Sive Morten
Special Consultant to the FPA
- Messages
- 18,643
Fundamentals
So, gold market has become a victim of the same factors as EUR and other markets - evident Fed statement concerning tapering and rate change. As a result natural price shape and sentiment has been broken and couldn't recover till the end of the week, when additional impact from NFP followed. In general this drop perfectly fits to long-term scenario on monthly/weekly chart when we have long-term bearish trading plan. Still, on short-term scenario gold was able to reach near stand targets without any contradiction to major bearish context, but this has not happened. Now technically gold still has theoretical chances to recover but it is bearish mood on the market. Last time Fed comments supported gold, but who will do it now?
Market overview
Gold prices inched lower on Thursday after the dollar firmed and remarks from a top U.S. Federal Reserve official signalled the possibility of bringing forward policy tightening. Bullion prices rose more than 1% in the previous session after the ADP National Employment Report showed U.S. private payrolls increased far less than expected in July.
Fed Vice Chair Richard Clarida said the conditions for raising interest rates could be met by the end of 2022, and suggested the central bank could start cutting back on asset purchase program later this year. The dollar index held firm on Clarida’s comments, making gold more expensive for holders of other currencies. Clarida also suggested the central bank could start cutting back on its asset purchase programme later this year.
Fed Governor Christopher Waller also saw the possibility of reducing accommodative policy sooner than some expected, given the progress in economic recovery and improving labour market.
Meanwhile, Minneapolis Fed President Neel Kashkari said the Delta variant of COVID-19 could throw a “wrinkle” into the labour market recovery and the timeline for a reduction in the Fed’s asset-purchase program.
Daily new COVID-19 cases have climbed to a six-month high in the United States, with more than 100,000 infections reported nationwide as the Delta variant ravaged states with lower vaccination rates.
Independent analyst Ross Norman said the mood is lacklustre towards gold, with the market seemingly unable to generate much momentum after Clarida’s comments.
Gold slid to its lowest in over a month on Friday after a strong U.S. jobs report boosted expectations the Federal Reserve could begin tapering its economic support sooner than previously anticipated. The U.S. nonfarm payrolls (NFP) report exceeded expectations with a 943,000 addition in jobs last month.
Speculation about the central bank cutting back on its stimulus programme has been brewing in recent days.
Edward Moya, senior market analyst at OANDA, also said that a majority of the job gains in the report were from lower wage leisure and hospitality sectors which is not inflationary, denting gold’s appeal as a hedge against rising prices.
The dollar and benchmark 10-year Treasury yields jumped after the data, denting non-yielding gold’s appeal.
SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell to 1,027.61 tonnes on Thursday.
A measure of U.S. services industry activity jumped to a record high in July, boosted by the shift in spending to services.
U.S. consumer credit grew at the fastest rate ever in June, as Americans increased their credit card usage to drive consumer spending in the second quarter, data from the Federal Reserve showed on Friday.
Total consumer credit expanded at a pace of $37.69 billion, which was the quickest rate ever and followed a $36.69 billion increase in May, the U.S. central bank said. Economists polled by Reuters had expected consumer credit to increase at a rate of $23.00 billion in June.
An alternate measure tracking the monthly change in the total amount of credit outstanding increased by the most since December 2010, the data showed. That measure showed that revolving credit, which mostly measures credit-card use, rose by $17.858 billion, the largest gain since 2006, after climbing by $9.089 billion in May.
But growth in nonrevolving credit, which includes auto loans as well as student loans made by the government, slowed to a pace of $19.831 billion from a rate of $27.601 billion in May.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, notched a second straight quarter of double-digit growth. That helped to pull the level of gross domestic product above its peak in the fourth quarter of 2019.
The U.S. Senate voted to advance a $1 trillion infrastructure package on Saturday but remained on a slow path toward passage with two Republicans openly opposing behind-the-scenes efforts to wrap up work on one of President Joe Biden's top priorities.
Where will yields go?
