Sive Morten
Special Consultant to the FPA
- Messages
- 18,766
Fundamentals
Since price action on gold market in recent month was really drammatic, many investors try to assess situation and come to reasonable conclusion – what is going on, why such outstanding drop in gold has happened and what are consequences?
In general, prior our turn to recent plunge we’ve pointed major long-term factors that will become determinant ones for gold prices. You can re-read our researches for March, but mostly there are two major factors – US economy growth and Budget. Economic growth in US is a complex factor, since in fact it is determined thin equilibrium between growth (GDP), Fed policy and inflation. Second is a Budget cutting and voting on US National debt ceil on May (rather soon by the way). If we more or less understand the problem of sequestrum, since this leads to spending cutting and cares nothing positive for national economy, but first problem is wider and a lot of opinions exist here. Thus, in March we’ve expressed our view on this problem but today I’ve decided to offer you opinion of well-known economists that probably will help us better understand concensus view. So, let’s start with it...
Some top investors say the gold sell-off, and the broader declines in oil and metals prices, reflect the failure of the Federal Reserve and other central banks to create robust demand even as they inject massive amounts of money into the world financial system. Some see the move in gold as a possible flashpoint for a broader economic and markets shock comparable to the collapse of hedge fund Long-Term Capital Management in 1998 and even the financial crisis a decade later. Both events were preceded by sharp drops in gold. But here I mostly agree with PIMCO (which manages ~ $2Trln. in assets) senior manager Mohamed El-Erian, who said that gold and commodities weakness, is "signaling concerns about global growth.” He is absolutely right, because no economy growth can start without growing demand for commodities. And now take a look at most industrial commodities – Oil, Copper and, say Gold. Three-month copper futures are down 12 percent this year, falling below $7,000 per tonne on the London Metal Exchange for the first time since October 2011. Copper's importance as a use in industrial and housing applications - from autos to water pipes - has made it a key barometer of demand. From this information we can make a conclusion that investors doubt economy growth in nearest future, but now question is why?
As we’ve said Federal Reserve and other central banks fail to create robust demand even as they inject massive amounts of money into the world financial system. Actually after the stampede out of gold on previous week, investors on Thursday (i.e. 2 days later) dumped their holdings of U.S. inflation bonds after a lousy auction. This kind of debt is seen as a way to protect against any rise in the inflation rate that might materialize in a more buoyant economy. The post-crisis run-up in gold prices resulted in part from speculation triggered by the massive amounts of cash created by aggressive monetary policy. It had been thought that the massive creation of credit would support a "re-inflation" of the world economy - but the recent pullback in gold, oil and copper - the latter two assets linked closely with global industrial growth - suggests that this may just not be happening.
The recent rush into the safety of U.S. Treasuries - which has pushed yields close to four-month lows - is another sign that the global economy is far from humming. Treasuries are often seen as a shelter when the economy is weak or unstable.
Again, PIMCO Total Return Fund , which holds $289 billion in assets and overseen by Bill Gross, increased its exposure to Treasuries and Treasury-related securities to 33 percent in March from 28 percent the previous month. Gross said on Twitter on the next day after gold miserable plunge - “gold has started a levered market ‘sell-off.’ Buy Treasuries.”
Concerns about slowing growth are also resonating within the Federal Reserve. Several Fed officials expressed worry about disinflation, including the more centrist James Bullard, St. Louis Fed president, who said on Wednesday that "if inflation continues to go down, I would be willing to increase the pace" of stimulus.
Thus, the answer stands with world’s Central Banks inability to stimulate growth, production and demand for commodities. This, in turn leads to low inflation. Partially this is confirmed by fiscal policy of Central Banks. Thus, Bank of Japan has changed policy first time for 2 decades – and turns to active inflows and aggressive inflation stimulation.
The sell-off in gold, together with weak economic data, knocked investors' long-term inflation expectations to their lowest levels since late last summer. The yield gap between 10-year Treasury Inflation-Protected Securities and regular 10-year Treasury notes - used to gauge investors' outlook on inflation - 2.27 percentage points on April 18th, the lowest since early September prior to the Fed's announcement of its third round of large-scale bond purchases, known as QE3.
Sponsored by Pellucid FX - Premium STP Forex Broker >>
In general these thoughts agree with our position, since we also discussed potential QE early close. After some improvement in US data, recent numbers again has started to decline – April NFP, U.S. first-quarter growth expanded at a 2.5 percent annual rate, missing economists' expectations for 3 percent. Meanwhile, a separate report on consumer sentiment showed a drop from the previous month. This suggests that positive treating and hope on early recovery were a bit overdone. That also explains why Fed is slow with announcement possible QE closing and doesn’t make any clear hints on US economy improvement. But this is not over yet. Many investors do not exclude second possible plunge. “If we see this kind of liquidation again, the equity market will follow. Then we’ll have a real problem,” said Frank Cholly, Jr., senior commodities broker at R.J. O’Brien and Associates in Chicago.
