Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
Gold this week has the same driving factors as any other market, including FX. Mostly we've discussed them yesterday. Currently it is relatively simple to follow the fundamental driving factors as all of them directly or relatively relates to USD weakness. Recent just that we saw this week was not due huge demand for gold directly but due collapse of USD value. Here is our historical Dollar Index chart. Last month we warned that Dollar stands at all time K-resistance area and depending on response - it trigger chain reaction on all markets. Take a look what is going on now:
Thus, in general all our driving factors are long-term and we do not see any exhausting in their impact on the gold. Rates are promised to be low for years, political tensions as well as unrest in US just getting more pace, virus situation is difficult as well as situation with employment. Previous supporting measures gradually are coming to an end, but now suddenly US meets no consensus among politicians on prolongation of these measures.
The top Democrats in Congress are not close to a deal with the White House to pump more money into the U.S. economy to ease the coronavirus’ heavy toll, both sides said on Saturday, after an essential lifeline for millions of unemployed Americans expired.
“This was the longest meeting we had and it was more productive than the other meetings,” Democratic Senate Minority Leader Chuck Schumer said. “There are many issues that are still very much outstanding.”
Schumer made the remarks after he and U.S. House of Representatives Speaker Nancy Pelosi concluded a three-hour meeting with Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows at the Capitol on Saturday. Mnuchin told reporters the talks were constructive but had reached an “impasse” over whether to come to a short-term agreement or a more comprehensive deal.
The officials will meet again on Monday, after their staff meet on Sunday, Schumer said.
Congress for the past several months has been unable to reach an accord for a next round of economic relief from a pandemic that has killed more than 150,000 Americans and triggered the sharpest economic collapse since the Great Depression.
In a meeting late Thursday between top White House officials and congressional Democratic leaders, negotiations focused on an extension of the $600 per week in federal unemployment benefits that Americans who lost jobs due to the pandemic have been receiving in addition to state jobless payments.
Pelosi said on Friday that she rejected an offer by Republican President Donald Trump’s administration to continue the $600 payments for one more week.
Congressional Democrats want to see the weekly payments extended into next year as part of a broader package.
Senate Republicans have said the $600 payments are an incentive to stay home rather than return to work. Their proposal would provide a much-reduced weekly payment of $200 until states create a system to provide a 70% wage replacement for laid-off workers.
Democratic presidential candidate Joe Biden on Saturday slammed Trump and Senate Majority Leader Mitch McConnell for letting the Senate go home for the weekend without a deal to extend the unemployment benefits or protect renters facing eviction.
“Because Donald Trump is abdicating his responsibility to lead us out of the pandemic crisis and the economic crisis, we now face a potential housing crisis across the country,” Biden said in a statement.
Pelosi told House Democrats in a letter late on Saturday that “all parties must understand the gravity of the situation in order to reach an agreement that protects Americans’ lives, livelihoods and the life of our democracy.”
There were hopes some sort of stimulus extension could be hammered out as U.S. Senate Republicans raced to complete details of a $1 trillion coronavirus aid proposal before enhanced unemployment benefits expired on Friday. The proposal could involve a cut in benefits to $200 from $600, which would be a big blow to household incomes and spending power. Aid is desperately needed given 30 million Americans are out of work and states are tightening social restrictions again, a trend that has also dragged on the U.S. dollar.
In financial markets, the continued divergence between stocks and the real economy has worried some investors. U.S. growth took its worst hit on record in the second quarter, while more recent data points to fading consumer confidence and jobless claims back on the rise. The S&P 500 .SPX, meanwhile, stands some 4% below all-time highs, though its weekly advances have grown progressively smaller in July.
That disconnect is pushing some investors to beef up cash positions or tilt their portfolios toward Europe, where economic prospects appear to be brighter than in the United States.
Concerns over the U.S. presidential election are also mounting. On Thursday, President Donald Trump suggested on Twitter that the Nov. 3 vote be delayed, though he has no direct authority to do so. Market participants hope the Labor Department’s July payrolls report, due next Friday, will shed more light on the state of the recovery.
During Fed Chair Jerome Powell's press conference following the close of the U.S. central bank's two-day policy meeting, gold jumped as much as 1.1% to $1,980.31 an ounce, just below the record high of $1,980.57 scaled on Tuesday, but pared gains soon after.