Since US interest rates is a major driving factor for the gold market, some concern exists on their direction. Yesterday, in our FX report we've touched this topic briefly.
An unexpectedly strong jobs number for July has bolstered the case for investors who believe Treasury yields will head higher over the rest of the year, potentially weighing on an equity rally that has taken stocks to record highs. Yields on the benchmark 10-year Treasury, which move inversely to prices, stood at about 1.3% on Friday, their highest level since July 23, after Labor Department data showed the U.S. economy added 943,000 jobs last month. Analysts polled by Reuters forecast payrolls adding 870,000 jobs.
Some investors believe the robust jobs numbers could support the view that the Federal Reserve, faced with rising inflation and strong growth, may need to unwind its ultra-easy monetary policies sooner than expected. Such an outcome could push yields higher while denting growth stocks and other areas of the market.
That view, however, is complicated by worries over rising COVID-19 cases across the United States that threaten to weigh on growth and the Fed’s insistence that the current surge in inflation is transitory.
In any event, the data will likely ramp up investor focus on this month’s central bank symposium in Jackson Hole, Wyoming. And if August's job growth proves equally as torrid, the summer hiring spree would raise the stakes for next month’s Fed meeting, at which the central bank may outline its plans for rolling back monthly asset purchases
Strong data, though, could make dollar-denominated assets more attractive to yield-seeking investors, potentially boosting the U.S currency. A stronger dollar can be a headwind for U.S. exporters because it makes their products less competitive abroad, while hurting the balance sheets of domestic multinationals that must convert foreign earnings into dollars.
Goldman Sachs, BofA Global Research and BlackRock are among firms that have said yields will rise to near 2% by year-end -- an outcome that could be hastened if a strong economy pushes the Federal Reserve to begin unwinding its ultra-easy monetary policies sooner than expected. Others, like HSBC, have called for yields below current levels.
UBS Hefele expected the U.S. 10-year Treasury yields to move closer to 2% in the second half of 2021, and said he was "underweight" on high-grade bonds due to the risk around them.
Among big central banks, the hot inflation issue has been most pronounced for the Federal Reserve. Its preferred measure of price pressures is well above its target at 3.5%, the highest in three decades. Headline consumer inflation hit 4.5% in June. But while some policymakers are starting to acknowledge that price pressures are stickier than they first thought, the Fed as a whole is sticking to the line that this is transitory.
Chair Jerome Powell said last month that the factors driving prices higher now - a 45% surge for used cars from last year or a 25% bump-up for airline tickets - are unlikely to be repeated in perpetuity. "We’re anxious like everybody else to see that inflation pass through," Powell said.
Same message at the European Central Bank. "Inflation has picked up, although this increase is expected to be mostly temporary. The outlook for inflation over the medium term remains subdued," ECB President Christine Lagarde said on July 22.
More fundamentally, central bankers in the United States and the euro zone are wary of repeating mistakes of the past decade, where they tightened policy at the earliest signs of growing price pressures that never fully materialised in the end.
Producer prices have been rising by 5%-10% in developed economies. But to what extent companies are willing and able to pass on higher costs to consumers is less clear.
For central bankers, the litmus test of whether price rises will be sustained is whether they start to push wages higher. Here the picture differs across the main regions.
Wages in the euro zone were up a modest 1.5% in the first quarter.
Even in the United States, where wages and salaries have been increasing throughout the pandemic and they were up 3.2% year-on-year in the second quarter, the Fed remains sanguine. "I think we're some way away from having had substantial further progress...toward the maximum employment goal," Fed chair Jerome Powell said on July 28.
Central bankers like to filter out such volatility, since it comes and goes, and focus on so-called core inflation that strips out energy and food prices. On this measure, prices rose by just 0.9%.
U.S. core consumer prices, the Federal Reserve's preferred inflation measure, have been growing by more than 3% year-over-year but even this has been blamed on supply disruptions, with containers still stuck in long queues in Asian ports. Arguably even American consumers, whose views on inflation are typically guided by things like swings in gasoline prices, buy into this logic.
