Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
Fed meeting this week has become the major driving factor as for gold as for other market. Meeting result is not a surprising, as we said - no sense to change something in July if you plan to announce tapering in August and provide details on September meeting. Still, markets take this news as very positive and stand inspiring as they could move higher with an environment of low US interest rates. Yesterday we've dedicated solid part of report to this topic and come to conclusion that there could appear new factors that make Fed to wait more. Although everybody habits with the scenario that everything should happen in August-September that minimal deviation of Fed rhetoric on tapering terms, volume etc. could bring strong reaction across the board. Since we still have untouched monthly target on DXY around 87.40 - we think this could happen, especially if statistics deteriorate a bit, starting from coming NFP next week...
Market overview
Net gold imports of gold into the world’s biggest bullion consumer China via Hong Kong jumped nearly 42% last month after a slump in May, data showed on Monday.
Indian gold demand is likely to recover in the second half of 2021 from 35% below the pre-pandemic five-year average in the first half, as festivals and weddings are likely to boost retail purchases in the fourth quarter, the World Gold Council (WGC) said on Thursday. Higher demand from the world's second-biggest gold consumer could support global prices that have corrected nearly 4% so far in 2021, although a rise in imports of the precious metal would widen India's trade deficit and weigh on the rupee. New infections of COVID-19 in India have fallen to around 40,000 per day from more than 400,000 in May.
In the June quarter, demand was 76.1 tonnes, nearly 57% below the five-year average in 2015 to 2019, the WGC said in a report published on Thursday. Lower demand in the June quarter pulled down total demand in the first half of the year to 216.1 tonnes, one-third below the pre-pandemic five-year average.
Weddings are one of the biggest drivers of gold purchases in India as bullion in the form of jewellery is an essential part of a bride's dowry and also a popular gift from family and guests.
At the same time holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell 0.2% to 1,025.64 tonnes on Monday, the lowest since May 13. The ETF has seen outflows of about 20 tonnes so far in July. Later, by the end of the week they've got 0.6% inflow to 1,031.46 tonnes on Thursday, marking the first inflow in about a month.
U.S. consumer confidence inched up to a 17-month high in July, with households’ spending plans rising even as concerns about higher inflation lingered, suggesting the economy maintained its strong growth early in the third quarter.
The International Monetary Fund on Tuesday maintained its 6% global growth forecast for 2021, upgrading its outlook for the United States and other wealthy economies but cutting estimates for developing countries struggling with surging COVID-19 infections.
Gold prices rose to its highest level in over a week on Thursday after the U.S. Federal Reserve failed to give a timeline for its tapering plans and said it was “ways away” from considering raising interest rates.
While the U.S. central bank acknowledged discussing the eventual withdrawal of pandemic-era monetary policy support in its statement, Chairman Jerome Powell said the U.S. job market still had “some ground to cover” before it would be time to pull back. Powell also downplayed the risk of the spread of the Delta variant of the coronavirus on the economic recovery.
Powell’s remarks sent the U.S. dollar index to a more than two-week low. A weaker greenback makes gold cheaper for holders of other currencies. U.S. Treasury yields also fell after the Fed gave no details on when it is likely to reduce bond purchases.
Global demand for gold rose in the second quarter to its highest quarterly level in a year as central banks and investors stepped up purchases, the World Gold Council said in a quarterly report.
Reinforcing Powell’s views, data showed the U.S. economy grew at a 6.5% annualized rate last quarter, below a forecast for an 8.5% rise by economists in a Reuters poll.
Gold prices will average a little above their current level of $1,830 an ounce for the remainder of 2021 before easing in 2022, a Reuters poll showed.
Gold prices held near a two-week high on Friday, and were set for their biggest weekly gain in more than two months, on renewed signs that the U.S. Federal Reserve may not taper economic support and hike interest rates in the near term.
Bob Haberkorn, senior market strategist at RJO Futures said data showing a rise in core inflation at a slightly slower-than-expected pace last month, coupled with a stronger dollar, was weighing on gold. Haberkorn also said:
Jeffrey Christian, managing partner at CPM Group, expects gold to break below $1,770 and silver below $25 over the course of August.
