Gold GOLD PRO WEEKLY, August 22 - 26, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,705
Fundamentals

So, in our FX Report recently we've taken in depth view on recent Fed minutes, real estate market and overall situation in the US economy. Still as we have big amount of important data, some part of it we consider here, in Gold report, which brings us more or less full picture to monitor. Gold market right now also is a kind of victim of recent Fed steps, but still, it stands in better conditions as overall background is supportive for safe haven demand.

Market overview

Gold headed for the first weekly decline in five as traders weighed reiteration from Federal Reserve officials that they’re determined to hike interest rates to fight inflation. Policy makers offered divergent views on the size of the next interest-rate increase, but they agreed on the need to keep raising interest rates. St. Louis’s James Bullard urged another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone. Richmond’s Thomas Barkin echoed that resolve on Friday, noting the risk those efforts could cause a recession.

Bullion dropped to a three-week low as the dollar and Treasury yields strengthened, bringing the precious metal’s weekly loss to 3.1%.

The resurgence in the dollar has weighed heavily on the precious metal, which was already seeing profit taking after recently reaching $1,800 an ounce, according to Craig Erlam, a senior market analyst at Oanda Corp. “It may just be more difficult if the dollar continues to drive higher and yields don’t ease further,” Erlam said in a note.

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George also noted that the Fed was shrinking its $8.9 trillion balance sheet while raising rates, which would also help to restrain the economy. The pace of decline steps up next month to an annual pace of around $1 trillion. Although yesterday we've considered that Fed totally fails QT programme, while promising from its representatives still sound. Policy makers saw the federal funds rate reaching a range of 3.25% to 3.5% this year, according to the median estimate of their June projections. The forecasts will be updated in September when the Fed next meets.

The officials spoke a day after the release of minutes from the July Fed policy meeting, which showed officials judged it would eventually be appropriate to slow the pace of interest-rate increases, with some advocating the Fed keep them at elevated levels for some time after increases concluded.

Fed officials who have spoken since the July meeting have pushed back against any perception that they’d be pivoting away from tightening any time soon. They’ve made it clear that curbing the hottest inflation in four decades is their top priority.

Gold slipped as the dollar advanced after latest data pointed to a still-healthy US labor market, potentially leaving the door open for the Federal Reserve to continue carrying out an aggressive path of interest rate hikes.

Applications for US unemployment insurance fell for the first time in three weeks, Labor Department data showed Thursday, with initial claims decreasing by 2,000 to 250,000 in the week ended Aug. 13. The median estimate in a Bloomberg survey of economists called for 264,000 applications. A gauge of manufacturing activity in the Philadelphia area unexpectedly expanded in August for the first time in three months. A gauge of the greenback advanced after the print, while the benchmark 10-year Treasury yield inched lower.

Gold’s “main headwind has been continued dollar strength only being partly offset by softer yields” today, said Ole Hansen, Saxo Bank head of commodity strategy. “The claims support the strong job market view,” giving the Fed room for more aggressive rate hikes. We believe inflation will remain stronger than expected thereby supporting a long position in gold, also considering we are into the final furlong of the bear market bounce in stocks,” Hansen said.

Gold could rally above $2,000 an ounce next year as inflation remains elevated, underpinning support for the metal often viewed as a traditional hedge against price pressures, an industry veteran said.

Given the latest Federal Reserve minutes signal hikes could be deferred or smaller, that indicates “the market is going to have to get used to inflation numbers being much higher for longer,” Jake Klein, executive chairman at Australia’s Evolution Mining Ltd., told Bloomberg TV. “That’s good for gold.”

Gold to Rebound When Fed Pivots, FS Investments’ Gayeski Says

Gold stands to rebound when the Federal Reserve pivots to easier monetary policy after about a year, although prices may drop before that as it goes on shrinking its balance sheet, according to FS Investments. The FS Chiron Capital Allocation Fund’s bullion exposure may rise from 4% once the Fed begins to ease aggressively, said Troy Gayeski, who joined the Philadelphia-based asset manager as chief market strategist in October. Before that “it’s rational to assume another mild leg down,” he said in an interview.

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Despite a meteoric run up in the dollar, gold is still trading around $1,800,” said Gayeski, who worked for more than a decade at Anthony Scaramucci’s SkyBridge Capital. “It’s not far below its recent peak, despite Herculean tightening by the Fed, so I think that really bodes well for the next cycle. A Fed pivot would probably be “modest and mild,” said Gayeski.

Initially, he expects the Fed to stop hiking and shrinking its balance sheet, then likely start easing in 12 to 18 months.

“The fact that it’s hung in as well as it has, relative to the pace of tightening, really tells us that if there is another leg down, it will be mainly driven by Fed balance sheet reduction, just like other assets,” he said. “The resilience this year has been impressive.”