Bank of America-Merrill Lynch recently warned that gold - which was trading at $1,392 an ounce late on Thursday - could fall to $1,200 before stabilizing, citing "fears of disinflation combined with news of potential central bank gold selling."
"The stars are lining up" for a significant dip in U.S. growth in the second half of the year, possibly even a double-dip recession by 2014, Sri-Kumar Global Strategies and a portfolio manager of the TCW Comprehensive Asset Allocation Strategy fund said.
So, here is an opinion of famous managers and economists. From this discussion we understand the major problem – mass cash inflow still can’t stimulate growth in economy and inflation holds anemic. Such context forces investors to leave low risk assets and search for opportunities to get real return on investments. Fundamentally it tells that until situation will not change – gold will be under some pressure and lack of demand. And look at overall situation with this angle leads to anticipation of further decline on long-term perspective.
Monthly
Although April bar has not closed yet, but we see how oversold stops market from further declining and forces it to make a step back. The Volatility Breakout setup, that was here only 2 weeks ago – now is disappearing, since potential close price of the April drifts higher and current oversold level even smaller than it was in 2008. Many investors explain this pullback by growing physical demand in Asia (India and China mostly) on bullions among population. This probably can be additional factor growth, but in long-term perspective gold is not driven by demand/supply, since they are mostly stable year to year.
All other comments that we’ve made previously still holds. Trend is bearish here, as well as price action. Market has significant bearish impulse that probably should lead to some continuation. The nearest destination point is a harmonic swing target at major 3/8 Fib support.
Still from technical point of view it is difficult to find reasons now to take long-term bearish position, since it will constantly be under the risk of significant pullback due oversold condition. By this reason monthly chart seems almost useless from pure practical standpoint.
Sponsored by Pellucid FX - Premium STP Forex Broker >>
Weekly
On previous week we’ve made assumption on possible upward bounce mostly due couple of reasons.
First is combination of 1.618 extension and oversold condition. This is a kind of DiNapoli directional “Stretch” setup that is called as “Kibby trade”. General rule of trading it assumes dropping time frame to daily and wait when trend will shift bullish, then taking long position at retracement and take profit at nearest AB-CD target up.
Second I’ve drawn as Butterfly “buy”, but to be absolutely honest this is not a butterfly since second top is exceeded initial Butterfly swing. We could not treat it as butterfly, but idea is the same – market at 1.618 extension of butterfly swing. Thus, price was held by support of three different issues – oversold, AB-CD extension and retracement swing extension.
As one week passed we see starting bounce from this area. Honestly I see nothing here except to stick with DiNapoli directional pattern and count on the moment that gold likes to make deep retracements up. Currently we see that market stands at K-resistance area and as it followed by DiNapoli pattern – we should take long position on retracement after daily trend will shift bullish. Thus, this retracement could follow. Potentially, who knows – if this will be compounded AB=CD retracement market can easily re-test 1530 broken area sooner than we’ve thought initially. By “sooner” I mean current retracement, although initially we’ve thought that this probably should happen but sometime in indefinite future.
Daily
Actually guys, I do not see any setups for trading except DiNapoli weekly Stretch pattern, so looks like we have no choice but just stick with it. Although is a different question trade it or not …
So, two conditions of this pattern were achieved – market at oversold and support on higher time frame (weekly) and two days ago lower time frame (daily) trend has turned bullish. Now is the third stage that we should get before taking long position with counting on deeper retracement up. This is retracement that should let us to step in. Other words – we need deep to buy. And here I see that this is possible. Take a look 1485-1505 area is strong resistance – daily overbought, weekly K-resistance and WPR1. Scalpers could probably even search possibility to take shorts around it. So on Monday-Tuesday we will be focused on reversal patterns around this area that confirm our expectation of retracement. And may be we will be able to estimate approximate target of this deep. Based on gold’s appetite to 5/8 retracements, this target will probably appear somewhere around 1380 Fib support and WPS1.
1-hour
On lower time frames it is difficult to make any comments. As on 4-hour time frame as here trend has turned bearish, but no patterns have been formed yet. Recent plunge on US data release could become the start of some pattern, but it is not in place yet. Also we can’t exclude that some upward action is still possible – market has not quite reached 5/8 Resistance and target of AB=CD pattern. Currently market has just completed downward harmonic retracement. So, currently we do not have yet a triggering pattern here for downward action and looks like Monday will become a day of expectation.
Conclusion:
Currently in short-term perspective I see only context for trading that is based on weekly oversold at support. This setup assumes catching of first deep on daily time frame to enter Long and take profit at some extension of AB-CD pattern.
