Gold GOLD PRO WEEKLY, August 14 - 18, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals
Today we try to make light report, just take a look at some forecasts, major political events and gold specific performance in crisis environment. Major events of this week were inflation data that we've discussed in details yesterday in our FX report. So it makes sense to repeat the same stuff here again, just make some minor update on CPI numbers to explain few calculation issues, so you better understand why it was decreasing in recent few months.

Market overview

Gold market this week was under pressure of hawkish comments from Fed members in the beginning of te week (we talked about this yesterday) and inflation statistics later on Thu and Friday. Statistics has pushed higher interest rates once again, making additional pressure on gold. As a result, price has confirmed bearish turn that was uncertain in the beginning of the week and as become evident closer to the end of it.

Investors anticipate that US Treasuries will continue to be whipsawed by heightened volatility as economic uncertainty threatens to alter the central bank’s path or keep rates pinned higher for far longer than traders currently expect.

Already, some Fed officials are underscoring that there may still be more work to do as inflation continues to hold above their 2% target despite the most aggressive monetary policy tightening in four decades.

“The rise in long-dated yields has been driven by the hawkish message from the Fed,” said Rob Waldner, chief strategist fixed income at Invesco. “The central bank is staying hawkish and that’s keeping uncertainty high.”

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That uncertainty, along with an increase in new debt sales as the federal government contends with mounting deficits, has weighed on the bond market.
After the central bank’s policy meeting in July, when it raised its overnight rate by a quarter percentage point, Chair Jerome Powell emphasized that its decision at the next meeting in September would hinge on the data released over the next two months.

So far, the major reports have generally supported speculation that it will hold steady in September, with job growth cooling and signs of easing inflation. But the core consumer price index — which strips out volatile food and energy prices and is seen as a better measure of underlying inflation pressures — still rose at a 4.7% annual pace in July. On Friday, an index of producer prices also rose at a faster-than-expected pace, driving up Treasury yields across maturities, which has increased pressure on the gold market. As you know we expect continuous uptrend in US Treasuries yield and technical picture confirms it with reversal session and two side-by-side grabbers on daily chart:

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In the coming week, traders will scour the release of the minutes from the July 25-26 FOMC meeting for clues on where policymakers see rates heading and any diverging views between them. The annual gathering of global central bankers in later this month in Jackson Hole, Wyoming, will also be closely watched. It could give Powell a venue to push back on markets pricing in that the Fed will cut its key rate to around 4% by January 2025. It’s in a range 5.25-5.5% now.

“The committee is divided,” said Subadra Rajappa, head of U.S. rates strategy for Societe Generale. “The market pricing is showing a lack of conviction. Six cuts are priced in. These are not deep cuts. That’s a high-for-longer story. I cannot see a strong trade here.”

China raised its gold reserves for a ninth straight month in July as central bank purchases continue to underpin prices of the precious metal. Bullion held by the People’s Bank of China rose by 740,000 troy ounces, the central bank said on Monday. That’s equivalent to about 23 tons. Total stockpiles now sit at 2,137 tons, with around 188 tons added in a run of purchases that began in November.

Official purchases are key to the outlook for prices this year, according to the World Gold Council. The industry body expects central banks to keep adding to their holdings, although at a slower pace than last year.

Speaking on some political news - confrontation between the US and China is spinning up. President Joe Biden's comment about China being a "ticking time bomb" referred to internal economic and social tensions that could have an effect on how Beijing interacts with the world, a White House official said Friday. White House spokesperson John Kirby told reporters that one area of concern regarding China was "the way that they bully and coerce and intimidate countries around the world" by offering high-interest infrastructure loans and then seizing assets when countries defaulted.

Biden told donors: "China is a ticking time bomb ... China is in trouble. China was growing at 8% a year to maintain growth. Now close to 2% a year," he said, misstating its growth rate.

Chinese embassy spokesperson Liu Pengyu warned Washington against "scapegoating" Beijing and fanning "division and confrontation." "We oppose the U.S. side seeking to make an issue of China, smearing China or talking down China’s prospects," he said in a statement to Reuters on Friday, without mentioning Biden.