A regular University of Michigan survey shows that while they expect price increases over the next year of roughly 4.7%, that drops to just 2.8% over a five-year horizon - squarely in the range of the past two decades.
If the current surge in prices lasts long enough to affect wages and people's expectations about future inflation, then chief executives will have won the day and central bankers will adjust their stances - and ultimately their policy.
For now they are betting this won't be the case, notably in economies where the population is ageing, such as Japan, and unemployment is high, such as parts of the euro zone. Over 70% of economists polled by Reuters agree.
COT Report
Since data of this week doesn't include yet NFP impact - we have minimal changes, as well as on EUR. Open interest has dropped slightly, investors have taken a bit more bearish positions, but in general volumes are quite low and make no impact on the total picture :
Source: cftc.gov
So, puzzle on gold market is collecting not in favor of the bulls. As technical as fundamental factors point on downside continuation. Our huge bearish engulfing pattern on monthly, achieved inflation Fed target, jump in interest rates and forecast of 2% by the end of the year, finally - superb NFP report leave no room to the bulls on gold market now. Theoretically we could argue that price stands above major lows and keeps chance on rebound - but this odd is mostly hypothetical. So, our hopes that retracement might be a bit higher haven't come true. Only some extended deteriorating in US data could support gold. Even new 1Trln infrastructure pack hardly bring any valuable support. But if we get 3-4 months of poor NFP and inflation data - this could help. Because NFP is the only thing that Fed now is watching closely. They need 5.5-6 Mln more jobs and employment-to-population ratio around 80% to free their hands for rate change (now it stands around 77%).
Any slowdown in recovery could postpone Fed action. But now it looks fantastic and hardly possible, mostly unbelievable issue. Let's keep it in mind, but meantime - watch for bearish setups that we have...
Technicals
Monthly
So, miracle has not happened, although just last week it was seemed that it is possible. Strong monthly sell - off and YPP hold price and now push it lower. Gold already stands below July lows. Market inability of return above YPP is a bearish sign.
As we already said since June collapse - overall picture remains bearish in long term as 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. In fact here we have few different targets. They are based as on initial "small" AB-CD as on the large one. Thus "small" OP agrees with "large" COP around 1650$, next is "large" OP agrees with YPS1. Finally "small" XOP agrees with 1540 K-support area. Thus, first destination point is re-testing of 1680 K-support area and reaching of "small" OP.
To break bearish construction gold has to climb above 1925$ that looks now like not very probable.
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, based on COT data.
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 1650 OP.
As we've said - classical price shape suggests minor pullback to 3/8-1/2 of engulfing range and then downside extension to next major target. 50% level has been reached and now it seems that gold is ready to proceed lower.
Weekly
Sell-off on weekly chart also promises nothing good to the market. In fact single week action crosses 2 month consolidation. Trend stands bearish by far. Flag consolidation is broken down. Our doubts on reverse H&S pattern are confirmed right now - too strong sell-off on the slope of the head and too slow recovery lead to downside drop. Although bottom of the right arm stands in harmony with the left one by far, but these 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 flag downside breakout and no solid barriers inside, market might be aiming on lower border of triangle:
Daily
So Fed and NFP numbers have broken the back of upside retracement. Now we have no choice but to turn to larger scale and consider more extended targets here. Although we have ones on weekly chart, here stands another one that is actually of bearish monthly engulfing. While its OP stands too far now and agrees with the same 1650$ area, we're mostly interested with the COP that coincides with butterfly 1.27 extensions. Both stand near daily oversold and right below recent lows. So - this is interesting object for daily performance:
Intraday
With this recent collapse market has completed few targets - major XOP and 1.618 extension that I've drawn like a butterfly here. It is difficult to say what pullback we get on Monday, if we get it at all. But maybe, approvement of 1Trln pack provides some support here. Thus, if we get any pullback, preferably to 1785 resistance level - we could treat it as B&B "Sell" and consider short entry. Appearing of "222" Sell will be an advantage to us.