But currently we do not have yet reversal pattern that could trigger the deep appearing. So, probably on Monday we should stay flat and wait.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Since price action on gold market in recent month was really drammatic, many investors try to assess situation and come to reasonable conclusion – what is going on, why such outstanding drop in gold has happened and what are consequences?
In general, prior our turn to recent plunge we’ve pointed major long-term factors that will become determinant ones for gold prices. You can re-read our researches for March, but mostly there are two major factors – US economy growth and Budget. Economic growth in US is a complex factor, since in fact it is determined thin equilibrium between growth (GDP), Fed policy and inflation. Second is a Budget cutting and voting on US National debt ceil on May (rather soon by the way). If we more or less understand the problem of sequestrum, since this leads to spending cutting and cares nothing positive for national economy, but first problem is wider and a lot of opinions exist here. Thus, in March we’ve expressed our view on this problem but today I’ve decided to offer you opinion of well-known economists that probably will help us better understand concensus view. So, let’s start with it...
Some top investors say the gold sell-off, and the broader declines in oil and metals prices, reflect the failure of the Federal Reserve and other central banks to create robust demand even as they inject massive amounts of money into the world financial system. Some see the move in gold as a possible flashpoint for a broader economic and markets shock comparable to the collapse of hedge fund Long-Term Capital Management in 1998 and even the financial crisis a decade later. Both events were preceded by sharp drops in gold. But here I mostly agree with PIMCO (which manages ~ $2Trln. in assets) senior manager Mohamed El-Erian, who said that gold and commodities weakness, is "signaling concerns about global growth.” He is absolutely right, because no economy growth can start without growing demand for commodities. And now take a look at most industrial commodities – Oil, Copper and, say Gold. Three-month copper futures are down 12 percent this year, falling below $7,000 per tonne on the London Metal Exchange for the first time since October 2011. Copper's importance as a use in industrial and housing applications - from autos to water pipes - has made it a key barometer of demand. From this information we can make a conclusion that investors doubt economy growth in nearest future, but now question is why?
As we’ve said Federal Reserve and other central banks fail to create robust demand even as they inject massive amounts of money into the world financial system. Actually after the stampede out of gold on previous week, investors on Thursday (i.e. 2 days later) dumped their holdings of U.S. inflation bonds after a lousy auction. This kind of debt is seen as a way to protect against any rise in the inflation rate that might materialize in a more buoyant economy. The post-crisis run-up in gold prices resulted in part from speculation triggered by the massive amounts of cash created by aggressive monetary policy. It had been thought that the massive creation of credit would support a "re-inflation" of the world economy - but the recent pullback in gold, oil and copper - the latter two assets linked closely with global industrial growth - suggests that this may just not be happening.
The recent rush into the safety of U.S. Treasuries - which has pushed yields close to four-month lows - is another sign that the global economy is far from humming. Treasuries are often seen as a shelter when the economy is weak or unstable.
Again, PIMCO Total Return Fund , which holds $289 billion in assets and overseen by Bill Gross, increased its exposure to Treasuries and Treasury-related securities to 33 percent in March from 28 percent the previous month. Gross said on Twitter on the next day after gold miserable plunge - “gold has started a levered market ‘sell-off.’ Buy Treasuries.”
Concerns about slowing growth are also resonating within the Federal Reserve. Several Fed officials expressed worry about disinflation, including the more centrist James Bullard, St. Louis Fed president, who said on Wednesday that "if inflation continues to go down, I would be willing to increase the pace" of stimulus.
Thus, the answer stands with world’s Central Banks inability to stimulate growth, production and demand for commodities. This, in turn leads to low inflation. Partially this is confirmed by fiscal policy of Central Banks. Thus, Bank of Japan has changed policy first time for 2 decades – and turns to active inflows and aggressive inflation stimulation.
The sell-off in gold, together with weak economic data, knocked investors' long-term inflation expectations to their lowest levels since late last summer. The yield gap between 10-year Treasury Inflation-Protected Securities and regular 10-year Treasury notes - used to gauge investors' outlook on inflation - 2.27 percentage points on April 18th, the lowest since early September prior to the Fed's announcement of its third round of large-scale bond purchases, known as QE3.
Sponsored by Pellucid FX - Premium STP Forex Broker >>
In general these thoughts agree with our position, since we also discussed potential QE early close. After some improvement in US data, recent numbers again has started to decline – April NFP, U.S. first-quarter growth expanded at a 2.5 percent annual rate, missing economists' expectations for 3 percent. Meanwhile, a separate report on consumer sentiment showed a drop from the previous month. This suggests that positive treating and hope on early recovery were a bit overdone. That also explains why Fed is slow with announcement possible QE closing and doesn’t make any clear hints on US economy improvement. But this is not over yet. Many investors do not exclude second possible plunge. “If we see this kind of liquidation again, the equity market will follow. Then we’ll have a real problem,” said Frank Cholly, Jr., senior commodities broker at R.J. O’Brien and Associates in Chicago.