The White House on Wednesday moved to start prohibiting some U.S. investments in certain sensitive technologies in China, and requiring government notification of other investments, but said it would take time before the moves take effect. President Joe Biden on Wednesday signed an executive order directing the U.S. Treasury Department to regulate certain U.S. investments in semiconductors and microelectronics, quantum computing and artificial intelligence.

The order lays out plans to regulate investments in certain "countries of concern," with a separate annex naming China, Hong Kong and Macau as initial targets. Further countries could be added later, a senior administration official told Reuters.

The Chinese Foreign Minister called the United States the largest source of instability in the world. Washington's foreign policy, which is "trying to cross the red lines" of Beijing, undermines confidence in the United States, Wang Yi believes. On the eve of Joe Biden limited investments by American companies in China's technology sector.

So, de-globalization and politization of the world economy is gaining momentum. The global trade crisis threatens the entire modern economic model. The Wall Street Journal came to such disappointing conclusions. Globalization is giving way to de-globalization, separate trade blocs are rapidly forming around China and the United States.

Now the number one question in choosing a partner is geopolitics, not economic benefits at all. In support of its point of view, the publication provides a number of figures and facts. Imports to the United States decreased by 4% in the first half of the year, and Mexico became the No. 1 trading partner: this is a clear discord with China.The IMF expects that this year the growth of world trade will slow down by more than 2.5 times — to 2% (in 2022 it was 5.2%).

The WTO forecast is even more modest: 1.7%. So far, not complete stagnation, but the slowdown is very noticeable. However, there are some glimmers of hope. Experts note a sharp increase in German exports to Kazakhstan and Georgia, and a significant share of goods in these countries is not delayed. The conclusion is obvious: the German business wants to maintain ties with the Russian Federation, despite the political discord. The question is whether the business community will be able to promote the next chancellor's candidacy, or the appointments will continue to come from Washington.

CPI components and Gold price

Indeed if we take a look at CPI maths, then it seems that "happy time" of inflation defeat is coming to an end. Falling energy prices continue to push overall CPI lower. The energy index decreased by 12.5% for the 12 months ending July, and gasoline prices are down 20.3% year-on-year. But, last week we've shown that this process is over - crude oil shows unstoppable rally, while gasoline prices hit records across the Globe. Oil (and especially heavy oil) deficit is coming, because supply can't be increased fast, especially on background of extraction cut from Russia and S. Arabia. Spread of Russian Urals to Brent is minimal around 12$ per barrel, ignoring any limits and ceils:
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Crude is now trading well above $80 a barrel and is up around 30% since it bottomed in May. It’s only a matter of time before consumers feel that pain at the pump. We’re already seeing the impact, with July prices rising 0.3% in July. In the months ahead, this bull market in oil will put upward pressure on the CPI. The food index increased 4.9% in July over the last year. Food prices rose 0.2% from June to July.

When we got the big drop in the headline CPI number in May, we said that it was partly a function of math and we would see it creep up again in July. That’s exactly what happened. Keep in mind, huge 0.9% and 1.2% month-on-month increases from a year ago dropped out of the calculation in May and June, bringing the yearly headline number way down. As we warned after the release of the April CPI data, math has now turned on the CPI calculation.

Pieter Schiff analysts tell the same:
The CPI last April was 0.4% which means the drop is due to a bigger number coming off the board. This will likely play into the May and June CPI especially as 0.92% and 1.21% fall off the YoY calculation. This will greatly help the CPI YoY come down further over the next two months.”

Moving forward, the monthly increases dropping out of the calculation will be much smaller, meaning the headline annual number will not drop as quickly moving forward. And it will quickly rise with any big monthly jump in prices. This reveals that price inflation isn’t cooling nearly as quickly as the headline CPI numbers last two months seem to indicate. The fact that core CPI is barely dropping at all further reveals that price inflation remains sticky.

Nevertheless, the mainstream perceived this CPI report as another indication that the Federal Reserve is winning the war on inflation. Stocks surged on the news as markets anticipated the data will give the Fed the excuse it needs to end rate hikes. The markets now put the likelihood that the Fed will not raise rates in September at 90%. Many in the mainstream also seem to think that an end to tightening now means the economy can glide into a soft landing and avoid a recession.