Scenarios of economy recovery
(By Fathom Consulting)
Last year’s collapse in global economic activity differed in pace and scale from any previous recession. Equally the recovery, now well established in most economies, will be unlike anything we have seen before. The global V-shaped recovery is complete, with global GDP above the pre-pandemic level in 2021 Q1. This has predominantly been driven by China, though the US is within a whisker of its 2019 Q4 level. Where we go from here will partly depend on how rapidly households in the major economies spend their excess savings pots, which are estimated to be worth 8%-9% of GDP in the US and the UK, and a little bit less in the euro area. Here we outline four broad scenarios considered in Fathom’s Global Economic and Markets Outlook for 2021 Q3, and what each of them means for the inflation outlook.
In our first scenario, which we have named ‘Steady as she goes’, households remain cautious, fearing further disease outbreaks, and pandemic savings go largely unspent. Here, the rise in inflation proves transitory and inflation returns to target sharply. In ‘Goldilocks’, our second scenario, 25% of pandemic savings are spent this year, pushing inflation higher. Survey data collected and published by the Bank of England, the New York Fed and the US Census Bureau are consistent with households either having spent, or intending to spend, around a quarter of their pandemic savings. However, inflation expectations remain firmly anchored, such that inflation returns to target within a year or two. Collectively, Fathom places a 40% weight on these two scenarios, where monetary policymakers have very little to do.
The remaining 60% of the distribution of possible outcomes covers two scenarios where the cyclical pickup in inflation, that occurs as 25% of pandemic savings balances are spent, gets embedded into expectations of higher future inflation. Early evidence is indicating that higher US inflation is impacting household and corporate expectations. This would leave monetary policymakers with a dilemma. Central bankers have the tools to deal with an overshoot of the inflation target, but the question is, with asset prices (including those of government bonds) underpinned by an expectation that policy rates will remain close to zero more or less indefinitely, will they deploy them?
In our two remaining scenarios, policymakers either deal with higher inflation — perhaps by withdrawing some of or indeed all the post-pandemic QE, as well as raising interest rates — or they roll with it and shift the goal posts. In our ‘Inflation — deal with it’ scenario, policymakers choose to tighten in order to return inflation to target within the medium term. Fathom expects that this would cause a recession early next year.
However, if policymakers choose ‘Inflation — roll with it’, inflation remains markedly above 2% for some time, and central banks opportunistically raise the inflation target either explicitly or implicitly through a variety of measures that have the same net effect. We have seen the early signs of this, as last year the Fed announced it would target ‘an average’ of 2%, whilst earlier this year the ECB announced a change to a symmetric target around 2%, an effective rise from a preference of below 2% inflation. More may yet be to come in this regard.
This is not an easy environment for asset allocators. In Fathom’s judgement, a robust macro recovery is largely priced in for most asset classes. There is perhaps still scope to profit from investing in assets that offer protection against inflation — while a transitory increase in inflation is widely expected, few currently imagine that it will persist. If inflation does persist there is a possibility of stagflation, as growth begins to slow beyond its cyclical peak. In that world, exposure to currencies may offer diversification.
COT Report
So, rally this week is really good and investors think that it could go further, but background of the rally remains weak, which makes it very sensitive to changes in the mood and sharp reversal. Despite solid price appreciation - investors are leaving gold. Market has lost 23K contracts this week. All market participants were closing positions - speculators closing as shorts as longs, as well as hedgers:
As a result, it seems that net long position has increased slightly, but as we see above - SPDR fund has got the first uptick only on Thursday - before this reserves were at 2-3 months low.
Source cftc.gov
Charting by Investing.com
Situation on gold market reminds EUR/USD. Recent Fed decision provides exciting effect on investors and triggers upward action. By common opinion it seems that this action should last for some time - interest rates stand low and some uncertainty exists concerning tapering announcement. As we've said before, Fed easily could set such scenario of tapering that doesn't match to the market expectation or even postpone it. Indeed, not only we but many others tell the same - Fed now mostly is watching over employment but not inflation. 3 of 4 scenarios provided by Fathom leads approximately to the same result of inflation rate within 2-3 years and only last scenario suggests inflation around 4%, if Central Banks will change the "limits". But even 4% inflation is not a tragedy and might be even useful for economy health.