Bank of America-Merrill Lynch recently warned that gold - which was trading at $1,392 an ounce late on Thursday - could fall to $1,200 before stabilizing, citing "fears of disinflation combined with news of potential central bank gold selling."
"The stars are lining up" for a significant dip in U.S. growth in the second half of the year, possibly even a double-dip recession by 2014, Sri-Kumar Global Strategies and a portfolio manager of the TCW Comprehensive Asset Allocation Strategy fund said.
So, here is an opinion of famous managers and economists. From this discussion we understand the major problem – mass cash inflow still can’t stimulate growth in economy and inflation holds anemic. Such context forces investors to leave low risk assets and search for opportunities to get real return on investments. Fundamentally it tells that until situation will not change – gold will be under some pressure and lack of demand. And look at overall situation with this angle leads to anticipation of further decline on long-term perspective.
Monthly
Although April bar has not closed yet, but we see how oversold stops market from further declining and forces it to make a step back. The Volatility Breakout setup, that was here only 2 weeks ago – now is disappearing, since potential close price of the April drifts higher and current oversold level even smaller than it was in 2008. Many investors explain this pullback by growing physical demand in Asia (India and China mostly) on bullions among population. This probably can be additional factor growth, but in long-term perspective gold is not driven by demand/supply, since they are mostly stable year to year.
All other comments that we’ve made previously still holds. Trend is bearish here, as well as price action. Market has significant bearish impulse that probably should lead to some continuation. The nearest destination point is a harmonic swing target at major 3/8 Fib support.
Still from technical point of view it is difficult to find reasons now to take long-term bearish position, since it will constantly be under the risk of significant pullback due oversold condition. By this reason monthly chart seems almost useless from pure practical standpoint.
Sponsored by Pellucid FX - Premium STP Forex Broker >>
Weekly
On previous week we’ve made assumption on possible upward bounce mostly due couple of reasons.
First is combination of 1.618 extension and oversold condition. This is a kind of DiNapoli directional “Stretch” setup that is called as “Kibby trade”. General rule of trading it assumes dropping time frame to daily and wait when trend will shift bullish, then taking long position at retracement and take profit at nearest AB-CD target up.
Second I’ve drawn as Butterfly “buy”, but to be absolutely honest this is not a butterfly since second top is exceeded initial Butterfly swing. We could not treat it as butterfly, but idea is the same – market at 1.618 extension of butterfly swing. Thus, price was held by support of three different issues – oversold, AB-CD extension and retracement swing extension.
As one week passed we see starting bounce from this area. Honestly I see nothing here except to stick with DiNapoli directional pattern and count on the moment that gold likes to make deep retracements up. Currently we see that market stands at K-resistance area and as it followed by DiNapoli pattern – we should take long position on retracement after daily trend will shift bullish. Thus, this retracement could follow. Potentially, who knows – if this will be compounded AB=CD retracement market can easily re-test 1530 broken area sooner than we’ve thought initially. By “sooner” I mean current retracement, although initially we’ve thought that this probably should happen but sometime in indefinite future.
Daily
Actually guys, I do not see any setups for trading except DiNapoli weekly Stretch pattern, so looks like we have no choice but just stick with it. Although is a different question trade it or not …
So, two conditions of this pattern were achieved – market at oversold and support on higher time frame (weekly) and two days ago lower time frame (daily) trend has turned bullish. Now is the third stage that we should get before taking long position with counting on deeper retracement up. This is retracement that should let us to step in. Other words – we need deep to buy. And here I see that this is possible. Take a look 1485-1505 area is strong resistance – daily overbought, weekly K-resistance and WPR1. Scalpers could probably even search possibility to take shorts around it. So on Monday-Tuesday we will be focused on reversal patterns around this area that confirm our expectation of retracement. And may be we will be able to estimate approximate target of this deep. Based on gold’s appetite to 5/8 retracements, this target will probably appear somewhere around 1380 Fib support and WPS1.
1-hour
On lower time frames it is difficult to make any comments. As on 4-hour time frame as here trend has turned bearish, but no patterns have been formed yet. Recent plunge on US data release could become the start of some pattern, but it is not in place yet. Also we can’t exclude that some upward action is still possible – market has not quite reached 5/8 Resistance and target of AB=CD pattern. Currently market has just completed downward harmonic retracement. So, currently we do not have yet a triggering pattern here for downward action and looks like Monday will become a day of expectation.
Conclusion:
Currently in short-term perspective I see only context for trading that is based on weekly oversold at support. This setup assumes catching of first deep on daily time frame to enter Long and take profit at some extension of AB-CD pattern.
But currently we do not have yet reversal pattern that could trigger the deep appearing. So, probably on Monday we should stay flat and wait.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