The Fed’s rate hikes and modest balance sheet reduction have succeeded in tightening credit and cooling the economy. This has taken some of the upward pressure off prices. We see that in the CPI data. If the Fed could stay this course indefinitely, it might be able to eventually beat price inflation down. But 5.5% interest rates and a small reduction in the balance sheet aren’t enough to counteract nearly 15 years of artificially low-interest rates and a more than $7 trillion expansion of the balance sheet since 2008.

This is why cooling inflation is transitory. The moment the economy collapses (and maybe even before), the central bank is going to go right back to artificially low interest rates and quantitative easing — in other words creating inflation. As we've said it yesterday - the end of the inflation problem today means the beginning of a new inflation problem tomorrow (or recession) because the Fed hasn’t addressed the root cause – an economy addicted to easy money.

On the background of all this stuff, forecasts for the gold price are rising. First is, gold is really low now in relation to oil: 1913/86.7 ~ 22. And it was recently about 25. That is, the price of Brent 87 should be around 2200 and if a storm breaks, then 2600.

Second is, many analysts start looking forward, suggesting that gold prices are on track to rally to all-time highs in 2024 on the back of tapering interest rates, and looming recessionary fears that elevate its role as a safe haven asset. Spot gold prices hit a record intraday high of $2,072.5 on Aug. 7, 2020, according to data from Refinitiv. Analysts who spoke to CNBC say they could surpass that level and push beyond the record.

“I do see gold move above $2,100 in late 2023, early 2024 as a trading level,” said TD Securities’ managing director and global head of commodity strategy, Bart Melek, attributing his optimism to a potential pause in the U.S. Federal Reserve tightening cycle. I am positive on gold as I believe that the Fed will tilt policy away from its current restrictive mode. This I believe will happen before the 2% inflation target is reached,” Melek told CNBC in an email.

Gold has outperformed most other major asset classes in the past 12 months, Melek wrote in a recent report, attributing it to the yellow metal’s ability to resist rising interest rates and its value as a safe bet against inflation.

Some analysts are particularly bullish on gold, and have called for a target of $2,500 by the end of next year — that’s more than 26% higher than current levels.

My target is $2,500 by the end of 2024 … Much of this has to do with the fact that recessionary forces may take hold beginning later this year and gain steam in 2024,” said David Neuhauser, founder of Livermore Partners. “2024 is when I see gold breaking out and reaching new highs and beyond.”

Neuhauser said he expects stagflation to persist in the global economy for the next few years as inflation falls to between 3% to 5%.

Gold tends to perform well in periods of economic uncertainty such as recessions and stagflation due to its status as a reliable store of value, and is often used as a hedge against inflation.

I’m pretty confident that within a couple of years, we will see $2,500 gold,” said CEO of Wheaton Precious Metals, Randy Smallwood. “Any type of recessionary move would be positive for gold,” he said, adding that he’s seeing weakness in the Chinese and U.S. economy.

Wheaton’s Smallwood said he’s seen an increase in consumer and retail demand. “Whether it’s jewelry, whether it’s bars, whether it’s coins. We have seen a pickup in that,” he said.

UOB also forecasts that gold prices will set new records, but only by the second half of 2024.

“Key driver in our positive outlook for gold is anticipated peak in Fed rate hiking cycle as well as upcoming topping out of US Dollar strength,” Heng Koon How, the bank’s head of markets strategy, global economics and markets research, said in an email. “We also see a return of physical gold jewelry demand from China and India as both economies stabilize and retail spending returns,” Heng said.

Gold should trade higher when interest rates stop rising and the greenback retreats, he explained. Heng predicted that gold will trade at $2,100 per ounce by the second quarter of 2024. Central bank purchases of gold have been “consistently strong,” alongside consumer demand for the precious metal, Heng pointed out.

Chinese retail gold demand has been resilient in 2023 even as consumption of other commodities remained weak, Citi said in a July report. First quarter gold jewelry demand in China was just shy of 200t, the strongest seasonal since 2015,” analysts led by Citi’s Head of Commodities Strategy Aakash Doshi said in the report. Citi projects more than 700 ton of jewelry demand from China this year, marking a 22% year-on-year increase, it said.

