Sive Morten
Special Consultant to the FPA
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- 18,630
Fundamentals
Gold was quiet through the whole week and only on Friday has got the impulse to show upward action, as well as other markets. The driver was a Michigan Institute statistics of sentiment that has become not as positive as month before. Yesterday in our FX research we've tried to understand how sentiment has changed and what it could mean for FX market. But the same conclusions are correct to the gold as well. Because it is also the dollar rival. Gold also gets the chances to show stronger upward action in medium term, because it seems that Fed tightening is postponed. The final answer we should get from NFP data in September.
Market overview
Gold slumped to a more than four-month low on Monday, as strong U.S. jobs data bolstered expectations for an early tapering of the Federal Reserve’s economic support measures. Bullion slipped over 2% after data on Friday showed U.S. employers hired the most workers in nearly a year in July.
High Ridge’s Meger also noted economic data would continue to play a pivotal role in the gold market’s expectations of stimulus tapering.
Some analysts suggest that market expectations of monetary tightening in the United States are increasing. Higher interest rates and the stronger U.S. dollar that accompanies them usually creates a headwind for gold, given its status as a non-interest bearing investment. One of the ways to gauge investor interest in gold is to look at the holdings of the biggest gold exchange-traded fund, the SPDR Gold Trust.
These have dropped to 32.64 million ounces on Aug. 6, from the 2020 high of 45.12 million, reached on Sept. 9, about six weeks after the spot price hit its record high.
With investor appetite for gold waning, the yellow metal needs its other drivers to fire to provide some price support.
These drivers include physical demand, especially from top consumers China and India, as well as central bank buying. On this front the news is somewhat mixed, with a solid recovery in recent months in China’s demand being the highlight.
China’s gold jewellery demand jumped 62% to 146.9 tonnes in the second quarter compared to the same period in 2020, according to data from the World Gold Council. The huge leap reflects the weakness in the second quarter last year caused by the pandemic and its associated lockdowns, but compared to the second quarter of 2019, China’s jewellery demand was 8% stronger.
Nonetheless, a cautionary note on China’s demand, as the second quarter figure was actually down 23% from the 191.1 tonnes recorded in the first quarter of 2021, suggesting jewellery demand is still somewhat fragile in the world’s biggest gold consumer.
India’s demand has also been affected by the coronavirus, and while the second quarter’s jewellery demand was up 25% from the same period a year earlier, at just 55.1 tonnes it was weak by historical standards. India jewellery demand for the first half of 2021 was 157.6 tonnes, 39% below the first half average from 2015 to 2019, according to council data.
The renewed outbreaks of coronavirus in both China and India are also likely to weigh on demand in the current quarter, meaning the spot price may find little support from the two major physical buyers.
Central bank purchases are a bright spot, rising to 199.9 tonnes in the second quarter, which was the highest since the second quarter of 2019, with Thailand, Hungary and Brazil the biggest buyers. While this is positive for gold demand, by itself central bank purchases won’t provide enough support in the absence of investor and consumer appetite.
For now gold appears to be facing the twin storm clouds of the possibility of higher U.S. interest rates and threats to physical demand from the ongoing coronavirus pandemic across Asia.
Gold edged higher on Wednesday as concerns over the rapid spread of the Delta coronavirus variant spurred some safe haven buying though gains were capped by bets on early tapering by the U.S. Federal Reserve and a firm dollar and after tame U.S. consumer price data eased fears that the Federal Reserve would taper its economic support sooner than expected.
Chicago Fed president Charles Evans said on Tuesday that the current inflation spike should not push the Fed to tighten monetary policy prematurely, with more months of labour data needed before any changes.
A strong U.S. jobs report last week hammered bullion and kept it well below the key $1,800 mark as investors worried the Fed might taper soon.
Further boosting gold, the dollar fell from its highest in more than four months and U.S. Treasury yields slipped, reducing the opportunity cost of holding non-interest bearing gold.
Michael Matousek, head trader at U.S. Global Investors, noted that inflation remained at a 13-year high on a yearly basis in July, and said persistent inflation could drive gold’s price higher even in the face of an interest rate hike.
