Sive Morten
Special Consultant to the FPA
- Messages
- 18,635
Fundamentals
Yesterday, guys, we've taken in-depth view on fundamental background in the light of Wyoming results and made detailed analysis of Fed position on tapering, as well as market reaction on it. Currently global markets have a special feature that they are driven by macro economy factors rather than its own specific once, which are taken backseat by far. So, the gold is no exception as well. Everything depends on interest rates and the term of how soon they start to change.
Market overview
Gold climbed higher on Monday as the dollar pulled back, while lingering fears of possible roadblocks to global economic growth from rising Delta coronavirus cases worldwide also supported prices. Recent data from the United Kingdom and Japan outlined the Delta variant’s economic impact, with soaring infections having hammered equity markets last week, boosting the allure of safe-haven assets.
Dallas Fed President Robert Kaplan, a strong supporter for tapering, said on Friday he might need to adjust that view if the Delta variant materially slows economic growth.
Analysts at Goldman Sachs said in a note gold would continue to trade “moderately higher” on a weaker dollar and demand recovery in emerging markets.
The spread of the Delta coronavirus variant has raised doubts about economic growth, with investors anticipating that the U.S. central bank might delay tapering.
Data showed U.S. business activity growth slowed in August, while Asia’s robust economic recovery from last year lost steam. Gold’s latest uptick also came despite outflows from exchange-traded funds, such as the SPDR Gold Trust.
Reflecting the economic impact of the virus was data showing U.S. business activity growth slowed in August.
Fawad Razaqzada, market analyst with ThinkMarkets, also noted that $1,805-$1,810 was significant for gold since the bearish trend line converges with the 200-day average there.
Gold’s latest uptick came despite outflows from exchange-traded funds.
Fixed income funds enjoyed their biggest inflows in seven weeks with investors piling into investment grade debt and U.S. Treasuries in the past week, BofA said on Friday.
Bond funds took in $13.3 billion with investment grade bond funds enjoying $8.8 bln of inflows and U.S. Treasuries pulling in $2.5 billion in the week to Wednesday -- their largest intake in five weeks, BofA said, citing EPFR data.
Equities saw inflows of $12.6 billion with U.S. stocks benefiting from a third straight week of inflows, at $6.2 billion.
Investors added cash to equities during a period that saw markets gyrate over speculation about when the U.S. Federal Reserve will begin tapering and concerns for economic growth amid the rapid spread of the Delta COVID-19 variant.
Precious metal funds suffered their largest outflows, at $1.4 billion, since March.
By Reuters data, among commodity funds, precious metal funds saw net sales of $1.33 billion, which was 86% higher than in the previous week.
Gold bounced over 1% on Friday after Federal Reserve Chair Jerome Powell stopped short of signalling when the U.S. central bank would start withdrawing its economic support and reiterated his view that current price spikes are transitory.
In a virtual speech to the Jackson Hole economic conference, Powell signalled the U.S. central bank will remain patient and repeated that he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process - a defence in effect of current Fed policy.
Lending a further boost to bullion, benchmark U.S. Treasury yields and the dollar weakened after Powell’s comments.
Powell said there had been clear progress toward maximum employment and he believed that if the U.S. economy improved as anticipated, "it could be appropriate to start reducing the pace of asset purchases this year."
In remarks to the annual Jackson Hole economic conference, Powell indicated the Fed will remain cautious in any eventual decision to raise interest rates as it tries to nurse the economy to full employment, saying he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process - a defense in effect of the new approach to Fed policy he introduced a year ago.
On the separate and potentially imminent decision by the U.S. central bank to begin reducing its $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities, Powell said he agreed with the majority of his colleagues that if job growth continues it “could be appropriate... this year.”
The weeks since the Fed’s policy meeting in July “brought more progress” towards repairing the jobs market, Powell said, with nearly a million positions added and continued progress expected. But it also coincided with “the further spread of the Delta variant” of the coronavirus, Powell noted, raising risks that would need to be evaluated as the debate over the bond-buying “taper” continues ahead of the Fed’s Sept. 21-22 policy meeting.
