interesting!!! I feel it is important to take into account, ALL the factors that you have both mentioned. I started buying Silver coins some time ago, because I feel [rightly or wrongly] that silver has a significantly superior growth potential to gold. Very little gold is actually USED [consumed by industry], but from what I understand, the known deposits of silver, [which has MASSES of uses in industry] are not sufficient to satisfy the industrial requirements. In addition, you do not have to pay a daily "swap" charge to hold coins.
 

Sive Morten

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

So, Gold was needed just one day to hit the level that we've set in weekly report. Downside action was relatively fast and now price stands at strong support area, including daily K-area, COP target and oversold level. So, chances stand in favor of some pullback, at least.
The US yields also turn to minor pullback, so the pressure on the gold market easing slightly.
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Downside action is relatively fast, so we do not see any reasons to change our mid term expectations and it seems that reaching of 1830 Agreement area is just a question of time. Thus, as we've said - we do not consider any long positions by far, although they are not forbidden, if you trade on 1H and lower time frames.

On 4H chart steep AB-CD pattern is also done, and CD leg looks suitable for DiNapoli patterns. Thus, if you want to go short here - you could keep an eye on them:
gold_4h_26_04_22.png


On 1H chart 1915 and 1930 levels are most probable retracement targets. At least, now we could watch for them, and later we see what will happen. Immediate downside action now less probable because of technical strength of support level.
gold_1h_26_04_22.png
 

Sive Morten

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

So, the gold market mostly stands in the same area, but today we have to discuss the minor nuance that we have. Just because many traders plan to take scalp long positions here, around strong daily support. The nuance stands with choosing of "A" point for extension calculation. Initially we've taken the top of black candle and it cares a lot of advantages as for position closing as for entry purposes. Because you escape competition of orders' execution if you have orders slightly above the other mass of traders.

At the same time, we have to take the absolute "A" point in consideration for different reasons. The absolute COP target stands around 1886 and has not been tested yet. It means that market could reach it before major upside action starts on lower time frames:
gold_d_27_04_22.png


On 4H chart it means that DRPO "Buy" that we're watching for, could have deeper 2nd bottom:
gold_4h_27_04_22.png


While on the 1H chart, as we haven't got upside AB-CD yesterday, and now we have signs of bearish dynamic pressure - butterfly shape seems like most probable one.

gold_1h_27_04_22.png


Other words speaking - if you plan to take scalp long position, you need count on possible spike down to 1886 and place stop accordingly. Or even wait when DRPO/butterfly/H&S or whatever will be formed.
 

Sive Morten

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

In recent times gold forms tricky situations. Just yesterday we've discussed possible 1886 testing while today it is a trap with the pullback that seems is started. But, it also cares the trap. In fact, if you take a look at all support tools that we have - all of them have been broken. Price stands under COP, under K-support and deeper than 1.618 extension of our 1H butterfly pattern.

gold_d_28_04_22.png


Usually when price reacts - it does it precisely from target/support level. In our situation it is not quite so. We could suggest though that it might be the hunting for the stops below recent lows, but still, it is too extended, as COP target should be enough for that.
On 4H chart we haven't got either DRPO or B&B as well, which is also not a good sign. With this performance, for any long positions - it is necessary to get clear bullish reversal pattern, such as reverse H&S on 1H chart. Without pattern, it might be risky to go long now. Because Gold performance shows weakness and not normal reaction on the support area:
gold_1h_28_04_22.png
 

Sive Morten

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

So, as many markets come to important targets - DXY, EUR, GBP, suggesting pullbacks, gold starts the pullback as well. As we've warned recently, situation is uncertain, so for position taking it is needed to wait for clear reversal pattern. Now market supposedly shows the pullback, that might get some extension. At least bulls could keep an eye on it:
gold_d_29_04_22.png


Currently chances exist as for the bulls as for the bears. Thus, on 4H chart market is coming to K-resistance area and we could get a kind of bearish momentum trade, as the pullback here is highly likely. So, if you consider short entry - this is the one that you might be interesting with:
gold_4h_29_04_22.png


Watch for 1H XOP target - once it will be hit, the time comes to make decision on position taking.
gold_1h_29_04_22.png


On the chart above our puny H&S has worked nice, that we've mentioned yesterday. But, to take another long position - we need to wait when the pullback down will be over. Hardly this happens today, so bulls could wait until next week and watch for support area areas.
 
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