Physical demand for gold across some regions has returned, and central banks’ gold demand remains strong, said Nicky Shiels, Head of Metals Strategy at precious metals company MKS PAMP. “Emerging market central banks continue to de-dollarize and utilize gold as an alternative in the event of any further Western sanctions,” she said.

BRICS countries, namely Brazil, Russia, India, China and South Africa, are also reportedly looking at moving away from the U.S. dollar to a new currency backed by gold.

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But, at the same time, and what is very important to us - gold has specific price performance in the beginning of recession. This is actually, why we recommend to buy any moderate pullbacks on gold market now for strategical investing. Gold usually is dropping in the beginning of recession.

Gold is of course a "must-have" in the portfolio. One problem (or not a problem) is that gold first falls during recessions and only then grows.The reason is simple - gold is only part of the portfolio of the average investor. The market stands so that when the acute phase of the crisis comes, asset prices fall and there is a shortage of liquidity. With active using of leverage in a way of different Repo-over-Repo trades, everything is over-rehearsed. Investors buy Treasuries, use them as collateral to get money back (Repo) and buy more Treasuries or some other assets and so on. Therefore, everything begins to be sold, including gold, in order to close the holes in the obligations that have arisen. But then, when the smoke settles, investors begin to run into what is more reliable and, in particular, into gold.

As some analysts tell (and we agree with them) - US is already in a recession (since 2021), citing indicators such as the yield curve, the change in the M2 money supply, and the inflation to deflationary moves. The labor market will be the next to crack. While gold not keeping up with the equity market rally, gold is seen as insurance against dying currencies and a hedge against the weakening purchasing power of the US dollar. The banking system and the potential for more liquidity crises should let people to realize that currency is getting weaker and they will turn to gold as a means to deal with the low purchasing power of their currency, all of which is held in increasingly beleaguered banks.

So, toward this end, we need to keep our heads and think for ourselves about what recessions can do to countries like the USA whose balance sheet and debt levels are quantifiably no better than your average, and once mocked, banana republic. Like any banana republic, extreme debt and embarrassing deficits spell their doom, as over time such heavy debt tides are inherently inflationary, despite the current (and expected) dis-inflationary period.

After all, crushing the middle class and small business sector with a record-breaking rate hike is dis-inflationary. In a recession, for example, a nation’s already weakened ability to produce goods and services (thanks to Powell’s rate hikes) at levels high enough to sustain those deficits only gets even weaker.

As Luke Gromen again argued, and illustrated below, a recession could easily send the US deficit to $4.5T, or 8% of GDP:
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In such an all-too-likely deficit scenario (and all we really have today are bad scenarios), we could see bonds fall into the next official recession (always announced too late), as we saw them fall along side stocks in the 2020 COVID crash. If bonds fall in a similar manner, this means bond yields, and hence rates, would rise, which would only add more pressure on the Fed to issue more US IOUs then paid for with more inflationary mouse-click Dollars to control their yields.

For now, such a view is still a minority view—but that doesn’t necessarily make it a wrong view, especially in a world figuratively losing it head. Like Japan, the EU and the UK, America has too many debts and not enough natural liquidity to sustain them. For those who understand the stubborn math, history and cycles of fiat currencies, the precise timing of such final currency defeats is impossible to predict with precision, but easy enough to see coming, and thus easy enough to prepare for in advance.

Gold, which is an obvious and historically-confirmed weapon (as opposed to barbarous relic) against such open currency destruction, is an equally obvious and historically-confirmed means of achieving such advanced preparation.
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Despite such objective facts (and the media-ignored power of gold as an open threat to fiat money), gold makes up only 0.5% of the global investments.
This, it might be said, makes such lonely “gold bugs” crazy, but as alluded to above, sometimes one must keep their heads when all about them are losing theirs.
The question, then, like the title of Kipling’s poem, is not “If” fiat money dies, but “When.” The former is obvious, the latter is approaching. We're not calling to hold only gold in portfolio, but obviously it has to be considered at some part and in physical form and this part probably should be increased.
 
Technicals
Monthly

Although fundamental part shows that gold price performance should change soon, but it seems not yet. Because markets are too inspiring with dropping of CPI, stable job market and raising equities. Sentiment could remain at least until mid September when we get new CPI numbers and Fed' meeting.