Meanwhile, a growing number of U.S. central bank officials have been discussing how and when they should begin to trim the massive pandemic-era asset purchases. The U.S. economy is growing at a robust pace and the labour market is rebounding, signalling it is nearly time for the Federal Reserve to start withdrawing its support, several U.S. central bank officials said on Wednesday. Fed Chair Jerome Powell said last month the current high inflation will ease “in coming months”.
While labour market recovery is an important criteria for the Fed to dial back its asset-purchase programme and raise interest rates, it considers current inflationary pressures as transitory.
Spot gold may test a resistance at $1,759, a break above which could lead to a gain into $1,768-$1,785 range, according to Reuters technical analyst Wang Tao.
The U.S. Labor Department also reported that initial jobless claims dropped in the latest week and U.S. producer prices jumped by a record 7.8% in the 12 months through July.
Investors were also focused on U.S. President Joe Biden’s spending plans. The U.S. Senate on Wednesday approved a $3.5 trillion budget plan that followed the chamber’s passage on Tuesday of a $1 trillion infrastructure bill.
Gold prices rose on Friday, underpinned by concerns over rising COVID-19 cases, although a resilient dollar kept bullion on course for its second straight weekly decline.
Meanwhile, the dollar held firm near four-month highs after data showed U.S. producer prices posted their largest annual increase in more than a decade.
The print came on the heels of tame U.S. consumer price data, which helped gold rise 1.3% on Wednesday, but has sent investors looking for more hints from the Federal Reserve on its monetary policy plans.
Inflationary pressure will be temporary and gold will trend lower over the next six to 12 months on expectations for real bond yields to rise, as economic recovery remains in play and inflation eases, Fitch Solutions said in a note.
U.S. consumer sentiment dived in early August calmed investor concerns over an early tapering of the Federal Reserve’s asset purchases. The precious metal has recovered sharply after sliding to an over four-month low on Monday that was spurred by fears the Federal Reserve would begin cutting back economic support after a strong U.S. jobs report last week.
In a sign of the potential economic impact of the fast-spreading Delta COVID-19 variant, the University of Michigan’s preliminary consumer sentiment index was at a decade low in early August. The dollar and U.S. benchmark 10-year treasury yields also weakened after the survey, bolstering the appeal of gold, which is non yield-bearing and becomes cheaper for holders of other currencies when the dollar falls.
Providing further support to bullion was increased physical demand, particularly from top consumers India and China.
COT Report
Precious metal funds faced outflows of $280 million as gold prices slumped to a more than a four-month low this week. This week CFTC data includes NFP impact and it looks impressive - massive closing of hedge positions against gold growth and big increase in short positions by speculators. Open interest mostly stands the same, which means that there was no new inflows but re-grouping of existed positions. This bearish numbers probably would be soften by recent Michigan data, but overall tendency is difficult to call as bullish.
Source: cftc.gov
Charting by Investing.com
As other markets Gold enjoys right now some easing of the pressure from Fed tightening factor. Ceiling of CPI data and weaker people expectations by recent Michigan data make investors start thinking that maybe Fed is right and inflation spike is temporal with further decreasing. Existence of big employment gap, comparing to pre-pandemic level and massive stimulus adoption becomes a very healthy background for the gold market in short term. Fed finally could feel that hands are free to keep existence policy without external pressure, when everybody hurry up with tapering announcement and rate change.
Yesterday we've provided very important data - Reuters poll of big banks expectations on Fed policy. The consensus tells that tapering announcement most probably happens only on November meeting and if we get weaker NFP data - even in December. No tapering announcement happens in Wyoming, so Jackson Hole meeting probably will be blank. This new environment lets gold to take a breath and feel more freedom in short-term fluctuations, especially in upward direction.
At the same time we should keep in mind that recent "weak CPI" was the first one but the single either, and to confirm this theory market needs more of the same kind. Although the beginning looks promising - the vital point is September NFP release that sheds the light on employment and inflation. Weak numbers provide final confirmation and green light for upward action for all dollar rivals and stock markets, while strong data again returns everything back to its own. Until September data, despite that gold is inspiring with recent sentiment shift but still it has limited upside potential.
Technicals
Monthly
Although we've got extended spike that could be seen even on the monthly chart - it is not clear how it could help us. With this spike market has not reached the major target, previous lows are not washed out, and it fact - spike makes no impact on overall technical picture here. With this drop gold just re-tested existing K-support area.