Thus, despite that current rally on gold market has fragile foundation as investors decrease the participation and net position is rising just because of closing shorts - this situation could last longer than many traders suggest. Gold should stay on positive mood in August, especially if we see some worse NFP numbers next week. But clarity we get only in September from two moments. First is tapering announcement per se, and second - the volume of tapering. It should be more or less significant. This will tell us that Fed intends to go with "classic" approach of holding inflation rather than live with it, and set higher target for it.
In a longer term scenario we do not see big changes. We're coming to reversal point and do not expect new long-term bullish trend on gold any time soon. The only concern that we have here is a timing of reversal. Maybe, if our suggestions appear to be correct - reaching major 87.40 target by Dollar Index tells us that reversal is near.
Technicals
Monthly
Monthly picture stands absolutely the same this week, so no new comments here by far. Gold finally has got the driver from the Fed that provides enough power to break through 1800 area, but it brings no big changes to monthly chart yet.
Overall picture remains bearish in long term - June price action leaves small room to bullish outlook. Trend is bearish, huge engulfing pattern lets market to show minor inside retracement, but inevitably suggests drop to 1650$ at least. And I would say, it doesn't exclude reaching of YPS1 around 1540$ as well. To break this construction gold has to climb above 1925$ and erase this pattern.
Appearing huge bearish engulfing pattern is a strong reason to not buy gold for long-term perspective. And we already see that investors don't, running out of the gold market.
Drop below YPP of 1807 also brings nothing positive and price now is just coiling around, can't return back solidly above it. Downside reversal has happened right from the major 5/8 Fib resistance area. As monthly gold stands not at oversold Potential downside target is K-area of 1685 and 1655 OP.
Classical price shape suggests minor pullback to 3/8-1/2 of engulfing range and then downside extension to next major target. As we were following this trading plan last week - so let's stay on it further. In fact, 50% level has been reached, but lower time frames action keeps door open for some upward continuation.
Weekly
This week mostly has become an inside one and has the same trading range as previous two consecutive weeks. Here price keeps upside reaction on support level. Trend stands bearish by far. Upside action looks weak to treat it as a reversal and mostly looks like technical shy reaction on oversold and Fib support, taking the shape of the flag consolidation. Theoretically we could recognize reverse H&S pattern, it seems that it stands in progress but it has two flaws. First one is too strong sell-off on the slope of the head. Second - too slow recovery when bulls should control situation. Although bottom of the right arm stands in harmony with the left one. These two moments make it tricky and not reliable for position taking.
By taking a look at larger scale, market could forming the big triangle pattern as well. With the upper border of the pattern around 1865-1870 market has the room to climb more, but breakout in any direction has to have fundamental driver and it is unclear for upward breakout scenario by far.
In the nearest term, although we see some fundamental reasons for gold to stay on the surface, technically if downside reversal starts, this will be the sign of weakness. Because we get early downside reversal in the middle of the triangle. Currently is very tricky moment here, market is very unstable and sensitive to any rumor, speech or news. Minor impact could change situation drastically.
Daily
Here we previously said that intraday price action mostly were standing in favor of some upward continuation that now is happening. Currently market target consensus (as we read above) stands around 1840$ area, which is also our opinion that we've mentioned last week, since we have COP right there and daily Overbought. Mostly this target remains for coming week as well. Besides, grabbers that have been formed recently need to be completed and COP fits to this purpose well.
Theoretically we could slightly increase the target from 1840 to 1845 if upside butterfly will be formed. No background for short entry yet.
Intraday
On 4H chart trend turns bearish, and price shows the pullback out from our XOP target. As previous tops remains untouched - it keeps chances for the butterfly that we've mentioned above. Obviously market has to stay above "A" lows to keep bullish scenario valid. This is not because of just butterfly, but also because of grabbers and AB-CD pattern on daily chart.
It seems that we still have got DRPO "Sell" at XOP as drop happened rather fast. Now, its minimum target is done and price stands around 0.5-0.618 support cluster that is typical for upside reversal with the bullish context. It means that for long entry we need to keep an eye on small bullish reversal patterns around 1800-1805 area on 15-30 min charts. Besides, this is also natural support of previous consolidation.
