Gold GOLD PRO WEEKLY, August 08 - 12, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,471
Fundamentals

When economy comes to some turning point, market performance becomes especially unstable. Any epic reversal on any direction won't come easy. Thus, as gold was strongly inspired by negative GDP as strong it was crushed by NFP report. With long-term downside momentum on the back, the changing of the direction is a lasting process and could bring more surprises.

Market overview

Gold dropped after US labor market data showed employers added more jobs in July than forecast, an indication the Federal Reserve may press on with steep interest-rate hikes to thwart inflation. Nonfarm payrolls rose 528,000 last month, more than double economists’ estimates. The dollar rose following the data release, putting pressure on gold.

Still, bullion is now poised to end the week little changed, after earlier gains amid tension between China and US over US House speaker Nancy Pelosi’s visit to the Taiwan. Bullion is headed for a third weekly gain, even as prices slipped on Friday, after China likely fired missiles over Taiwan during military drills. Beijing has responded aggressively to US House Speaker Nancy Pelosi’s visit to the island this week.

“Gold bulls didn’t get their green light from the jobs data with the outsized strong beat,” said Nicky Shiels, head of metals strategy at MKS PAMP SA. “Gold should remain capped below $1,800 for now, but attention will turn to the CPI.”

There were more signs that the fight to cool inflation will weigh on global growth. The Bank of England unleashed its biggest rate hike in 27 years on Thursday as it warned the UK is heading for more than a year of recession, while Cleveland Federal Reserve Bank President Loretta Mester said US interest rates need to be raised above 4%.

"Some Fed speakers have repeated an aggressive stance, which is keeping inflow (in gold) limited," Edward Moya, senior analyst with OANDA, said. "However, global recessionary fears are to put an end to these aggressive rate hikes, so gold should maintain a bullish trend".

Gold will average $1,745 an ounce in 2023, slightly below current prices, as high interest rates and a strong dollar reduce its appeal, a Reuters poll showed on Wednesday. The gold price has fallen to about $1,770 an ounce from a high of $2,069.89 in March as the U.S. Federal Reserve and other central banks increased interest rates rapidly in an effort to tame inflation.

The median forecasts from a survey of 35 analysts was for gold to average $1,770 an ounce in the July-September quarter, $1,750 in the fourth quarter and $1,745 in 2023. That is a downgrade from a similar poll in May that predicted average prices of $1,875 in the third quarter and $1,762.50 in 2023. Gold has averaged $1,854 an ounce so far this year.

"The U.S. dollar's dominance and the rise in real U.S. bond yields are weighing on the mood in the gold market," said Julius Baer analyst Carsten Menke. He said that further price falls are possible but the "base case calls for a stabilisation around current levels".

For silver, the poll forecast average prices of $20 an ounce in the third quarter, $20.06 in the fourth and $20.18 in 2023. That is down from the May poll's projection of $22.50 for 2023.

NFP Report, employment and market reaction we've discussed yesterday in our FX market report.

MAJOR TRENDS

Now take a look at more gold specific topics, economical and geopolitical. I would like to show you exciting stuff. First is, we've got the confirmation of the Fed strategy. If earlier we've just suggested that it should go in this way, now we have clear signal from the Fed. I've briefly mentioned this in the beginning of the week, but it makes to repeat it here:
US Treasury Lifts Quarterly Borrowing Estimate to $444 Billion. The Treasury Department boosted the quarterly borrowing estimate by about $262 billion, a release in Washington showed on Monday. The change reflects in part the Treasury having left out, back in May, any assumption for the Fed’s scaling back its holdings of Treasuries -- in advance of the formal Fed announcement. The Fed’s runoff began in June.

The Treasury’s debt managers now expect to borrow $444 billion in the July-through-September period, compared with the original estimate of $182 billion. The Treasury left unchanged its cash-balance estimate for the end of September, at $650 billion. That stockpile is currently around $597 billion. For the three months through December, the Treasury said Monday that it anticipates borrowing $400 billion through net new marketable debt issuance. It assumes a cash balance of $700 billion at the end of the period.