"The gold price action around the Powell presser - up, down sharply, recovering - when the chair was careful and neutral, suggests a developing plurality of viewpoints at current levels in the market," said Tai Wong, head of base and precious metals derivatives trading at BMO. "That, after a long rally, indicates a higher probability of a short-term correction."
The current economic downturn is severe and continued fiscal and monetary support will be necessary for a recovery, Powell said, following the release of the U.S. central bank's latest policy statement. Fed policymakers said they remain committed to using their "full range of tools" to support the economy and keeping interest rates near zero for as long as it takes for the economy to recover. Massive stimulus packages to aid economies around the world reeling from pandemic-driven woes and a low interest rate environment have helped drive gold prices up nearly 30% so far this year.
"The fundamentals for gold have never been better," said Jeffrey Sica, founder of Circle Squared Alternative Investments. But, he said, gold is going to face resistance near the $2,000 level. "You've a lot of people trading gold short-term now, so we are going to get some pullback just on what I would consider simple profit-taking since it's had such an incredible run year-to-date," Sica said.
Gold rose on Friday, hovering near its all time peak, as a sliding dollar and dire economic numbers from far and wide sparked a rush to safety in bullion, which is
on course for its biggest monthly gain since February 2016.
"The macro environment still remains very positive and prices continue to track real rates ... extreme weakness in the dollar has helped buoy gold prices further," said Standard Chartered analyst Suki Cooper.
The dollar was on track for its biggest monthly drop in almost a decade. Data showed the U.S. economy suffered its harshest blow since the Great Depression in the second quarter due to the pandemic, while investors also geared up for an uncertain political situation in the country. Safe-haven bullion has gained nearly 30% so far this year, propelled by low interest rates globally and widespread stimulus from central banks adding to support for the metal considered a refuge from inflation and currency debasement.
"With policy rates already at or even below the zero bound, support to gold prices will increasingly have to come from higher inflation, in our view," said BofA Global Research, which expects gold to hit $3,000 per ounce in the coming 18 months.
CFTC Data
Despite strong fundamentals, net long position has dropped slightly this week, despite that gold has not reached 300-350K zone of high position saturation. Market was growing too fast and too far, so investors need to take a relief, as major news and fundamental background is seemed to priced-in finally. Coming growth will be on lasting effect of the same driving factors. Take a look that open interest has increased, while speculators have closed 13.3K long contracts and open new 7.7K shorts. Hedgers added as more as ~30K long contracts, increasing hedge from possible downside action on Gold market. It seems that retracement is coming closer...
Source: cftc.gov
Charting by Investing.com
Also I would like to put here the chart that we've considered last week, as "Real gold value". It is long-term and we need to keep an eye on it.
REAL GOLD VALUE by Fathom Consulting
Gold has performed well through the COVID-19 crisis, returning some 20% year to date. Since the early 1970s there have been two major spikes in the real price of gold. The first was almost certainly a consequence of rising inflation uncertainty, as convertibility of the US dollar came to an end. The second, which began in the early 2000s is ongoing. Gold bugs might argue that it again reflects fears about currency debasement. But that does not fit with measures of inflation expectations, such as inflation breakevens, which remain well contained. A more plausible explanation is the steady decline in the real risk-free rate, driven in part by QE, which has pushed all asset prices higher (They confirm what we were talking about within few months!!). If we look at data back to the 1830s, the real price of gold appears to mean revert. But mean reversion is slow. On average it takes close to five years for the real gold price to move just halfway back to its long-term average. And if a slower-than-expected recovery from the economic consequences of COVID-19 pushes government debt higher and real yields lower, while causing some to worry even more about currency debasement, it may yet rise (much) further from here.
Technicals
Monthly
So, on monthly chart market has exceeded all previously specified targets and now even challenging the 1920 top area. Thus we need to increase the scale to see what next destination point we could get. Now it seems that we have historical AB-CD pattern and nearest COP extension stands at ~2100$ area. Still, I have to remind you again, that market is at historical level of overbought here by DOSC indicator.