Fed meeting this week has become the major driving factor as for gold as for other market. Meeting result is not a surprising, as we said - no sense to change something in July if you plan to announce tapering in August and provide details on September meeting. Still, markets take this news as very positive and stand inspiring as they could move higher with an environment of low US interest rates. Yesterday we've dedicated solid part of report to this topic and come to conclusion that there could appear new factors that make Fed to wait more. Although everybody habits with the scenario that everything should happen in August-September that minimal deviation of Fed rhetoric on tapering terms, volume etc. could bring strong reaction across the board. Since we still have untouched monthly target on DXY around 87.40 - we think this could happen, especially if statistics deteriorate a bit, starting from coming NFP next week...
Market overview
Net gold imports of gold into the world’s biggest bullion consumer China via Hong Kong jumped nearly 42% last month after a slump in May, data showed on Monday.
Indian gold demand is likely to recover in the second half of 2021 from 35% below the pre-pandemic five-year average in the first half, as festivals and weddings are likely to boost retail purchases in the fourth quarter, the World Gold Council (WGC) said on Thursday. Higher demand from the world's second-biggest gold consumer could support global prices that have corrected nearly 4% so far in 2021, although a rise in imports of the precious metal would widen India's trade deficit and weigh on the rupee. New infections of COVID-19 in India have fallen to around 40,000 per day from more than 400,000 in May.
In the June quarter, demand was 76.1 tonnes, nearly 57% below the five-year average in 2015 to 2019, the WGC said in a report published on Thursday. Lower demand in the June quarter pulled down total demand in the first half of the year to 216.1 tonnes, one-third below the pre-pandemic five-year average.
Weddings are one of the biggest drivers of gold purchases in India as bullion in the form of jewellery is an essential part of a bride's dowry and also a popular gift from family and guests.
At the same time holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell 0.2% to 1,025.64 tonnes on Monday, the lowest since May 13. The ETF has seen outflows of about 20 tonnes so far in July. Later, by the end of the week they've got 0.6% inflow to 1,031.46 tonnes on Thursday, marking the first inflow in about a month.
U.S. consumer confidence inched up to a 17-month high in July, with households’ spending plans rising even as concerns about higher inflation lingered, suggesting the economy maintained its strong growth early in the third quarter.
The International Monetary Fund on Tuesday maintained its 6% global growth forecast for 2021, upgrading its outlook for the United States and other wealthy economies but cutting estimates for developing countries struggling with surging COVID-19 infections.
Gold prices rose to its highest level in over a week on Thursday after the U.S. Federal Reserve failed to give a timeline for its tapering plans and said it was “ways away” from considering raising interest rates.
While the U.S. central bank acknowledged discussing the eventual withdrawal of pandemic-era monetary policy support in its statement, Chairman Jerome Powell said the U.S. job market still had “some ground to cover” before it would be time to pull back. Powell also downplayed the risk of the spread of the Delta variant of the coronavirus on the economic recovery.
Powell’s remarks sent the U.S. dollar index to a more than two-week low. A weaker greenback makes gold cheaper for holders of other currencies. U.S. Treasury yields also fell after the Fed gave no details on when it is likely to reduce bond purchases.
Global demand for gold rose in the second quarter to its highest quarterly level in a year as central banks and investors stepped up purchases, the World Gold Council said in a quarterly report.
Reinforcing Powell’s views, data showed the U.S. economy grew at a 6.5% annualized rate last quarter, below a forecast for an 8.5% rise by economists in a Reuters poll.
Gold prices will average a little above their current level of $1,830 an ounce for the remainder of 2021 before easing in 2022, a Reuters poll showed.
Gold prices held near a two-week high on Friday, and were set for their biggest weekly gain in more than two months, on renewed signs that the U.S. Federal Reserve may not taper economic support and hike interest rates in the near term.
Bob Haberkorn, senior market strategist at RJO Futures said data showing a rise in core inflation at a slightly slower-than-expected pace last month, coupled with a stronger dollar, was weighing on gold. Haberkorn also said:
Jeffrey Christian, managing partner at CPM Group, expects gold to break below $1,770 and silver below $25 over the course of August.