Based on our "magic" chart we see that despite a lot of argumentations around recent Fed minutes protocol, data releases and so on - the sentiment mostly stands stable, the full percent hike until the end of the year and perspective of starting policy easing on next 12 months.
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It means that all noise in the media concerning coming aggressive Fed steps are just short term outbreaks that have short-term impact and makes no difference to longer term picture, which stands blur for US economy and inspiring for the gold market.

Our major conclusion right now that US government, Fed and Treasury have space only for tactical moves due existed reserves of 400+ Bln Treasury cash, 2.2 Trln, of banks' reserves on the Fed account, denying of QT programme and holding aside new debt issues by US Treasury.
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Also the US has contracted strongly the budget deficit in recent two years but there is no additional source to contract it more. Meantime, rising consumption leading to huge disbalance in Trade and current accounts rising debt expenses and drop for US Treasuries everywhere force the US search ways of additional financing. The global sources become thin and no really free money exist to support the US. They try to stay until November elections with visuality of success but to survive they have to collapse consumption or start pump out money from domestic markets, such a stocks, where sell-off has not started yet.

We see big financial bomb here, mostly because of investments size from EU and other countries to the US stock market. This construction still holds just because EU is still could hold the tension its own economy and hasn't started yet to sell foreign assets to finance record trade deficit. But this patience is limited - amount of cashflows to the US stocks are start dropping slowly. The deadpoint is not passed yet, as the US households also have not started massive sell-off, thanks to the Fed that supports market with liquidity, but reserves are gradually exhausting, people loose wealth and sell-off stands not too far over horizon.
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EU holds solid bulk of these investments as well:
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The pressure on the market in the first half of the year was largely provided by non–residents who sold $ 211 billion worth of American shares - this is the most significant capitulation of non-residents in the entire history of the market. It is noteworthy here that for 10 years the accumulated financial flows into American stocks from non-residents are equal to zero!

Before fleeing the market in 2022, non-residents actively entered in 2020. The main impulse came in April 2020-March 2021, when $ 400 billion was placed – then it became the most intensive purchases in history, and now it is the most intensive sales. Everything is classic, nothing changes in this world.

The main sales have come from offshore companies from the Cayman Islands for $ 73 billion, which can be assumed that these non–residents are directly or indirectly affiliated with residents of the United States, Canada is in second place with 67 billion sales, followed by the United Kingdom - 45 billion, and Singapore – 33 billion sales, i.e. all the others worked almost zero.

For example, the Eurozone countries are symbolic plus 2 billion, but the dynamics inside are multidirectional. The Netherlands sold for 14 billion, and Germany bought for 10 billion. Why we focus on the Eurozone? Because EU countries have generated almost half of the net inflow into stocks 2020-2021, but have not started the sell-off... So, everything is still ahead against the background of record trade deficits in the region.

Among of the four major buyers of the market, the only one remained – it is corporate buybacks. The Fed has left the scene, foreigners have become net sellers, and households are devastated after closing the valves of helicopter money, trying to support current consumption through savings.

Therefore, speaking about prospects, it is necessary to understand, and who is the buyer? Now these are only corporations, but the money will be reduced from the third quarter on the trajectory of margin compression and falling demand. Bitcoin already shows the leading warning on coming trend change, like a storm crower - this week traders have liquidated $605 mln in positions just on Friday.
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Many times we've warned that market makers together with Fed will create the "bullish traps", making the visuality of reversals, to catch into trap trusted people and sell them their stock positions - big banks also need to exist somehow! That's what we see now. Recent rally stands due big 400 Bln money pump from the Fed (right after first collapse when foreign investors have started selling) which has helped to stabilize market for some time. Now pressure is growing again and Fed will have to use next bulk of reserves to not let them crush!
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Current market action accurately repeats performance of 2008 subprime S&P crush...
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Conclusion:

Despite that few last pictures looks interesting - let's keep lyrics aside. What do we have in dry residual that could let the US to keep control over the markets and even to follow with some tightening policy? It is reserves of ~ $2.5 Trln. They will have to spend them on holding markets on the surface and buying new debt issues that should come from the US Treasury in Sep- Dec. By our calculation, Fed could stay relatively comfortable within 6-12 months, using this reserves, and another rate hike, up to 3.5% will not make the big hurt.

It means that in nearest 6-9 months we can't expect final reversal on the gold market. At the same time we do not expect the collapse either, despite it remains under pressure of the Fed policy. Because statistics keep going from bad to worse, while providing Fed liquidity should keep inflation on high levels. Thus, it is more prominent to expect rising volatility on the gold market in some range, without big drops. This is a kind of preparation stage for final reversal up.

Once all sources will exhaust Fed meets with financial drought because no other sources of capital exist now and they start to pump money out of the US stocks market. Foreign investors will do the same. The US debt market will be destabilized turning situation out of control, which should become the blossom of the gold demand. Hardly this happens later than the mid of 2023.

