Gold GOLD PRO WEEKLY, August 29 - 02, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,705
Fundamentals
Recent week was important for the gold market as well as for any other - stocks, currencies etc. Fed sets mid term strategy that becomes a major driver in nearest 6 -9 months and should determine the shape of price performance across the board. Despite that J. Powell statements have provided more details that have added hawkishness to overall Fed position, they mostly have tactical effect, as the core has not changed. It means that our major position on Gold has not changed as well.

Market overview

Gold fell over 1% on Friday after Federal Reserve Chair Jerome Powell in his speech at Jackson Hole said the U.S. economy needed a tight monetary policy until inflation was under control. Powell said this could mean slower growth, but did not hint at what the Fed might do at its September policy meeting.

"Equities and metals are suffering from Powell's unvarnished reminder that rates will need to be high for longer and that perhaps 75 bps is the default for September unless the totality of the data suggests otherwise," said Tai Wong, a senior trader at Heraeus Precious Metals in New York.

Since there was no dovish pivot from Powell, gold will continue to face pressure as it will have to deal with higher interest rates, said Philip Streible, chief market strategist at Blue Line Futures in Chicago.

Standard Chartered analyst Suki Cooper said in a note that while gold could trend lower in the coming months, most of the downside risk was already priced in. Bullion could also benefit from "tailwinds including recession risk, a price-responsive physical market, already scaled-back positioning and elevated inflation," Cooper added.

Powell signaled the Fed will likely keep raising interest rates and leave them elevated for a while to contain high inflation. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”

“There is no waffling in Powell’s speech -- high rates will be here for some time. The only question now is will September be 50 bps or 75 bps,” said Tai Wong, a senior trader at Heraeus Precious Metals in New York, referring to the size of the basis point increase. “Gold will fluctuate based on rate-hike expectations, perhaps in the $1,680-$1,820 range in the near future.”

Prior to Powell’s speech, investors saw the odds as roughly even of a half-point or another three-quarter point hike at the Fed’s Sept. 20-21 gathering. They remained in that vicinity after he spoke, but the amount of reductions in fed rates priced for 2023 briefly retreated.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”

He said lowering inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.

“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.

Mark Spindel, chief investment officer at MBB Capital Partners, said the resolute tone of Powell’s speech points to another large rate rise next month.

“Failure to back that up with another 75 basis point increase would cheapen his talk,” Spindel said, noting that Powell took pains to quote former chairs Alan Greenspan, Paul Volcker and Ben Bernanke, invoking the Fed’s Hall of Fame to bolster his message.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said in remarks that were set to be live-streamed for the first time from inside the lodge where the event has been held since 1982. Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.

While the Fed’s preferred measure of inflation eased to 6.3% for the 12-month period ending July, wages and salaries had the biggest monthly gain since February, according to a government report released earlier on Friday.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience, gathered in person after two years of holding the conference virtually because of the pandemic.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”

The Federal Reserve is likely to deliver the last of its big rate hikes in September, setting up stocks to continue rallying in the second half, according to JPMorgan Chase & Co. strategists.

“We expect another outsized Fed hike in September, but post that we would look for the Fed not to surprise the markets on the hawkish side again,” strategists led by Mislav Matejka wrote in a note on Monday. They expect the trade-off between growth and monetary policy to improve from here on, and “help the overall market to keep recovering.”
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The strategists are among the most bullish top-ranked voices on US equities and expect rate-sensitive growth stocks to maintain their outperformance over the value basket, even as investors remain worried that the Fed could remain on a hawkish course. A Bloomberg survey found that on average top strategists see the S&P 500 rallying another 3.5% from current levels to the end of the year.

“We suggest investors use the rally in tech to reduce positioning in excess of recommended benchmarks and to lighten portfolio exposure to high beta names, rebalancing funds to our preferred areas of the market like value and quality income,” Haefele wrote in a note.

So recent comments from the big banks bring two major features. First is - they confirm analysis that we've made last week, suggesting, that Gold could show volatility and remain under pressure in nearest 6 months because of Fed steps, but there are no expectations of drop below 1650 area. Second - they indirectly hint that Fed should not let stock market to drop at least until the end of the year, as average consensus suggests 3.5% growth, which actually the same like market should stay flat.

Thus, the time bomb on stock market is ticking but it seems that it still has more than 6 month until its explode.