Scenarios of economy recovery
(By Fathom Consulting)
Last year’s collapse in global economic activity differed in pace and scale from any previous recession. Equally the recovery, now well established in most economies, will be unlike anything we have seen before. The global V-shaped recovery is complete, with global GDP above the pre-pandemic level in 2021 Q1. This has predominantly been driven by China, though the US is within a whisker of its 2019 Q4 level. Where we go from here will partly depend on how rapidly households in the major economies spend their excess savings pots, which are estimated to be worth 8%-9% of GDP in the US and the UK, and a little bit less in the euro area. Here we outline four broad scenarios considered in Fathom’s Global Economic and Markets Outlook for 2021 Q3, and what each of them means for the inflation outlook.
In our first scenario, which we have named ‘Steady as she goes’, households remain cautious, fearing further disease outbreaks, and pandemic savings go largely unspent. Here, the rise in inflation proves transitory and inflation returns to target sharply. In ‘Goldilocks’, our second scenario, 25% of pandemic savings are spent this year, pushing inflation higher. Survey data collected and published by the Bank of England, the New York Fed and the US Census Bureau are consistent with households either having spent, or intending to spend, around a quarter of their pandemic savings. However, inflation expectations remain firmly anchored, such that inflation returns to target within a year or two. Collectively, Fathom places a 40% weight on these two scenarios, where monetary policymakers have very little to do.
The remaining 60% of the distribution of possible outcomes covers two scenarios where the cyclical pickup in inflation, that occurs as 25% of pandemic savings balances are spent, gets embedded into expectations of higher future inflation. Early evidence is indicating that higher US inflation is impacting household and corporate expectations. This would leave monetary policymakers with a dilemma. Central bankers have the tools to deal with an overshoot of the inflation target, but the question is, with asset prices (including those of government bonds) underpinned by an expectation that policy rates will remain close to zero more or less indefinitely, will they deploy them?
In our two remaining scenarios, policymakers either deal with higher inflation — perhaps by withdrawing some of or indeed all the post-pandemic QE, as well as raising interest rates — or they roll with it and shift the goal posts. In our ‘Inflation — deal with it’ scenario, policymakers choose to tighten in order to return inflation to target within the medium term. Fathom expects that this would cause a recession early next year.
However, if policymakers choose ‘Inflation — roll with it’, inflation remains markedly above 2% for some time, and central banks opportunistically raise the inflation target either explicitly or implicitly through a variety of measures that have the same net effect. We have seen the early signs of this, as last year the Fed announced it would target ‘an average’ of 2%, whilst earlier this year the ECB announced a change to a symmetric target around 2%, an effective rise from a preference of below 2% inflation. More may yet be to come in this regard.
This is not an easy environment for asset allocators. In Fathom’s judgement, a robust macro recovery is largely priced in for most asset classes. There is perhaps still scope to profit from investing in assets that offer protection against inflation — while a transitory increase in inflation is widely expected, few currently imagine that it will persist. If inflation does persist there is a possibility of stagflation, as growth begins to slow beyond its cyclical peak. In that world, exposure to currencies may offer diversification.
COT Report
So, rally this week is really good and investors think that it could go further, but background of the rally remains weak, which makes it very sensitive to changes in the mood and sharp reversal. Despite solid price appreciation - investors are leaving gold. Market has lost 23K contracts this week. All market participants were closing positions - speculators closing as shorts as longs, as well as hedgers:
As a result, it seems that net long position has increased slightly, but as we see above - SPDR fund has got the first uptick only on Thursday - before this reserves were at 2-3 months low.
Source cftc.gov
Charting by Investing.com
Situation on gold market reminds EUR/USD. Recent Fed decision provides exciting effect on investors and triggers upward action. By common opinion it seems that this action should last for some time - interest rates stand low and some uncertainty exists concerning tapering announcement. As we've said before, Fed easily could set such scenario of tapering that doesn't match to the market expectation or even postpone it. Indeed, not only we but many others tell the same - Fed now mostly is watching over employment but not inflation. 3 of 4 scenarios provided by Fathom leads approximately to the same result of inflation rate within 2-3 years and only last scenario suggests inflation around 4%, if Central Banks will change the "limits". But even 4% inflation is not a tragedy and might be even useful for economy health.