Fed redemptions contributed $120 billion to the July-through-September borrowing estimate, and $139 billion to the October-through-December estimate, the Treasury said. The Treasury on Wednesday will announce plans for its so-called quarterly refunding of longer-term securities. Most dealers predict US debt managers will scale back its auctions for a fourth straight quarter, predicting extra cutbacks for the 20-year bond, which has been plagued by limited liquidity.

This week Fed has decreased the balance for 25 Bln, but it has been done by using of US Treasury deposit that again has dropped for ~ 50 Bln. It seems that Fed intends to keep this tactic in future. As we've said previously - the rest of cash is enough to stay on surface for 6-8 months, so Democrats could last it until elections without making big impact on the markets. The major intrigue now is - who will buy the new bonds' issues? Whether US Treasury deposit will be spend on buying new debt?
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While Fed, US Treasury and US Government takes science debates on whether the US has recession or not - economists worry on bad things.

Zoltan Pozsar of Credit Suisse Group AG says L-Shaped Recession Is Needed to Conquer Inflation. Markets expect the surge in consumer prices will soon peak and central banks will become less hawkish, but there’s a high risk that global cost pressures will remain elevated, Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note. The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe, he said.
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“War is inflationary,” Pozsar wrote. “Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.” That pattern held “until East-West relations soured, and supply snapped back,” he said.

Take a look - Pozsar repeats the same things that we've said 1-2 months ago, that the nature of current crisis is structural, not the cyclical. That's why it is not quite a recession as everybody think. We've talked about supply/demand disbalances that have to be fixed by depressing overblown demand. And he tells the same - rate has to be around inflation rate, but not 2-3%. This is not enough.

The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic, Pozsar said. There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there(!!!) to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.

The same on bond market - that it is toxic now:

The bond market is more misguided now than at any other time this year as traders wager the US central bank will start cutting rates in early 2023, Bloomberg Economics’ chief US economist Anna Wong and her colleagues said this week. Money markets are wagering on almost one percentage point of hikes by year-end followed by a quarter-point cut by June.

“Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”

But this is not the end yet. Take a look at public letter that best american economists have sent to government:
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Next interesting topic is a stock market, that, as we expect should drop significantly in a perspective of 9-12 months. We expect S&P below 2500 level or even lowers. Together with expectation of job market worsening, we've talked on "companies zombification". This phenomena explains the fragility of corporate bond market and corporate loans sector. In fact, many companies, that can't create positive cashflow have got a lot of funds by bond issuing and loans, because of free and unlimited liquidity. Now, when this "easy money" flow droughted - somebody has to pay on accounts. "Zombie companies" do not have money, then - either bond holders or banks will have to pay for it in a way of defaults and provisions.

Fathom research has identified a link between persistently low interest rates and weak productivity outturns, a phenomenon known in the academic literature as zombification. The premise for this theory is that holding borrowing costs at abnormally low levels for a prolonged period allows unprofitable firms to stay in business. Not only are these firms unproductive, but their survival blocks the emergence of younger, more innovative competitors. Expressed another way, Fathom thinks that low interest rates have stifled the forces of creative destruction. This is reflected by a fall in the rates of corporate failures and corporate births, and is one explanation for the so-called ‘productivity puzzle’. But could we now be at a turning point? Corporate failures have been rising since 2015 when the Federal Reserve began its previous tightening cycle, and they shot up during the pandemic.
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And just to close stock market topic - here is exciting chart, guys. Comparison of nowadays S&P performance with the shape of Great Depression (1930-1937), Dotcom bubble (2000-2002) and subprime crisis (2008-2010). Looks cool...
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Finally, few moments on Geopolitics. There was a lot of noise around Pelosi flight to Taiwan which brings nothing good to global stability. Here are the first fruits. China is abandoning US Treasuries market:
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And this one:

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Somebody, guys, plays the bad games, trying to pit China against the EU as well, or make a pressure on it.