Engulfing target also is missed for ~ 30$. Here we also can't say that its target is completed. MACD stands bearish and targets of 1650$ and 1540$ are still valid. Targets are based as on initial "small" AB-CD as on the large one. Thus "small" OP agrees with "large" COP around 1650$, next is "large" OP agrees with YPS1. Finally "small" XOP agrees with 1540 K-support area. Thus, first destination point is re-testing of 1680 K-support area and reaching of "small" OP.
To break bearish construction gold has to climb above 1925$.
Market probably should start forming something different here, to re-shape of price action after the spike. For example, we do not exclude bearish butterfly to form here, that lets price to complete all the targets.
Second - with changing of the short-term sentiment, it is interesting to see how durable upward action will be here.
Weekly
Context remains bearish on weekly chart as well by far - as well as MACD trend. Thus, while it is bearish, I would keep an eye on upper triangle border and appearing of butterfly that we've mentioned above. 1865$ upside potential looks solid enough for short-term price action and it is also good test for the strength of driving factors.
Upward breakout of triangle and 1922$ resistance area makes us to turn to larger scale and search for more extended bullish targets. But for now it seems enough potential in 1865$ area. Besides, huge hammer pattern itself is an important bullish factor that you do not want to argue and go against it without clear bearish context. As short-term momentum on gold market stands up, we could try to ride on it for awhile.
Daily
Market showed strength on Friday, breaking through the daily K-resistance area. But despite strong action - trend remains bearish here because of earlier strong downside momentum. Besides price is coming to the first serious test of bullish ambitions, as right on Monday it could meet daily OB and MACD line. It will be quite interesting to see what will happen.
Potentially, if we get bearish grabber - it might be good background for scalp short position with strong bearish momentum on the back and near standing Overbought area. This is the first thing that we intend to watch on next week.
Intraday
Another reason, why it would be interesting to watch for reaction is because of our OP target. In fact on 1H chart we get "222" Sell pattern that we've discussed on Friday. Here is also minor AB=CD target stands as well. The reaction on this pattern should be at least to 1743-1747 K-area. This is the background that might be interesting for the scalp traders as well...
But most important thing is what happens after downside pullback. Gold should tell us - whether makes sense to count on more extended upward action, or it was just short-term reaction on Michigan data.
Gold was quiet through the whole week and only on Friday has got the impulse to show upward action, as well as other markets. The driver was a Michigan Institute statistics of sentiment that has become not as positive as month before. Yesterday in our FX research we've tried to understand how sentiment has changed and what it could mean for FX market. But the same conclusions are correct to the gold as well. Because it is also the dollar rival. Gold also gets the chances to show stronger upward action in medium term, because it seems that Fed tightening is postponed. The final answer we should get from NFP data in September.
Market overview
Gold slumped to a more than four-month low on Monday, as strong U.S. jobs data bolstered expectations for an early tapering of the Federal Reserve’s economic support measures. Bullion slipped over 2% after data on Friday showed U.S. employers hired the most workers in nearly a year in July.
High Ridge’s Meger also noted economic data would continue to play a pivotal role in the gold market’s expectations of stimulus tapering.
Some analysts suggest that market expectations of monetary tightening in the United States are increasing. Higher interest rates and the stronger U.S. dollar that accompanies them usually creates a headwind for gold, given its status as a non-interest bearing investment. One of the ways to gauge investor interest in gold is to look at the holdings of the biggest gold exchange-traded fund, the SPDR Gold Trust.
These have dropped to 32.64 million ounces on Aug. 6, from the 2020 high of 45.12 million, reached on Sept. 9, about six weeks after the spot price hit its record high.
With investor appetite for gold waning, the yellow metal needs its other drivers to fire to provide some price support.
These drivers include physical demand, especially from top consumers China and India, as well as central bank buying. On this front the news is somewhat mixed, with a solid recovery in recent months in China’s demand being the highlight.
China’s gold jewellery demand jumped 62% to 146.9 tonnes in the second quarter compared to the same period in 2020, according to data from the World Gold Council. The huge leap reflects the weakness in the second quarter last year caused by the pandemic and its associated lockdowns, but compared to the second quarter of 2019, China’s jewellery demand was 8% stronger.
Nonetheless, a cautionary note on China’s demand, as the second quarter figure was actually down 23% from the 191.1 tonnes recorded in the first quarter of 2021, suggesting jewellery demand is still somewhat fragile in the world’s biggest gold consumer.