So, gold market has become a victim of the same factors as EUR and other markets - evident Fed statement concerning tapering and rate change. As a result natural price shape and sentiment has been broken and couldn't recover till the end of the week, when additional impact from NFP followed. In general this drop perfectly fits to long-term scenario on monthly/weekly chart when we have long-term bearish trading plan. Still, on short-term scenario gold was able to reach near stand targets without any contradiction to major bearish context, but this has not happened. Now technically gold still has theoretical chances to recover but it is bearish mood on the market. Last time Fed comments supported gold, but who will do it now?
Market overview
Gold prices inched lower on Thursday after the dollar firmed and remarks from a top U.S. Federal Reserve official signalled the possibility of bringing forward policy tightening. Bullion prices rose more than 1% in the previous session after the ADP National Employment Report showed U.S. private payrolls increased far less than expected in July.
Fed Vice Chair Richard Clarida said the conditions for raising interest rates could be met by the end of 2022, and suggested the central bank could start cutting back on asset purchase program later this year. The dollar index held firm on Clarida’s comments, making gold more expensive for holders of other currencies. Clarida also suggested the central bank could start cutting back on its asset purchase programme later this year.
Fed Governor Christopher Waller also saw the possibility of reducing accommodative policy sooner than some expected, given the progress in economic recovery and improving labour market.
Meanwhile, Minneapolis Fed President Neel Kashkari said the Delta variant of COVID-19 could throw a “wrinkle” into the labour market recovery and the timeline for a reduction in the Fed’s asset-purchase program.
Daily new COVID-19 cases have climbed to a six-month high in the United States, with more than 100,000 infections reported nationwide as the Delta variant ravaged states with lower vaccination rates.
Independent analyst Ross Norman said the mood is lacklustre towards gold, with the market seemingly unable to generate much momentum after Clarida’s comments.
Gold slid to its lowest in over a month on Friday after a strong U.S. jobs report boosted expectations the Federal Reserve could begin tapering its economic support sooner than previously anticipated. The U.S. nonfarm payrolls (NFP) report exceeded expectations with a 943,000 addition in jobs last month.
Speculation about the central bank cutting back on its stimulus programme has been brewing in recent days.
Edward Moya, senior market analyst at OANDA, also said that a majority of the job gains in the report were from lower wage leisure and hospitality sectors which is not inflationary, denting gold’s appeal as a hedge against rising prices.
The dollar and benchmark 10-year Treasury yields jumped after the data, denting non-yielding gold’s appeal.
SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell to 1,027.61 tonnes on Thursday.
A measure of U.S. services industry activity jumped to a record high in July, boosted by the shift in spending to services.
U.S. consumer credit grew at the fastest rate ever in June, as Americans increased their credit card usage to drive consumer spending in the second quarter, data from the Federal Reserve showed on Friday.
Total consumer credit expanded at a pace of $37.69 billion, which was the quickest rate ever and followed a $36.69 billion increase in May, the U.S. central bank said. Economists polled by Reuters had expected consumer credit to increase at a rate of $23.00 billion in June.
An alternate measure tracking the monthly change in the total amount of credit outstanding increased by the most since December 2010, the data showed. That measure showed that revolving credit, which mostly measures credit-card use, rose by $17.858 billion, the largest gain since 2006, after climbing by $9.089 billion in May.
But growth in nonrevolving credit, which includes auto loans as well as student loans made by the government, slowed to a pace of $19.831 billion from a rate of $27.601 billion in May.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, notched a second straight quarter of double-digit growth. That helped to pull the level of gross domestic product above its peak in the fourth quarter of 2019.
The U.S. Senate voted to advance a $1 trillion infrastructure package on Saturday but remained on a slow path toward passage with two Republicans openly opposing behind-the-scenes efforts to wrap up work on one of President Joe Biden's top priorities.
Where will yields go?
Since US interest rates is a major driving factor for the gold market, some concern exists on their direction. Yesterday, in our FX report we've touched this topic briefly.