Our "magic" predicting chart shows that market has priced in additional 0.12% on rate change. Now, September and November meeting together count for 1.11%, which means 0.75% +0.5% definitely. While further rising could increase chances of 0.75% change in November as well.
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Meantime stock market perfectly repeats the shape of subprime crisis - Wyoming bearish reversal has happened precisely at the corresponding peak of previous crisis:
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Future profit margin is dropping for all S&P companies. While revenue grows for ~ 13%, EBIT (operation income) have increased for around 10%, which means the narrowing of a profit margin. While the nominal revenues could stay in positive area due to the high inflation levels, the EBIT to could turn negative as soon as IV Q of 2022.
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Population utility services debt is growing. About 20 million homes have a debt on utility bills. It is reported that approximately 1 in 6 American households are not paying their bills and more and more Americans are facing power outages. These are the worst indicators in the entire history of observations in the United States. However, according to forecasts, the situation may worsen due to climatic conditions, high electricity prices and growing demand for it.
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While Fed is sabotaging QT programme, crisis is spreading over the major part of the US economy.
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Starting September 1st, the balance sheet should be reduced at a rate of $ 95 billion per month, but in fact the current backlog from the schedule is at least $ 82 billion. They were supposed to cut by 133 billion, but they cut just for 50 billion, where the reduction of treasuries is 69 billion, which is more or less according to the promised pace. But! MBS balance have increased by 19 billion because of real estate market starts collapsing like a house of cards.

The percentage of successful implementation of the QT plan is 38% - this is a complete failure. For treasuries, 82% of sales are almost within the reduction schedule, while for MBS, they are not just zero, but even increasing the balance.

According to the actual change in the balance of treasuries, it is clear that the Fed began selling treasuries only in July as the market conditions stabilized and continues to do so while market situation was relatively stable. We can't say the same about the mortgage market, which began to crumble amid the collapse of demand for primary and secondary sales in the real estate market.

The first line of Fed support is primary dealers and the financial industry associated with the Fed, which together have accumulated enough excess cache and will be able to intercept the falling demand of the private sector and non–residents for treasuries. We discussed it last week and have shown that they have accumulated about $2.2 Trln on short-term RePo accounts with the Fed.

Starting in the autumn, the US Treasury will try to enter the open market for the first time in six months since March with fairly tangible borrowings, but as it seems, none of this will happen – there is no demand for debt securities in conditions of record negative real rates. With about 530 billion in cash, the US Treasury, as usual, will continue to balance on the fine line of default. And what's next?

Speaking on Mortgages, MBS bonds - the US real estate market has gone into collapse mode. Never before in the history of the American real estate market have sales fallen as much as in the last 6 months through July 2022. From February to March, the change in sales of new homes in the United States amounted to - 320 thousand in annual terms. For comparison, during the real estate crisis of 2006-2008, sales decreased at the rate of 180-220 thousand houses in 6 months, and in April 1980 at the moment by 300 thousand.
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The number of new houses put up for sale to the number of new houses sold was 10.9, i.e. almost 11 months are needed to realize the available supply at the current demand. In a state of shortage of new homes, as in 1997-2006, this ratio was on average about 4, from 2012 to 2019 about 5-5.2. Now it is more than twice the norm of 2012-2019.
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The current overstocking has been at its maximum since the acute phase of the crisis in September 2008-February 2009, when the real estate market was completely frozen.

The market is in a severe crisis – the strongest in history. The reason is obvious – the maximum mortgage rates since 2008, falling real incomes and inadequately high prices, which at the peak in Q4 2021 grew at a rate of 23.1% YoY, in Q1 2022 the growth was 22.8% YoY, in the second quarter of 2022 – 19.2% YoY. This is the highest rate of price growth in the history of the market.

In the conditions of the real estate market price bubble of 2004-2006, the annual growth rates of prices did not exceed 13.2% and on average were about 9% YoY. During the inflationary crisis of the 70s, the rate of price growth did not exceed 19.5%.

Now, in two years, US home prices have increased by 40% from 375K to 525K per house – this is a record. In 2004-2006, the peak was 25% in two years, and in the late 70s "only" 37%. As a result, prices are in space, sales are zero. From the 3rd quarter, prices will collapse and almost immediately speculative schemes for buying houses on credit for resale...

Conclusion

Thus, taking in consideration the time bomb on stock market that we've discussed last week, although it is a bit more time given, at least until November elections, big Fed and US Treasury problems with new debt placement and repayment of the old one, while government has to finance enormous trade deficit and just collapsing real estate market - it is few reasons to expect big drop on the Gold. While all these factors might be terrible for stocks and currencies, gold is a quite different song, as it enjoys massive inflows, while everybody feels bad.