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It is not needed even to comments guys. I suppose that you understand it as well as me. China starts drifting out of US cooperation. They are too related to each other and China can't just burn all down, but the gradual process has started. The intrigue with Taiwan has special background. The TSMC plant produces chips not only for common use, but US defence industry mostly is based on its application. Controlling TSMC plant and Taiwan also means control over US defense...

Next week Wednesday's July U.S. inflation print is shaping up as a key test for a summer rally in U.S. stocks that has lifted the S&P 500 to multi-week highs. The benchmark index is up 14% from its mid-June low, supported in part by expectations that the Federal Reserve will be less hawkish than previously anticipated.

Fed officials have pushed back against the idea that they will be less aggressive in a so-called dovish pivot. Any signs that inflation is not yet peaking after the Fed's 225 bps worth of rate hikes could provide a reality check to markets hopeful of a soft landing for the economy. Analysts polled by Reuters forecast annual inflation at 8.9% in July versus 9.1% in June, which was the largest increase since 1981
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Conclusion

Shortly speaking guys, we now get confirmation of our long-term view from other sources. Today they are Mr. Pozsar from Credit Suisse and community of best US economists. Markets right now are wrong with long-term expectations with expectation of policy easing in the beginning of 2023. They are wrong in two ways - either no easing will happen, because rate has to remain high for long-term to defeat inflation or, if easing happens - it triggers the new spiral of inflation. Both scenarios are positive to gold market. By taking a look at Fed policy that doesn't intend to control money supply, it seems that 2nd scenario is more probable.

All analysts expect that gold price has to be more or less stable. In long-term perspective it sounds bullish, because current levels is just 30% pullback from ATH. Anticipation of 1% rate change could make some pressure on gold prices, but it likely will be temporal and tactic, because it doesn't change real interest rates positive. They could become less negative for awhile but as inflation will keep going higher - it doesn't help. The negative interest rates is the major gold driver.

Here is comparison of 1 week ago expectations and now - market are ready for 1.0% rate hike within 6 months, but 1-year yield barely has changed, meaning that policy easing are still widely expected:

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More and more people talk about jobs' shortage although NFP and unemployment data do not confirm it by far. This indirectly confirms our worry about job market that soon it should start showing signs of deteriorating.

Finally, recent geopolitical events in Serbia, Taiwan, now around Gaza sector do not cut the tension at all. Taking it all together we keep our bullish long-term view on the gold market. Occasional events, such as NFP report could bring some mess in investors' minds but it should not change the major trend if we indeed correct in our long-term strategy.

To be continued...
 
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Sive Morten

Special Consultant to the FPA
Messages
16,471
Technicals
Monthly

Despite high volatility on Friday, monthly chart is barely impacted by it.

Gold is completed AB-CD pattern that we've talked about already. In general 1660-1680 area includes all kind of supports that we ever could imagine. We can't call it as "222" Buy by far, just because "C" point is lower than "D" right now. Since market has some momentum, it could flirt around this area for awhile, until crisis signs in the US economy will become more evident, on a job market in particular.

From technical point of view, the recent bounce is absolutely logical thing as price enters our super strong support area. With the recent week lows of $1680 gold touches YPS1 level and monthly K-support area.

Big banks and Funds expect gold to remain at current levels, while 1600$ area hardly will be tested any time soon because of monthly oversold level at 1660$. For strategic investments, it seems that current level could be considered for gold buying, at least at some fraction of total position. With some circumstance, gold could start reversal right from here. In fact, we have huge "222" Buy here, with absolutely superb support area of 1660-1680$.

gold_m_08_08_22.png


Weekly

Next week driver is CPI report, no doubts. Technically trend remains bearish here and price has completed the harmonic pullback. Downside momentum is strong. Thus formally we have no reasons to bet on strong upside continuation, but only due weak CPI numbers. Without CPI chance, it would say that we should be ready for deep retracement, partially because we have bearish grabber on EUR this week as well, suggesting dollar strength. Taking a long position this week probably will be risky and tricky.

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Daily

Trend here stands bullish and pullback is not too scaring. Since we have uncompleted intraday target I would prefer to get them completed before the pullback starts. Thus, right now only bears have more or less evidence here. Once intraday XOP will be reached around daily K-area - watch for the pattern and make a decision on position taking.