In the days before Powell’s speech, several Fed regional bank presidents said they were eager to get a taper underway, and to reduce the asset purchases fast, with some arguing the shift was needed to prepare for interest rate increases that may be needed sooner than expected.
Data released earlier on Friday showed inflation continuing to rise. The personal consumption expenditures (PCE) price index, a key inflation gauge watched by the Fed, was up 4.2% in the 12 months through July, the third straight month it has been at least double the central bank’s 2% target.
We will be carefully assessing incoming data and the evolving risks,” he said, signaling that Fed discussions about exactly when to reduce the bond-buying program not only remain unresolved, but must be squared against the health and economic risks posed by the highly contagious Delta variant.
Powell’s remarks offered a broad road map of where the U.S. central bank stands as it moves away from policies rolled out to counteract the pandemic’s economic shock, while also accounting for the fact that the health crisis has not passed, and that millions of Americans remain out of work as a result of it.
Expectations for continued job growth are in part based on reopened schools, eased childcare constraints, and a steady return to consumer spending on close-contact activities - developments that may be influenced by the worsening outbreak.
Fed officials “expect to see continued strong job creation. And we will be learning more about the Delta variant’s effects,” Powell said in his speech. “For now, I believe that policy is well positioned; as always, we are prepared to adjust.”
The next major decision, of when to raise the benchmark overnight interest rate from the current near-zero level, will be subject to a “substantially more stringent test,” Powell said, that satisfies Fed officials that the economy has reached maximum employment and inflation is sustainably at the 2% target.
While the current fast pace of price increases is “a cause for concern,” Powell said it would also be damaging if the Fed jumped the gun with a premature decision to hike rates.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” Powell said. “If a central bank tightens policy in response to factors that turn out to be temporary ... the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”
CFTC Data
Now guys, we're coming to most interesting moment as here we have key difference of gold market to the others. Despite positive price dynamic we see big outflows from the gold market and this divergence can't last too long. Sooner rather than later it leads to price reversal as rally loses the foundation, if this tendency wouldn't be broken in near term.
We've mentioned above of record outflows from ETF's and now take a look what's going on with the SPDR Fund. It is rare to see opposite direction of price and SPDR Fund reserves. Market is trying to recover but investors are leaving it.
Source: SPDR Fund, FPA.
Recent CFTC report shows that everything maybe is not as awful as it looks like. At least some chances exist that situation could change on a background of recent Wyoming events. Recent data shows big jump in Open interest and inflow in long positions as from speculators as from hedgers (they hedge against gold appreciation).
In a recent few weeks the net long position is rising, but in a bit longer period it mostly stands flat around 170-200K contracts:
Source: cftc.gov, Charting by Investing.com
According to gold.org the COMEX open interest of the market also stands flat.
This data doesn't include yet impact of Wyoming meeting and it is also interesting to see what coming NFP report brings us. But, if this tendency doesn't change, gold has limited upside potential.
So, situation stands moderately positive to the gold market. But it has few nuances that make it different compares to stock market and FX. As we've mentioned above and in our FX report as well - there are few key figures that Fed is concerned about. The major one is employment. They need to close 5 Mln jobs gap to pre-pandemic level. J. Powell said - "We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis. We think that it means the same as "let's cover the employment gap and see what inflation will be at that moment". They don't care about inflation, and maybe they are correct, because now we see slowdown in China, ceiling of inflation statistics in US and drop of the sentiment.
Second, what Fed is concerned - Delta variant. They start to mention it more often in recent few weeks. As one trader said - You’d need next week’s jobs report to show a miss, a resurgence of the Delta variant or geopolitical risks with more news coming from Afghanistan for gold to break substantially higher.