India’s demand has also been affected by the coronavirus, and while the second quarter’s jewellery demand was up 25% from the same period a year earlier, at just 55.1 tonnes it was weak by historical standards. India jewellery demand for the first half of 2021 was 157.6 tonnes, 39% below the first half average from 2015 to 2019, according to council data.
The renewed outbreaks of coronavirus in both China and India are also likely to weigh on demand in the current quarter, meaning the spot price may find little support from the two major physical buyers.
Central bank purchases are a bright spot, rising to 199.9 tonnes in the second quarter, which was the highest since the second quarter of 2019, with Thailand, Hungary and Brazil the biggest buyers. While this is positive for gold demand, by itself central bank purchases won’t provide enough support in the absence of investor and consumer appetite.
For now gold appears to be facing the twin storm clouds of the possibility of higher U.S. interest rates and threats to physical demand from the ongoing coronavirus pandemic across Asia.
Gold edged higher on Wednesday as concerns over the rapid spread of the Delta coronavirus variant spurred some safe haven buying though gains were capped by bets on early tapering by the U.S. Federal Reserve and a firm dollar and after tame U.S. consumer price data eased fears that the Federal Reserve would taper its economic support sooner than expected.
Chicago Fed president Charles Evans said on Tuesday that the current inflation spike should not push the Fed to tighten monetary policy prematurely, with more months of labour data needed before any changes.
A strong U.S. jobs report last week hammered bullion and kept it well below the key $1,800 mark as investors worried the Fed might taper soon.
Further boosting gold, the dollar fell from its highest in more than four months and U.S. Treasury yields slipped, reducing the opportunity cost of holding non-interest bearing gold.
Michael Matousek, head trader at U.S. Global Investors, noted that inflation remained at a 13-year high on a yearly basis in July, and said persistent inflation could drive gold’s price higher even in the face of an interest rate hike.
Meanwhile, a growing number of U.S. central bank officials have been discussing how and when they should begin to trim the massive pandemic-era asset purchases. The U.S. economy is growing at a robust pace and the labour market is rebounding, signalling it is nearly time for the Federal Reserve to start withdrawing its support, several U.S. central bank officials said on Wednesday. Fed Chair Jerome Powell said last month the current high inflation will ease “in coming months”.
While labour market recovery is an important criteria for the Fed to dial back its asset-purchase programme and raise interest rates, it considers current inflationary pressures as transitory.
Spot gold may test a resistance at $1,759, a break above which could lead to a gain into $1,768-$1,785 range, according to Reuters technical analyst Wang Tao.
The U.S. Labor Department also reported that initial jobless claims dropped in the latest week and U.S. producer prices jumped by a record 7.8% in the 12 months through July.
Investors were also focused on U.S. President Joe Biden’s spending plans. The U.S. Senate on Wednesday approved a $3.5 trillion budget plan that followed the chamber’s passage on Tuesday of a $1 trillion infrastructure bill.
Gold prices rose on Friday, underpinned by concerns over rising COVID-19 cases, although a resilient dollar kept bullion on course for its second straight weekly decline.
Meanwhile, the dollar held firm near four-month highs after data showed U.S. producer prices posted their largest annual increase in more than a decade.
The print came on the heels of tame U.S. consumer price data, which helped gold rise 1.3% on Wednesday, but has sent investors looking for more hints from the Federal Reserve on its monetary policy plans.
Inflationary pressure will be temporary and gold will trend lower over the next six to 12 months on expectations for real bond yields to rise, as economic recovery remains in play and inflation eases, Fitch Solutions said in a note.
U.S. consumer sentiment dived in early August calmed investor concerns over an early tapering of the Federal Reserve’s asset purchases. The precious metal has recovered sharply after sliding to an over four-month low on Monday that was spurred by fears the Federal Reserve would begin cutting back economic support after a strong U.S. jobs report last week.
In a sign of the potential economic impact of the fast-spreading Delta COVID-19 variant, the University of Michigan’s preliminary consumer sentiment index was at a decade low in early August. The dollar and U.S. benchmark 10-year treasury yields also weakened after the survey, bolstering the appeal of gold, which is non yield-bearing and becomes cheaper for holders of other currencies when the dollar falls.
Providing further support to bullion was increased physical demand, particularly from top consumers India and China.