Other factors could accelerate this, if EU lost patience earlier or geopolitical games will escalate or go out of the control either in Europe, Taiwan or wherever else.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Technicals
Monthly

Gold shows nice bounce, but it performance still stands inside the July and we can't talk about clear signs of the reversal yet. Under impact of fundamental factors, mentioned above - it comes back to major 1660 support area. The fact that YPS1 has held price also has important meaning. It lets us to treat downside action as retracement.

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 "B" 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.

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$.
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Weekly

This time frame tells everything. FInally Retail broker FX Choice also starts to show the grabber, but, as we've discovered it - it has appeared on the market last week already, and has become the gem in our mid term view on the gold, keeping us aside from taking any "early" long positions.

Based on this pattern, gold has to re-test the lows, at least. Invalidation point is 1807 top. Weekly chart suggests that we should consider only short positions this week.
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Daily

Based on local AB-CD pattern, we have COP precisely around the lows. Oversold level is slightly higher, but once price will drift lower, the OS level also should move down, so it should not become a problem for target reaching:
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Intraday

Here we have relatively strong bearish performance. Despite K-area support - market is pressing it down. Thus, the H&S pattern of Cup& Handle (as you like it more) - could not be formed, and price just could keep going lower. In this case 1730 is the next level where bounce could happen:
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Still, as price is not totally abandon support area, let's see, maybe the bounce will come. Initially we thought to get harmonic bounce to 1780-1785$ area that equals to the left arm, as we've considered potential H&S pattern. Now, we do not have any hints on bullish patterns thus, it seems to more realistic to consider just 1760$ and 1767 K-area at best, in the case of the pullback in the same way of "222" Sell, that market repeats here regularly.

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Just watch for the speed of the pullback. Fast bounce could be the sign that 4H H&S is still possible, while slow and choppy "222" action here suggests the pullback to just $1760 area.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Greetings everybody,

Gold shows absolutely great performance with strong resistance to external bearish factors. We're going with our trading plan - aiming on re-testing of 1680 lows this week, supposedly on hawkish background of Wyoming meeting:
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As we've agreed yesterday - plan suggests in catching of the bounce for short entry. As gold has not shown anything from 1740, we've agreed to watch for 1710-1720 final 5/8 support area. Thus, if we get the bounce - we consider the short entry.

One of the patterns that could trigger the pullback is DRPO "Buy" as most recent downside thrust only looks small, but in fact it is sufficient for DiNapoli pattern:
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The bottom of DRPO could take the shape of any pattern - butterfly, double bottom etc. So, for intraday trading, scalp traders also could consider long position, once pattern will be formed. Still, our major object is to get good entry for short position as primary context stands bearish:
gold_1h_23_08_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Greetings everybody,

So, the bounce that we've discussed starts accurately, and market is coming to 1755-1759 resistance area that seems potentially interesting for short-position taking. It also could be treated as B&B Sell pattern.
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But even without B&B idea, market is coming to XOP target that perfectly agrees with 4H K-area. On 1H chart XOP could be finalized by some pattern, most probable it could be butterfly Sell. Thus, if you think about short entry - watch for XOP completion and then make a decision with stops just above the 4H K area:
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Since we have bearish weekly/daily setup, we consider the scenario when downside action doesn't stop at just minor B&B target and keep going to major lows later.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Greetings,

Gold indeed shows better resistance to negative factors and is more aimed on upside action. Yesterday we've got three pullback from our K-area and XOP target, but nevertheless, price has broken it up and keep going higher now.

It means that next time we consider chances for short entry only around 1770-1777 area:
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On 1H chart, as our initial (former XOP) has been exceeded, we use larger scale AB-CD's to set the next upside target. Now it stands at 1769 that agrees with the major Fib level. Maybe, we could get daily bearish grabber as well around this area, if we get lucky.
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Although we do not consider long trades on daily chart because of bearish context and existence of weekly bearish grabber - if you trade on 15-30 min charts, you probably could.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Greetings everybody,

On a daily chart the shape of bearish flag pattern becomes obvious. I would be nice if we have bearish grabber here as well, but... At the same time, who knows, what will happen on Wyoming press conference and maybe we will get it next week. This picture represents our conservative scenario. It has less chances to happen but if it will - it give best price for short entry:
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Meantime, gold was not able to break the K-area, while we already have agreed to wait for 1777 to consider next short entry. Now we have bearish engulfing and reversal bar. The only tricky moment here, on 4H chart is possible grabber that could be formed within few hours. It is not comfortable to go against it. Thus you will have to make decision - either wait for upward action when it will be completed, or, to take short position but place more extended stop order. In fact, stop now has to be at least above 1770 (XOP) and better above 1780 Fib level:
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On 1H chart we do not see something special. 1750 level is important, because in this case upside AB-CD patterns will be erased and market drops in old "new" trading range, making step closer to the breakout of daily flag. So, if you intend to take short position - it should be done somewhere around, while market is relatively quiet.
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