Indeed, the importance of coming NFP report is magnified. Still, as we've said yesterday - if even it shows great numbers, tapering anyway will be postponed to November with high degree of certainty - just because of other factors. Taking in consideration that level of expectations stands extremely high - market waits for 763K of new jobs. Chances of "in a row" or "missing" report are significant.
Finally the most important nuance is tapering postponing doesn't help gold to climb higher. Indeed, take a look at assets flows across the markets. While rates stand near zero any interest bearing asset such as a bonds or stocks (with dividend yield) get the advantage over gold. Both bond and stock funds shows 13 Bln inflows this week while gold shows record outflows and SPDR fund just confirms this right now. For the gold market is shake and stress are the major drivers - delta spreading, political risks that could push it higher, but hardly we could count on them as long-term driving factors.
It means that in nearest term we, of course, will keep an eye on NFP release and other statistics, on a new stimulus packs from US government and other stuff, but the major thing that we want to get is a change of the sentiment. Wyoming statement impact is yet to be estimated and find the road into investors' positions. If within 2-3 weeks after NFP report we do not see open interest rising and SPDR fund trend change - upside perspectives will be looking doubtful.
Thus, with no change in sentiment, tapering postponing should let gold to stay on the surface and even fluctuate around 1750-1800 area but not to reach some new upside extended targets. In this case it looks more like expectation of reversal, when market drifts in the range or in slow upward motion, waiting for the deadly hit.
It means that despite friendly Fed position, gold market has too strong competitors and it makes it not very attractive for long-term investing right now.
Technicals
Monthly
Here we have few moments that seem important. In a very long term view, current picture doesn't look bearish. Yes, by letter we have bearish context with downside MACD trend and price tendency. But take a look at bit wider. Gold shows very small, 3/8 retracement, and not from 1100 lows but from one of the secondary reaction points. It stubbornly stands in tight range within a year. Second - price stands above Yearly Pivot and has not even dropped to YPS1. Finally, the price shape reminds flag consolidation, which is potentially bullish, at least theoretically. The targets that we have here are not too far - 1650 and 1540, but even these targets gold has not reached yet.
Finally, we have two days to August close, and if price climbs above July top of 1834$ - we get bullish reversal bar. In a shorter-term everything is based on August huge trading range. We could say that downside trend continues only when price drops below 1650 area. Upward major breakout happens if price moves above 1925 top.
Direction mostly depends on investors' money. If gold attracts inflows, it could break the situation and keep going higher. Otherwise, retracement to 1540$ is just a question on time.
Weekly
Bearish risks are not cancelled totally. Jackson Hole statement is "a lot" and "a few" at once, and coming NFP report could bring drastic shifts in price shape on weekly chart. Take a look that right at the end of the next week, gold comes to vital moment - flirting with MACD line and reaching of the triangle's border. Sharp reversal here could make supposed butterfly to look more realistic. Especially because we have targets and resistance cluster around 1825-1830 area on daily and intraday charts:
Daily
Based on positive news on Friday price was able to touch first resistance level of 1820$. As gold stands in a new trading range of 1800-1830$ - it is relatively easy should be to move slightly higher and complete our intraday targets. But, around 1830$ it might be serious challenge as gold meets Fib level, upper border of the range and daily overbought area. Hardly upward breakout is possible without external support, such as weak NFP report.
Intraday
Here we do not see much to do with existed positions as they are already protected by b/e stop. Those who have stepped-in using Stop "Buy" order around 1809 now could do the same. We need just wait when price hits 1828 target. With recent upside impulse our 3-Drive "sell" pattern has good chances to be completed:
The only thing that we could discuss right now is attempt to make a scalp trade, while gold is not reached the target yet. If price shows some pullback, at least to 1806 - it is possible to consider long entry. Market has to keep "Wyoming" rally, otherwise short-term bullish context will be lost. Retracement should not be too strong and deep because of upside momentum and lack of overbought. In fact, we have only 1820$ Fib level barrier, so supposedly pullback should be moderate, somewhere to 1800-1805 level.