Bulls have nothing to do here as price is coiling around K-resistance:
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Intraday

So, here is XOP. It would be nice if gold hits it first, before reversal starts. In general, reversal is growing as we already have divergence. It seems that 1753 level is vital here. While gold stands above it, it keeps chances to reach 1806$ target. While drop below 1743-1752 K-area signals that upside action is over. Thus, bearish should watch for these two moments - either XOP completion or inability to do this and drop below 1753 lows.
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Sive Morten

Special Consultant to the FPA
Messages
16,471
Greetings everybody,

Yesterday we've got the inside session and in general we would say that gold is ready for the pullback, if we wouldn't have the 1806$ target and CPI on horizon. These drivers make investors stay flat, waiting for release:
gold_d_09_08_22.png


We confirm the same things that we've said in weekend - nothing to do for the bulls by far. We need to wait for the pullback out of the K-resistance area. Only if you have taken scalp long position that we've discussed - now you could move stops to breakeven.

For the bears - it is too early to go short. Bears need to get reversal pattern and completion of 1806$ XOP, despite that wedge and divergence are here already:
gold_4h_09_08_22.png


Appearing of the butterfly here could become nice final action here. It would be as bearish reversal pattern, as the one that could complete XOP target. Let's see.
gold_1h_09_08_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Good morning

So, gold gradually is moving with our trading plan trying to touch 1806$ target. We do not want to make any forecasts on CPI, market expects 8.7%, slightly lower than 9.1% month before. In a longer-term we do not expect inflation to drop. And yesterday's Labor Costs shows 10.6% QoQ basis. It is a leading indicator to CPI. We do not hint on anything - just be careful
gold_d_10_08_22.png


Technical picture stands in favor of the bears, as price right at K-resistance area and Agreement with XOP target. Divergence, wedge pattern - all of them are showing the preparation to some reaction:
gold_4h_10_08_22.png


If you have long positions - move stops to breakeven and be ready to book results once XOP will be completed. Bears, in turn, should wait when XOP will be completed, and then, depending on CPI numbers - either wait (if CPI drops too much), or search chance for entry, look for patterns, if CPI will be above 8.7%.

On 1H chart hardly we could talk about butterfly, as right wing seems too small. But, extensions remain the same:
gold_1h_10_08_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Greetings everybody,

Today is not much to do actually on gold market. Price accurately hits 1806$ and now is coiling around the daily resistance. For the bulls - it is no choice but to wait for the pullback:
gold_d_11_08_22.png


Supposedly retracement should not be too deep, 1750-1760K area should hold the market, because CPI effect is solid and should have long lasting impact on the markets:
gold_4h_11_08_22.png


For the bearish position situation stands as follows. If you have taken the position right on the spike to XOP - you could keep it with stops above it or at breakeven. If you just think about short entry - it would be better to wait for the clear pattern, such as H&S, for example. Because of CPI, gold could turn to just sideways action under K-area, which potentially is bullish. To avoid this - it would be better to watch for the pattern. If coiling starts - don't take any shorts, as gold will keep going higher in this way.

The same is to the bulls - sideways action around daily K-area tells that no pullback happens and market intends to keep upward action.
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Morning folks,

Market is coiling around daily resistance and it is few that we could do today. Investors either take a rest or thinking on recent statistics, preparing the next step:
gold_d_12_08_22.png


Yesterday we've discussed the major signal - the longer Gold stands around resistance - the more bullish chances it gets. Now, on 4H chart light signs of bullish dynamic pressure are appearing. After XOP been touched, price has not dropped fast but stands flat, forming higher lows. While MACD is going down...
gold_4h_12_08_22.png


On 1H chart price has not broken yet the upside channel and 1780 area seems the one that could clarify further action. Downside breakout makes possible appearing of, say, H&S, and deeper pullback, while tight standing in sideways action works in favor of the bulls. Right now it is not very comfortable to take the short position. So, it makes sense to wait until the next week
gold_1h_12_08_22.png
 
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