An unexpectedly strong jobs number for July has bolstered the case for investors who believe Treasury yields will head higher over the rest of the year, potentially weighing on an equity rally that has taken stocks to record highs. Yields on the benchmark 10-year Treasury, which move inversely to prices, stood at about 1.3% on Friday, their highest level since July 23, after Labor Department data showed the U.S. economy added 943,000 jobs last month. Analysts polled by Reuters forecast payrolls adding 870,000 jobs.
Some investors believe the robust jobs numbers could support the view that the Federal Reserve, faced with rising inflation and strong growth, may need to unwind its ultra-easy monetary policies sooner than expected. Such an outcome could push yields higher while denting growth stocks and other areas of the market.
That view, however, is complicated by worries over rising COVID-19 cases across the United States that threaten to weigh on growth and the Fed’s insistence that the current surge in inflation is transitory.
In any event, the data will likely ramp up investor focus on this month’s central bank symposium in Jackson Hole, Wyoming. And if August's job growth proves equally as torrid, the summer hiring spree would raise the stakes for next month’s Fed meeting, at which the central bank may outline its plans for rolling back monthly asset purchases
Strong data, though, could make dollar-denominated assets more attractive to yield-seeking investors, potentially boosting the U.S currency. A stronger dollar can be a headwind for U.S. exporters because it makes their products less competitive abroad, while hurting the balance sheets of domestic multinationals that must convert foreign earnings into dollars.
Goldman Sachs, BofA Global Research and BlackRock are among firms that have said yields will rise to near 2% by year-end -- an outcome that could be hastened if a strong economy pushes the Federal Reserve to begin unwinding its ultra-easy monetary policies sooner than expected. Others, like HSBC, have called for yields below current levels.
UBS Hefele expected the U.S. 10-year Treasury yields to move closer to 2% in the second half of 2021, and said he was "underweight" on high-grade bonds due to the risk around them.
Among big central banks, the hot inflation issue has been most pronounced for the Federal Reserve. Its preferred measure of price pressures is well above its target at 3.5%, the highest in three decades. Headline consumer inflation hit 4.5% in June. But while some policymakers are starting to acknowledge that price pressures are stickier than they first thought, the Fed as a whole is sticking to the line that this is transitory.
Chair Jerome Powell said last month that the factors driving prices higher now - a 45% surge for used cars from last year or a 25% bump-up for airline tickets - are unlikely to be repeated in perpetuity. "We’re anxious like everybody else to see that inflation pass through," Powell said.
Same message at the European Central Bank. "Inflation has picked up, although this increase is expected to be mostly temporary. The outlook for inflation over the medium term remains subdued," ECB President Christine Lagarde said on July 22.
More fundamentally, central bankers in the United States and the euro zone are wary of repeating mistakes of the past decade, where they tightened policy at the earliest signs of growing price pressures that never fully materialised in the end.
Producer prices have been rising by 5%-10% in developed economies. But to what extent companies are willing and able to pass on higher costs to consumers is less clear.
For central bankers, the litmus test of whether price rises will be sustained is whether they start to push wages higher. Here the picture differs across the main regions.
Wages in the euro zone were up a modest 1.5% in the first quarter.
Even in the United States, where wages and salaries have been increasing throughout the pandemic and they were up 3.2% year-on-year in the second quarter, the Fed remains sanguine. "I think we're some way away from having had substantial further progress...toward the maximum employment goal," Fed chair Jerome Powell said on July 28.
Central bankers like to filter out such volatility, since it comes and goes, and focus on so-called core inflation that strips out energy and food prices. On this measure, prices rose by just 0.9%.
U.S. core consumer prices, the Federal Reserve's preferred inflation measure, have been growing by more than 3% year-over-year but even this has been blamed on supply disruptions, with containers still stuck in long queues in Asian ports. Arguably even American consumers, whose views on inflation are typically guided by things like swings in gasoline prices, buy into this logic.