Yesterday, guys, we've taken in-depth view on fundamental background in the light of Wyoming results and made detailed analysis of Fed position on tapering, as well as market reaction on it. Currently global markets have a special feature that they are driven by macro economy factors rather than its own specific once, which are taken backseat by far. So, the gold is no exception as well. Everything depends on interest rates and the term of how soon they start to change.
Market overview
Gold climbed higher on Monday as the dollar pulled back, while lingering fears of possible roadblocks to global economic growth from rising Delta coronavirus cases worldwide also supported prices. Recent data from the United Kingdom and Japan outlined the Delta variant’s economic impact, with soaring infections having hammered equity markets last week, boosting the allure of safe-haven assets.
Dallas Fed President Robert Kaplan, a strong supporter for tapering, said on Friday he might need to adjust that view if the Delta variant materially slows economic growth.
Analysts at Goldman Sachs said in a note gold would continue to trade “moderately higher” on a weaker dollar and demand recovery in emerging markets.
The spread of the Delta coronavirus variant has raised doubts about economic growth, with investors anticipating that the U.S. central bank might delay tapering.
Data showed U.S. business activity growth slowed in August, while Asia’s robust economic recovery from last year lost steam. Gold’s latest uptick also came despite outflows from exchange-traded funds, such as the SPDR Gold Trust.
Reflecting the economic impact of the virus was data showing U.S. business activity growth slowed in August.
Fawad Razaqzada, market analyst with ThinkMarkets, also noted that $1,805-$1,810 was significant for gold since the bearish trend line converges with the 200-day average there.
Gold’s latest uptick came despite outflows from exchange-traded funds.
Fixed income funds enjoyed their biggest inflows in seven weeks with investors piling into investment grade debt and U.S. Treasuries in the past week, BofA said on Friday.
Bond funds took in $13.3 billion with investment grade bond funds enjoying $8.8 bln of inflows and U.S. Treasuries pulling in $2.5 billion in the week to Wednesday -- their largest intake in five weeks, BofA said, citing EPFR data.
Equities saw inflows of $12.6 billion with U.S. stocks benefiting from a third straight week of inflows, at $6.2 billion.
Investors added cash to equities during a period that saw markets gyrate over speculation about when the U.S. Federal Reserve will begin tapering and concerns for economic growth amid the rapid spread of the Delta COVID-19 variant.
Precious metal funds suffered their largest outflows, at $1.4 billion, since March.
By Reuters data, among commodity funds, precious metal funds saw net sales of $1.33 billion, which was 86% higher than in the previous week.
Gold bounced over 1% on Friday after Federal Reserve Chair Jerome Powell stopped short of signalling when the U.S. central bank would start withdrawing its economic support and reiterated his view that current price spikes are transitory.
In a virtual speech to the Jackson Hole economic conference, Powell signalled the U.S. central bank will remain patient and repeated that he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process - a defence in effect of current Fed policy.
Lending a further boost to bullion, benchmark U.S. Treasury yields and the dollar weakened after Powell’s comments.
Powell said there had been clear progress toward maximum employment and he believed that if the U.S. economy improved as anticipated, "it could be appropriate to start reducing the pace of asset purchases this year."
In remarks to the annual Jackson Hole economic conference, Powell indicated the Fed will remain cautious in any eventual decision to raise interest rates as it tries to nurse the economy to full employment, saying he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process - a defense in effect of the new approach to Fed policy he introduced a year ago.
On the separate and potentially imminent decision by the U.S. central bank to begin reducing its $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities, Powell said he agreed with the majority of his colleagues that if job growth continues it “could be appropriate... this year.”
The weeks since the Fed’s policy meeting in July “brought more progress” towards repairing the jobs market, Powell said, with nearly a million positions added and continued progress expected. But it also coincided with “the further spread of the Delta variant” of the coronavirus, Powell noted, raising risks that would need to be evaluated as the debate over the bond-buying “taper” continues ahead of the Fed’s Sept. 21-22 policy meeting.