I can't forbid you to take long position, as gold is a specific asset and it could keep rising paying no attention to technical indicators. But I have to warn you in terms of probabilities that we are at overbought. You have to make your own decision on whether you stand with probabilities and wait for the pullback to buy gold, or, you ignore the probabilities and just jump in here. Difficult to predict who will be correct in result, as driving factors behind the gold are really strong. Personally, I'm waiting. But I do not want you to accuse me, if rally will continue without us. That's why it should be your personal decision. My choice is to listen technical indicators as well. As we said above - first fruits of overbought are coming as net position is changing...
In very long perspective, we could listen Bank of America analysts - 3000$ is not something impossible in 18 month...
Weekly
So, we've discussed potential upside targets, now we could pay attention to downside action as well. Especially because we hope that it comes soon. On weekly chart we consider action only till 1780 area and are not interested in lower standing levels, because of weekly oversold. Interestingly that in a whole length of the rally market was forming very accurate harmonic pullbacks either single or double. Here initially we intend to watch for the same depth of the retracement - one harmonic swing fits to 1st Fib level @1863 while X 2 retracement perfectly matches to K-support around 1780-1800 and weekly oversold.
Daily
Here is nothing to add. Daily gold is overbought as well. Recent few sessions market ha spent around the top, forming nothing new. Thus, we still intend to rely on thrusting action and hope to get DiNapoli B&B or DRPO patterns. Together with harmonic swings and Fib levels it should be good tool for position taking.
Intraday
Here charts mostly stand the same as on Friday. To seriously speak on retracement we need at least to get reversal swing and bearish reversal pattern. Somehow it should be around 1H triangle consolidation. Right now it is too early to speak on taking scalp short positions, despite that we have grabber on 4H and W&R on 1H chart. It is possible, of course, but context is not sufficient by far...
Conclusion:
As it was said above - "Gold never had better fundamentals". Indeed, different political and economical disasters happened previously, but never they come at global zero interest rates environment and on a background of printing 20% of Global GDP. It keeps our bullish view strong with no need to change something. Thus, BofA forecast in reality could be not as fantastic as it sounds now, as Gold indeed could reach 3K within 18 months, why not?
In short-term, although we do not see yet clear patterns on the market but CFTC data shows change in sentiment. We've planned everything and ready for retracement once it get started.
Gold this week has the same driving factors as any other market, including FX. Mostly we've discussed them yesterday. Currently it is relatively simple to follow the fundamental driving factors as all of them directly or relatively relates to USD weakness. Recent just that we saw this week was not due huge demand for gold directly but due collapse of USD value. Here is our historical Dollar Index chart. Last month we warned that Dollar stands at all time K-resistance area and depending on response - it trigger chain reaction on all markets. Take a look what is going on now:
Thus, in general all our driving factors are long-term and we do not see any exhausting in their impact on the gold. Rates are promised to be low for years, political tensions as well as unrest in US just getting more pace, virus situation is difficult as well as situation with employment. Previous supporting measures gradually are coming to an end, but now suddenly US meets no consensus among politicians on prolongation of these measures.
The top Democrats in Congress are not close to a deal with the White House to pump more money into the U.S. economy to ease the coronavirus’ heavy toll, both sides said on Saturday, after an essential lifeline for millions of unemployed Americans expired.
“This was the longest meeting we had and it was more productive than the other meetings,” Democratic Senate Minority Leader Chuck Schumer said. “There are many issues that are still very much outstanding.”
Schumer made the remarks after he and U.S. House of Representatives Speaker Nancy Pelosi concluded a three-hour meeting with Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows at the Capitol on Saturday. Mnuchin told reporters the talks were constructive but had reached an “impasse” over whether to come to a short-term agreement or a more comprehensive deal.
The officials will meet again on Monday, after their staff meet on Sunday, Schumer said.
Congress for the past several months has been unable to reach an accord for a next round of economic relief from a pandemic that has killed more than 150,000 Americans and triggered the sharpest economic collapse since the Great Depression.
In a meeting late Thursday between top White House officials and congressional Democratic leaders, negotiations focused on an extension of the $600 per week in federal unemployment benefits that Americans who lost jobs due to the pandemic have been receiving in addition to state jobless payments.
Pelosi said on Friday that she rejected an offer by Republican President Donald Trump’s administration to continue the $600 payments for one more week.
Congressional Democrats want to see the weekly payments extended into next year as part of a broader package.