COT Report
Precious metal funds faced outflows of $280 million as gold prices slumped to a more than a four-month low this week. This week CFTC data includes NFP impact and it looks impressive - massive closing of hedge positions against gold growth and big increase in short positions by speculators. Open interest mostly stands the same, which means that there was no new inflows but re-grouping of existed positions. This bearish numbers probably would be soften by recent Michigan data, but overall tendency is difficult to call as bullish.
Source: cftc.gov
Charting by Investing.com
As other markets Gold enjoys right now some easing of the pressure from Fed tightening factor. Ceiling of CPI data and weaker people expectations by recent Michigan data make investors start thinking that maybe Fed is right and inflation spike is temporal with further decreasing. Existence of big employment gap, comparing to pre-pandemic level and massive stimulus adoption becomes a very healthy background for the gold market in short term. Fed finally could feel that hands are free to keep existence policy without external pressure, when everybody hurry up with tapering announcement and rate change.
Yesterday we've provided very important data - Reuters poll of big banks expectations on Fed policy. The consensus tells that tapering announcement most probably happens only on November meeting and if we get weaker NFP data - even in December. No tapering announcement happens in Wyoming, so Jackson Hole meeting probably will be blank. This new environment lets gold to take a breath and feel more freedom in short-term fluctuations, especially in upward direction.
At the same time we should keep in mind that recent "weak CPI" was the first one but the single either, and to confirm this theory market needs more of the same kind. Although the beginning looks promising - the vital point is September NFP release that sheds the light on employment and inflation. Weak numbers provide final confirmation and green light for upward action for all dollar rivals and stock markets, while strong data again returns everything back to its own. Until September data, despite that gold is inspiring with recent sentiment shift but still it has limited upside potential.
Technicals
Monthly
Although we've got extended spike that could be seen even on the monthly chart - it is not clear how it could help us. With this spike market has not reached the major target, previous lows are not washed out, and it fact - spike makes no impact on overall technical picture here. With this drop gold just re-tested existing K-support area.
Engulfing target also is missed for ~ 30$. Here we also can't say that its target is completed. MACD stands bearish and targets of 1650$ and 1540$ are still valid. Targets are based as on initial "small" AB-CD as on the large one. Thus "small" OP agrees with "large" COP around 1650$, next is "large" OP agrees with YPS1. Finally "small" XOP agrees with 1540 K-support area. Thus, first destination point is re-testing of 1680 K-support area and reaching of "small" OP.
To break bearish construction gold has to climb above 1925$.
Market probably should start forming something different here, to re-shape of price action after the spike. For example, we do not exclude bearish butterfly to form here, that lets price to complete all the targets.
Second - with changing of the short-term sentiment, it is interesting to see how durable upward action will be here.
Weekly
Context remains bearish on weekly chart as well by far - as well as MACD trend. Thus, while it is bearish, I would keep an eye on upper triangle border and appearing of butterfly that we've mentioned above. 1865$ upside potential looks solid enough for short-term price action and it is also good test for the strength of driving factors.
Upward breakout of triangle and 1922$ resistance area makes us to turn to larger scale and search for more extended bullish targets. But for now it seems enough potential in 1865$ area. Besides, huge hammer pattern itself is an important bullish factor that you do not want to argue and go against it without clear bearish context. As short-term momentum on gold market stands up, we could try to ride on it for awhile.
Daily
Market showed strength on Friday, breaking through the daily K-resistance area. But despite strong action - trend remains bearish here because of earlier strong downside momentum. Besides price is coming to the first serious test of bullish ambitions, as right on Monday it could meet daily OB and MACD line. It will be quite interesting to see what will happen.
Potentially, if we get bearish grabber - it might be good background for scalp short position with strong bearish momentum on the back and near standing Overbought area. This is the first thing that we intend to watch on next week.
Intraday
Another reason, why it would be interesting to watch for reaction is because of our OP target. In fact on 1H chart we get "222" Sell pattern that we've discussed on Friday. Here is also minor AB=CD target stands as well. The reaction on this pattern should be at least to 1743-1747 K-area. This is the background that might be interesting for the scalp traders as well...
But most important thing is what happens after downside pullback. Gold should tell us - whether makes sense to count on more extended upward action, or it was just short-term reaction on Michigan data.