In the days before Powell’s speech, several Fed regional bank presidents said they were eager to get a taper underway, and to reduce the asset purchases fast, with some arguing the shift was needed to prepare for interest rate increases that may be needed sooner than expected.
Data released earlier on Friday showed inflation continuing to rise. The personal consumption expenditures (PCE) price index, a key inflation gauge watched by the Fed, was up 4.2% in the 12 months through July, the third straight month it has been at least double the central bank’s 2% target.
We will be carefully assessing incoming data and the evolving risks,” he said, signaling that Fed discussions about exactly when to reduce the bond-buying program not only remain unresolved, but must be squared against the health and economic risks posed by the highly contagious Delta variant.
Powell’s remarks offered a broad road map of where the U.S. central bank stands as it moves away from policies rolled out to counteract the pandemic’s economic shock, while also accounting for the fact that the health crisis has not passed, and that millions of Americans remain out of work as a result of it.
Expectations for continued job growth are in part based on reopened schools, eased childcare constraints, and a steady return to consumer spending on close-contact activities - developments that may be influenced by the worsening outbreak.
Fed officials “expect to see continued strong job creation. And we will be learning more about the Delta variant’s effects,” Powell said in his speech. “For now, I believe that policy is well positioned; as always, we are prepared to adjust.”
The next major decision, of when to raise the benchmark overnight interest rate from the current near-zero level, will be subject to a “substantially more stringent test,” Powell said, that satisfies Fed officials that the economy has reached maximum employment and inflation is sustainably at the 2% target.
While the current fast pace of price increases is “a cause for concern,” Powell said it would also be damaging if the Fed jumped the gun with a premature decision to hike rates.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” Powell said. “If a central bank tightens policy in response to factors that turn out to be temporary ... the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”
CFTC Data
Now guys, we're coming to most interesting moment as here we have key difference of gold market to the others. Despite positive price dynamic we see big outflows from the gold market and this divergence can't last too long. Sooner rather than later it leads to price reversal as rally loses the foundation, if this tendency wouldn't be broken in near term.
We've mentioned above of record outflows from ETF's and now take a look what's going on with the SPDR Fund. It is rare to see opposite direction of price and SPDR Fund reserves. Market is trying to recover but investors are leaving it.
Source: SPDR Fund, FPA.
Recent CFTC report shows that everything maybe is not as awful as it looks like. At least some chances exist that situation could change on a background of recent Wyoming events. Recent data shows big jump in Open interest and inflow in long positions as from speculators as from hedgers (they hedge against gold appreciation).
In a recent few weeks the net long position is rising, but in a bit longer period it mostly stands flat around 170-200K contracts:
Source: cftc.gov, Charting by Investing.com
According to gold.org the COMEX open interest of the market also stands flat.
This data doesn't include yet impact of Wyoming meeting and it is also interesting to see what coming NFP report brings us. But, if this tendency doesn't change, gold has limited upside potential.
So, situation stands moderately positive to the gold market. But it has few nuances that make it different compares to stock market and FX. As we've mentioned above and in our FX report as well - there are few key figures that Fed is concerned about. The major one is employment. They need to close 5 Mln jobs gap to pre-pandemic level. J. Powell said - "We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis. We think that it means the same as "let's cover the employment gap and see what inflation will be at that moment". They don't care about inflation, and maybe they are correct, because now we see slowdown in China, ceiling of inflation statistics in US and drop of the sentiment.
Second, what Fed is concerned - Delta variant. They start to mention it more often in recent few weeks. As one trader said - You’d need next week’s jobs report to show a miss, a resurgence of the Delta variant or geopolitical risks with more news coming from Afghanistan for gold to break substantially higher.