Thus, despite that current rally on gold market has fragile foundation as investors decrease the participation and net position is rising just because of closing shorts - this situation could last longer than many traders suggest. Gold should stay on positive mood in August, especially if we see some worse NFP numbers next week. But clarity we get only in September from two moments. First is tapering announcement per se, and second - the volume of tapering. It should be more or less significant. This will tell us that Fed intends to go with "classic" approach of holding inflation rather than live with it, and set higher target for it.
In a longer term scenario we do not see big changes. We're coming to reversal point and do not expect new long-term bullish trend on gold any time soon. The only concern that we have here is a timing of reversal. Maybe, if our suggestions appear to be correct - reaching major 87.40 target by Dollar Index tells us that reversal is near.
Technicals
Monthly
Monthly picture stands absolutely the same this week, so no new comments here by far. Gold finally has got the driver from the Fed that provides enough power to break through 1800 area, but it brings no big changes to monthly chart yet.
Overall picture remains bearish in long term - June price action leaves small room to bullish outlook. Trend is bearish, huge engulfing pattern lets market to show minor inside retracement, but inevitably suggests drop to 1650$ at least. And I would say, it doesn't exclude reaching of YPS1 around 1540$ as well. To break this construction gold has to climb above 1925$ and erase this pattern.
Appearing huge bearish engulfing pattern is a strong reason to not buy gold for long-term perspective. And we already see that investors don't, running out of the gold market.
Drop below YPP of 1807 also brings nothing positive and price now is just coiling around, can't return back solidly above it. Downside reversal has happened right from the major 5/8 Fib resistance area. As monthly gold stands not at oversold Potential downside target is K-area of 1685 and 1655 OP.
Classical price shape suggests minor pullback to 3/8-1/2 of engulfing range and then downside extension to next major target. As we were following this trading plan last week - so let's stay on it further. In fact, 50% level has been reached, but lower time frames action keeps door open for some upward continuation.
Weekly
This week mostly has become an inside one and has the same trading range as previous two consecutive weeks. Here price keeps upside reaction on support level. Trend stands bearish by far. Upside action looks weak to treat it as a reversal and mostly looks like technical shy reaction on oversold and Fib support, taking the shape of the flag consolidation. Theoretically we could recognize reverse H&S pattern, it seems that it stands in progress but it has two flaws. First one is too strong sell-off on the slope of the head. Second - too slow recovery when bulls should control situation. Although bottom of the right arm stands in harmony with the left one. These two moments make it tricky and not reliable for position taking.
By taking a look at larger scale, market could forming the big triangle pattern as well. With the upper border of the pattern around 1865-1870 market has the room to climb more, but breakout in any direction has to have fundamental driver and it is unclear for upward breakout scenario by far.
In the nearest term, although we see some fundamental reasons for gold to stay on the surface, technically if downside reversal starts, this will be the sign of weakness. Because we get early downside reversal in the middle of the triangle. Currently is very tricky moment here, market is very unstable and sensitive to any rumor, speech or news. Minor impact could change situation drastically.
Daily
Here we previously said that intraday price action mostly were standing in favor of some upward continuation that now is happening. Currently market target consensus (as we read above) stands around 1840$ area, which is also our opinion that we've mentioned last week, since we have COP right there and daily Overbought. Mostly this target remains for coming week as well. Besides, grabbers that have been formed recently need to be completed and COP fits to this purpose well.
Theoretically we could slightly increase the target from 1840 to 1845 if upside butterfly will be formed. No background for short entry yet.
Intraday
On 4H chart trend turns bearish, and price shows the pullback out from our XOP target. As previous tops remains untouched - it keeps chances for the butterfly that we've mentioned above. Obviously market has to stay above "A" lows to keep bullish scenario valid. This is not because of just butterfly, but also because of grabbers and AB-CD pattern on daily chart.
It seems that we still have got DRPO "Sell" at XOP as drop happened rather fast. Now, its minimum target is done and price stands around 0.5-0.618 support cluster that is typical for upside reversal with the bullish context. It means that for long entry we need to keep an eye on small bullish reversal patterns around 1800-1805 area on 15-30 min charts. Besides, this is also natural support of previous consolidation.