Meantime, on monthly chart we do not see yet vital changes. Yes, price has dropped to the bottom of the July and could drop more, but still, for monthly retracement this is very small action. Nearest support area stands around 1841, where we also have Yearly Pivot point. MACD trend remains bullish, price is coming to predictor line (not shown) but it is not there yet.

It seems that gold should remain under pressure for some time, but closer to the mid September situation could start changing:
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Weekly

Trend stands bearish here and we have tail close on Friday. Despite that this is 2nd test of weekly K-support area, it still should provide some support and volatility around it will rise. Also we could get healthy bounce and better price to consider short entry:
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Daily

Once (and if) bounce will start, we need to keep an eye on performance. Since overall short-term sentiment remains bearish, market could start forming downside butterfly pattern and bounce could become the right wing - with target around 1867 area. To change bearish sentiment, market has to move above 1985 "C" point top, which now seems hardly possible.

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Intraday

Here we do not see any changes. Gold could try to reach 4H XOP around 1900 first, before pullback starts:
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But neither 4H chart nor 1H one shows any signs of bullish reaction yet:
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Those who would like to make scalp "Long" trade here, somewhere from 1900-1910 area, it is absolutely necessary to get bullish reversal pattern first. Because if bearish sentiment will be too strong, gold could not hold around weekly K-area, as it already has been tested and follows directly to 1865 target area, without any butterfly.
 
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Greetings everybody,

So, as we've discussed in our weekly report, US yields are raising and it makes pressure on gold, which is coming to important 1900 area. It is important not because our targets that we're watching but because of possible pullback - whether we get downside butterfly or not. 1900 is weekly K-support that has already been tested, so pullback should not be too strong:
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At the same time market comes to 4H XOP, and pullback could start somewhere around:
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On 1H chart we do not see yet any reaction:
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Thus, in two words - we wait when 4H XOP will be touched and look at 1H chart for bullish patterns. If reaction up will start - we consider short entry at better price, maybe around 1H K-area of 1930. We do not consider any longs.
If no upside reaction happens - we change our trading plan and try to enter on some minor tactical retracement.
 
Greetings everybody,

So, on daily chart we do not have any changes, the most important thing for us stands intraday. On 4H chart gold has hit XOP, so, all preliminary conditions for potential bounce are completed - XOP is touched, market around weekly K-support area:
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But on 1H (here I'm using 2H chart), we do not see yet any response, and have to keep an eye on lows in spot. Downside breakout means that it will be no butterfly and no pullback, with downside continuation to 1870$. Appearing of some bullish reversal pattern here could trigger the bounce:
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Greetings everybody,

So, it is short talk today, as gold has failed our "XOP test". Fed minutes has become more hawkish than market expected, which has pushed US Yields higher, making pressure on all dollar rivals, including Gold. Now more or less definitely we could say that Gold is coming to 1865-1867 area of COP target, challening recent lows of "B" point:

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On 4H chart you could see what has happened around XOP - mostly nothing:
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So, Gold keeps its journey inside downside channel. Channels are tricky thing for trading, because you do not see bright and large patterns that much easier to follow. For now, we could consider minor pullback to 1900-1905 resistance area and upside channel's border that could give us, say, "222" Sell.

At the same time it is easy to understand that party is over - it happens when market forms upside reversal swing, so we always know our vital area. For now, we could try to catch 1905 retracement with 1865$ target area, then we'll see what will happen. No longs still...
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Greetings everybody,

On Gold market we have even less changes than on EU. US yields rally is also taking a pause, so we see slowdown everywhere. Gold doesn't have acceptable targets on lower time frame, so, we use 1865-1870$ area as our nearest next target:
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On 4H chart channel now is absolutely evident. Now we have no other options but trade minor patterns inside of it, at least until 1870 level will be met, and upside channel breakout could happen. Yesterday our entry point has been confirmed by the grabber and now take a look - we get another one:
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So, yesterday's entry has worked nice right around 1905 resistance area. So, if you keep shorts - now it is possible to move stops to breakeven. Concerning new entry - mostly picture repeats the one that we had yesterday. Same upside bounce but today an area to watch is around 1895. But this is only if you are ready to keep it through weekend... Probably we could watch for the same upside AB-CD pattern.
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