Indeed, the importance of coming NFP report is magnified. Still, as we've said yesterday - if even it shows great numbers, tapering anyway will be postponed to November with high degree of certainty - just because of other factors. Taking in consideration that level of expectations stands extremely high - market waits for 763K of new jobs. Chances of "in a row" or "missing" report are significant.
Finally the most important nuance is tapering postponing doesn't help gold to climb higher. Indeed, take a look at assets flows across the markets. While rates stand near zero any interest bearing asset such as a bonds or stocks (with dividend yield) get the advantage over gold. Both bond and stock funds shows 13 Bln inflows this week while gold shows record outflows and SPDR fund just confirms this right now. For the gold market is shake and stress are the major drivers - delta spreading, political risks that could push it higher, but hardly we could count on them as long-term driving factors.
It means that in nearest term we, of course, will keep an eye on NFP release and other statistics, on a new stimulus packs from US government and other stuff, but the major thing that we want to get is a change of the sentiment. Wyoming statement impact is yet to be estimated and find the road into investors' positions. If within 2-3 weeks after NFP report we do not see open interest rising and SPDR fund trend change - upside perspectives will be looking doubtful.
Thus, with no change in sentiment, tapering postponing should let gold to stay on the surface and even fluctuate around 1750-1800 area but not to reach some new upside extended targets. In this case it looks more like expectation of reversal, when market drifts in the range or in slow upward motion, waiting for the deadly hit.
It means that despite friendly Fed position, gold market has too strong competitors and it makes it not very attractive for long-term investing right now.
Technicals
Monthly
Here we have few moments that seem important. In a very long term view, current picture doesn't look bearish. Yes, by letter we have bearish context with downside MACD trend and price tendency. But take a look at bit wider. Gold shows very small, 3/8 retracement, and not from 1100 lows but from one of the secondary reaction points. It stubbornly stands in tight range within a year. Second - price stands above Yearly Pivot and has not even dropped to YPS1. Finally, the price shape reminds flag consolidation, which is potentially bullish, at least theoretically. The targets that we have here are not too far - 1650 and 1540, but even these targets gold has not reached yet.
Finally, we have two days to August close, and if price climbs above July top of 1834$ - we get bullish reversal bar. In a shorter-term everything is based on August huge trading range. We could say that downside trend continues only when price drops below 1650 area. Upward major breakout happens if price moves above 1925 top.
Direction mostly depends on investors' money. If gold attracts inflows, it could break the situation and keep going higher. Otherwise, retracement to 1540$ is just a question on time.
Weekly
Bearish risks are not cancelled totally. Jackson Hole statement is "a lot" and "a few" at once, and coming NFP report could bring drastic shifts in price shape on weekly chart. Take a look that right at the end of the next week, gold comes to vital moment - flirting with MACD line and reaching of the triangle's border. Sharp reversal here could make supposed butterfly to look more realistic. Especially because we have targets and resistance cluster around 1825-1830 area on daily and intraday charts:
Daily
Based on positive news on Friday price was able to touch first resistance level of 1820$. As gold stands in a new trading range of 1800-1830$ - it is relatively easy should be to move slightly higher and complete our intraday targets. But, around 1830$ it might be serious challenge as gold meets Fib level, upper border of the range and daily overbought area. Hardly upward breakout is possible without external support, such as weak NFP report.
Intraday
Here we do not see much to do with existed positions as they are already protected by b/e stop. Those who have stepped-in using Stop "Buy" order around 1809 now could do the same. We need just wait when price hits 1828 target. With recent upside impulse our 3-Drive "sell" pattern has good chances to be completed:
The only thing that we could discuss right now is attempt to make a scalp trade, while gold is not reached the target yet. If price shows some pullback, at least to 1806 - it is possible to consider long entry. Market has to keep "Wyoming" rally, otherwise short-term bullish context will be lost. Retracement should not be too strong and deep because of upside momentum and lack of overbought. In fact, we have only 1820$ Fib level barrier, so supposedly pullback should be moderate, somewhere to 1800-1805 level.