Senate Republicans have said the $600 payments are an incentive to stay home rather than return to work. Their proposal would provide a much-reduced weekly payment of $200 until states create a system to provide a 70% wage replacement for laid-off workers.
Democratic presidential candidate Joe Biden on Saturday slammed Trump and Senate Majority Leader Mitch McConnell for letting the Senate go home for the weekend without a deal to extend the unemployment benefits or protect renters facing eviction.
“Because Donald Trump is abdicating his responsibility to lead us out of the pandemic crisis and the economic crisis, we now face a potential housing crisis across the country,” Biden said in a statement.
Pelosi told House Democrats in a letter late on Saturday that “all parties must understand the gravity of the situation in order to reach an agreement that protects Americans’ lives, livelihoods and the life of our democracy.”
There were hopes some sort of stimulus extension could be hammered out as U.S. Senate Republicans raced to complete details of a $1 trillion coronavirus aid proposal before enhanced unemployment benefits expired on Friday. The proposal could involve a cut in benefits to $200 from $600, which would be a big blow to household incomes and spending power. Aid is desperately needed given 30 million Americans are out of work and states are tightening social restrictions again, a trend that has also dragged on the U.S. dollar.
In financial markets, the continued divergence between stocks and the real economy has worried some investors. U.S. growth took its worst hit on record in the second quarter, while more recent data points to fading consumer confidence and jobless claims back on the rise. The S&P 500 .SPX, meanwhile, stands some 4% below all-time highs, though its weekly advances have grown progressively smaller in July.
That disconnect is pushing some investors to beef up cash positions or tilt their portfolios toward Europe, where economic prospects appear to be brighter than in the United States.
Concerns over the U.S. presidential election are also mounting. On Thursday, President Donald Trump suggested on Twitter that the Nov. 3 vote be delayed, though he has no direct authority to do so. Market participants hope the Labor Department’s July payrolls report, due next Friday, will shed more light on the state of the recovery.
During Fed Chair Jerome Powell's press conference following the close of the U.S. central bank's two-day policy meeting, gold jumped as much as 1.1% to $1,980.31 an ounce, just below the record high of $1,980.57 scaled on Tuesday, but pared gains soon after.
"The gold price action around the Powell presser - up, down sharply, recovering - when the chair was careful and neutral, suggests a developing plurality of viewpoints at current levels in the market," said Tai Wong, head of base and precious metals derivatives trading at BMO. "That, after a long rally, indicates a higher probability of a short-term correction."
The current economic downturn is severe and continued fiscal and monetary support will be necessary for a recovery, Powell said, following the release of the U.S. central bank's latest policy statement. Fed policymakers said they remain committed to using their "full range of tools" to support the economy and keeping interest rates near zero for as long as it takes for the economy to recover. Massive stimulus packages to aid economies around the world reeling from pandemic-driven woes and a low interest rate environment have helped drive gold prices up nearly 30% so far this year.
"The fundamentals for gold have never been better," said Jeffrey Sica, founder of Circle Squared Alternative Investments. But, he said, gold is going to face resistance near the $2,000 level. "You've a lot of people trading gold short-term now, so we are going to get some pullback just on what I would consider simple profit-taking since it's had such an incredible run year-to-date," Sica said.
Gold rose on Friday, hovering near its all time peak, as a sliding dollar and dire economic numbers from far and wide sparked a rush to safety in bullion, which is
on course for its biggest monthly gain since February 2016.
"The macro environment still remains very positive and prices continue to track real rates ... extreme weakness in the dollar has helped buoy gold prices further," said Standard Chartered analyst Suki Cooper.
The dollar was on track for its biggest monthly drop in almost a decade. Data showed the U.S. economy suffered its harshest blow since the Great Depression in the second quarter due to the pandemic, while investors also geared up for an uncertain political situation in the country. Safe-haven bullion has gained nearly 30% so far this year, propelled by low interest rates globally and widespread stimulus from central banks adding to support for the metal considered a refuge from inflation and currency debasement.
"With policy rates already at or even below the zero bound, support to gold prices will increasingly have to come from higher inflation, in our view," said BofA Global Research, which expects gold to hit $3,000 per ounce in the coming 18 months.