Thus we stay on our course, suggesting no direction change within nearest 6 months and expecting higher volatility with price performance above 1650-1680 area. With winter approaching and rising financial problems in EU, passing the US November elections and visible Fed and US Treasury problems with debt financing - Gold should start drifting north. From long-term investment view, current levels and period could be treated as "accumulation".

Our long-term view suggest 1.5-2 times gold price increase within 1-2 years.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Technicals
Monthly

On monthly chart changes are minimal. We expect re-testing of 1660 lows as we're busy with weekly grabber and it has the target at previous lows.

So 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

Despite that Wyoming meeting happened this week - the major drop has taken place two weeks ago.

We keep our journey with bearish grabber here. MACD trend stands bearish as well. While pattern is valid we do not consider any long positions.

Based on this pattern, gold has to re-test the lows, at least. Invalidation point is 1807 top.
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Daily

Here market has broken bearish flag down, as expected. Now the broken flag works like good invalidation indicator. To confirm bearish action, gold has to stay below it and should not return back inside. Although return will not break the major tendency but it could suggest deeper upside retracement before turning down again. Thus, for bearish position taking on daily and intraday chart this seems important. It lets us to focus only on most recent downside tick:
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Intraday

Friday's setup has worked nice, market dropped after Reversal bar, no bullish grabber that we were worrying about have been formed. Now price is coming to major 5/8 Fib support area again, where minor bounce could start. MACD trend is bearish here:
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As we do not want to see price back inside the flag - there are only two levels suitable for short entry consideration. K-area agrees with the flag trend line as well.
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Sive Morten

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

So, our initial entry setup is done well - now it is time to move stops to breakeven, because market could show 2-leg upside bounce. On EUR currency we see the same scenario:
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As we've said in weekend, the vital condition for short entry is price should stay outside the flag, it should not return back. That's why as a vital area we've chosen K-resistance on 1H chart and lower trend of the flag pattern. Our entry setup has been completed accurately, line has been re-tested and price has dropped out.
Now - you could see that 4H chart give mixed signals. We have bullish divergence and "Evening star" pattern, that increases chances of AB-CD upside action.
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That's why, if you have taken short position recently - book the half and keep the rest (or book totally) with the breakeven stop. If you just think about taking short position - let's keep watching for possible AB-CD upside bounce, 2nd re-test of the K-area and appearing of "222" Sell pattern:

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Sive Morten

Special Consultant to the FPA
Messages
16,705
Morning guys,

So, gold was bearish enough recently, thus our insurance steps to protect against potential AB-CD action was not needed. On a daily chart everything looks like it should, market is going to COP @ 1685, which is also the minimal target of weekly grabber:
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On 4H chart the most important sign is erasing of Morning start pattern and no AB-CD action that we've discussed yesterday. It means that downside pressure is strong enough and strong downside acceleration today is not impossible:
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as market has COP target at 1715, hopefully we could get minor bounce that let us to consider another short entry, if you do not have position yet. In this case 1735 area looks suitable for this purpose.
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But I'm worry that we could get direct downside acceleration instead, as a breakout of wedge pattern.
 

Sive Morten

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

It seems that bearish pressure on gold is stronger than on other markets, as Gold has shown almost no reaction on poor ADP report recently. Slowly but stubbornly price is moving to the 1680 target:
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On 4H chart we see both scenarios at once - as downside wedge breakout as minor COP reaction. Hopefully, you were able to sell on the pullback from COP around nearest Fib level, as we've suggested.
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As market already stands in extension mode to OP, we do not need to consider far standing Fib levels and big pullbacks. Until OP is not reached, the upside retracements should be moderate. That's why we consider either 1711 or 1717 K area as most probable pullback. Only absolutely despair NFP numbers could trigger stronger upside reaction.
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Sive Morten

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

So, as market is flirting just above the target - just minor comments we could make. Mostly we could say that our 2-weeks journey is done. Here are few thoughts on possible downside depth. I suggest that most probable destination point is 1672$. Just because this is uncompleted monthly AB-CD. Price is not at oversold and gold should reach it. Besides, knowing the cunning of the gold market, hardly it leaves behind stops under the "B" point.
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Daily and intraday targets point on 1685$ area. Today, I do not see a lot of things that we could do. Those who hold short positions now just need to properly close it. It is too early to think about long positions, just because targets are not hit yet and no patterns have been formed yet. Let's just watch for NFP trigger.
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