A regular University of Michigan survey shows that while they expect price increases over the next year of roughly 4.7%, that drops to just 2.8% over a five-year horizon - squarely in the range of the past two decades.
If the current surge in prices lasts long enough to affect wages and people's expectations about future inflation, then chief executives will have won the day and central bankers will adjust their stances - and ultimately their policy.
For now they are betting this won't be the case, notably in economies where the population is ageing, such as Japan, and unemployment is high, such as parts of the euro zone. Over 70% of economists polled by Reuters agree.
COT Report
Since data of this week doesn't include yet NFP impact - we have minimal changes, as well as on EUR. Open interest has dropped slightly, investors have taken a bit more bearish positions, but in general volumes are quite low and make no impact on the total picture :
Source: cftc.gov
So, puzzle on gold market is collecting not in favor of the bulls. As technical as fundamental factors point on downside continuation. Our huge bearish engulfing pattern on monthly, achieved inflation Fed target, jump in interest rates and forecast of 2% by the end of the year, finally - superb NFP report leave no room to the bulls on gold market now. Theoretically we could argue that price stands above major lows and keeps chance on rebound - but this odd is mostly hypothetical. So, our hopes that retracement might be a bit higher haven't come true. Only some extended deteriorating in US data could support gold. Even new 1Trln infrastructure pack hardly bring any valuable support. But if we get 3-4 months of poor NFP and inflation data - this could help. Because NFP is the only thing that Fed now is watching closely. They need 5.5-6 Mln more jobs and employment-to-population ratio around 80% to free their hands for rate change (now it stands around 77%).
Any slowdown in recovery could postpone Fed action. But now it looks fantastic and hardly possible, mostly unbelievable issue. Let's keep it in mind, but meantime - watch for bearish setups that we have...
Technicals
Monthly
So, miracle has not happened, although just last week it was seemed that it is possible. Strong monthly sell - off and YPP hold price and now push it lower. Gold already stands below July lows. Market inability of return above YPP is a bearish sign.
As we already said since June collapse - overall picture remains bearish in long term as 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. In fact here we have few different targets. They are based as on initial "small" AB-CD as on the large one. Thus "small" OP agrees with "large" COP around 1650$, next is "large" OP agrees with YPS1. Finally "small" XOP agrees with 1540 K-support area. Thus, first destination point is re-testing of 1680 K-support area and reaching of "small" OP.
To break bearish construction gold has to climb above 1925$ that looks now like not very probable.
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, based on COT data.
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 1650 OP.
As we've said - classical price shape suggests minor pullback to 3/8-1/2 of engulfing range and then downside extension to next major target. 50% level has been reached and now it seems that gold is ready to proceed lower.
Weekly
Sell-off on weekly chart also promises nothing good to the market. In fact single week action crosses 2 month consolidation. Trend stands bearish by far. Flag consolidation is broken down. Our doubts on reverse H&S pattern are confirmed right now - too strong sell-off on the slope of the head and too slow recovery lead to downside drop. Although bottom of the right arm stands in harmony with the left one by far, but these 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 flag downside breakout and no solid barriers inside, market might be aiming on lower border of triangle:
Daily
So Fed and NFP numbers have broken the back of upside retracement. Now we have no choice but to turn to larger scale and consider more extended targets here. Although we have ones on weekly chart, here stands another one that is actually of bearish monthly engulfing. While its OP stands too far now and agrees with the same 1650$ area, we're mostly interested with the COP that coincides with butterfly 1.27 extensions. Both stand near daily oversold and right below recent lows. So - this is interesting object for daily performance:
Intraday
With this recent collapse market has completed few targets - major XOP and 1.618 extension that I've drawn like a butterfly here. It is difficult to say what pullback we get on Monday, if we get it at all. But maybe, approvement of 1Trln pack provides some support here. Thus, if we get any pullback, preferably to 1785 resistance level - we could treat it as B&B "Sell" and consider short entry. Appearing of "222" Sell will be an advantage to us.