CFTC Data
Despite strong fundamentals, net long position has dropped slightly this week, despite that gold has not reached 300-350K zone of high position saturation. Market was growing too fast and too far, so investors need to take a relief, as major news and fundamental background is seemed to priced-in finally. Coming growth will be on lasting effect of the same driving factors. Take a look that open interest has increased, while speculators have closed 13.3K long contracts and open new 7.7K shorts. Hedgers added as more as ~30K long contracts, increasing hedge from possible downside action on Gold market. It seems that retracement is coming closer...
Source: cftc.gov
Charting by Investing.com
Also I would like to put here the chart that we've considered last week, as "Real gold value". It is long-term and we need to keep an eye on it.
REAL GOLD VALUE by Fathom Consulting
Gold has performed well through the COVID-19 crisis, returning some 20% year to date. Since the early 1970s there have been two major spikes in the real price of gold. The first was almost certainly a consequence of rising inflation uncertainty, as convertibility of the US dollar came to an end. The second, which began in the early 2000s is ongoing. Gold bugs might argue that it again reflects fears about currency debasement. But that does not fit with measures of inflation expectations, such as inflation breakevens, which remain well contained. A more plausible explanation is the steady decline in the real risk-free rate, driven in part by QE, which has pushed all asset prices higher (They confirm what we were talking about within few months!!). If we look at data back to the 1830s, the real price of gold appears to mean revert. But mean reversion is slow. On average it takes close to five years for the real gold price to move just halfway back to its long-term average. And if a slower-than-expected recovery from the economic consequences of COVID-19 pushes government debt higher and real yields lower, while causing some to worry even more about currency debasement, it may yet rise (much) further from here.
Technicals
Monthly
So, on monthly chart market has exceeded all previously specified targets and now even challenging the 1920 top area. Thus we need to increase the scale to see what next destination point we could get. Now it seems that we have historical AB-CD pattern and nearest COP extension stands at ~2100$ area. Still, I have to remind you again, that market is at historical level of overbought here by DOSC indicator.
I can't forbid you to take long position, as gold is a specific asset and it could keep rising paying no attention to technical indicators. But I have to warn you in terms of probabilities that we are at overbought. You have to make your own decision on whether you stand with probabilities and wait for the pullback to buy gold, or, you ignore the probabilities and just jump in here. Difficult to predict who will be correct in result, as driving factors behind the gold are really strong. Personally, I'm waiting. But I do not want you to accuse me, if rally will continue without us. That's why it should be your personal decision. My choice is to listen technical indicators as well. As we said above - first fruits of overbought are coming as net position is changing...
In very long perspective, we could listen Bank of America analysts - 3000$ is not something impossible in 18 month...
Weekly
So, we've discussed potential upside targets, now we could pay attention to downside action as well. Especially because we hope that it comes soon. On weekly chart we consider action only till 1780 area and are not interested in lower standing levels, because of weekly oversold. Interestingly that in a whole length of the rally market was forming very accurate harmonic pullbacks either single or double. Here initially we intend to watch for the same depth of the retracement - one harmonic swing fits to 1st Fib level @1863 while X 2 retracement perfectly matches to K-support around 1780-1800 and weekly oversold.
Daily
Here is nothing to add. Daily gold is overbought as well. Recent few sessions market ha spent around the top, forming nothing new. Thus, we still intend to rely on thrusting action and hope to get DiNapoli B&B or DRPO patterns. Together with harmonic swings and Fib levels it should be good tool for position taking.
Intraday
Here charts mostly stand the same as on Friday. To seriously speak on retracement we need at least to get reversal swing and bearish reversal pattern. Somehow it should be around 1H triangle consolidation. Right now it is too early to speak on taking scalp short positions, despite that we have grabber on 4H and W&R on 1H chart. It is possible, of course, but context is not sufficient by far...
Conclusion:
As it was said above - "Gold never had better fundamentals". Indeed, different political and economical disasters happened previously, but never they come at global zero interest rates environment and on a background of printing 20% of Global GDP. It keeps our bullish view strong with no need to change something. Thus, BofA forecast in reality could be not as fantastic as it sounds now, as Gold indeed could reach 3K within 18 months, why not?
In short-term, although we do not see yet clear patterns on the market but CFTC data shows change in sentiment. We've planned everything and ready for retracement once it get started.
