Gold GOLD PRO WEEKLY, December 20 - 24, 2021

Sive Morten

Special Consultant to the FPA
Messages
16,107
Fundamentals

You probably should notice that gold market reaction on the "Week of the Central Banks" stands a bit different, compares to stocks or FX market. While FX was able to show just short-term, emotional inspiration on major currencies, such as EUR or GBP - Gold has shown better upside dynamic. And, although Omicron fears have depressed it a bit on Friday, it has shown much better performance. Our suggestion that secret stands in the bond market and how it treats recent Fed promises...

Market overview

Gold prices stabilized near a two-week low on Wednesday, as investors await the U.S. Federal Reserve's decision on the pace at which the central bank plans to taper its pandemic stimulus measures.

"A potential acceleration of tapering from the Fed and a steeper rate curve could sustain some pressure, but as some expectations have been priced in, a more aggressive move than anticipated could move gold lower further," said Xiao Fu, head of commodities markets strategy at Bank of China International.

Gold prices recovered from early losses to trade higher on Wednesday, drawing support from a decline in the dollar after the U.S. Federal Reserve said it would end its pandemic-era stimulus measures in March. The U.S. central bank's move signaled its inflation target has been met and paved the way for three quarter-percentage-point interest rate increases by the end of 2022.

"Market was looking for a hawkish move from the Fed and they got it in the dot plot," said Tai Wong, a precious metals trader based in New York. The market is happy that the Fed is a little spooked and doesn't want to be too far behind the curve. For gold, the key technical level is $1,750; a break substantially below that could lead to a rout in the waning days of the year."

"Any dollar weakness should see a corresponding rise in gold. The expectation is for a winding back of fiscal and monetary stimulus, if this view is unchanged then it would be reasonable for gold prices to remain below $1,800," said Michael Langford, director at corporate advisory AirGuide.

In its new economic projections, the Fed forecast inflation would run at 2.6% next year, compared with the 2.2% projected as of September. Fed Chair Jerome Powell also noted the U.S. economy was improving quickly, but warned he sees no near-term end to the COVID-19 pandemic.

"The risk that the economy could fall into recession in 2023 does not seem so unreasonable. Gold's weakness could be near its end as the Fed will be on autopilot until the March policy meeting," said Edward Moya, senior market analyst at brokerage OANDA.

ECB officials are set to call time on the central bank's Pandemic Emergency Purchase Programme but investors will look to see how the six-year-old Asset Purchase Programme may pick up the slack, though rate rises are a way away.

"The unemployment data will not have a large impact on gold … we have monetary policies from the European region, so that may put some pressure on gold prices but overall, the sentiment is positive," said Jigar Trivedi, a commodities analyst at Mumbai-based broker Anand Rathi Shares. The year-end sees $1,840-$1,850 as a resistance for gold."

"The gold market has digested the impact of accelerated Fed tapering," Standard Chartered analyst Suki Cooper said. "The market has been focused on tapering risks and inflation data but concerns over Omicron and it's transmissibility impacting global mobility could start to garner greater focus."

Analysts said gold gained despite the possibility of higher U.S. interest rates, which increase the opportunity cost of holding bullion, because rate hike prospects had been priced in before the Fed announcement. Apart from a weaker dollar, "there are multiple supportive elements for gold, including geopolitical issues and pent-up physical demand," StoneX analyst Rhona O'Connell said.

Gold rose above the key $1,800 level on Friday and was set for its first weekly gain in five as worries over the Omicron surge and hot inflation drove investors to safe-haven assets.

"Growth is going to slow into next quarter, and U.S. equities are correcting off their highs, so it seems to be a panic out of equities into safe-haven assets such as gold and silver," said Phillip Streible, chief market strategist at Blue Line Futures in Chicago. The U.S. Federal Reserve meeting outcome had been a "big cloud of uncertainty" over precious metals and now the focus will be on the labour data, Streible said.

But the metal marched higher because rate hike prospects had been priced in before the announcement, analysts said. Gold's gains came despite inflows into the dollar, also considered a safe store of value during geopolitical uncertainties. But its outlook for 2022 "remains clouded with most of the bearish gold forecasts being driven by expectations for sharply higher real yields," Saxo Bank analyst Ole Hansen said in a note.

"For the most part, gold seems to be responding to the Fed's decision of remaining behind the curve and keeping policy fairly loose, and the inflation dynamic has continued to push investors into gold as a key store of value," said IG Markets analyst Kyle Rodda. "The market seems to be approaching a gold price of $1,800 pushing towards $1,830, which could be the key levels to look at," added Rodda.

The Fed said it would pave the way for a three quarter-percentage-point interest rate increases by the end of 2022 as a response to full employment and surging inflation. The benchmark 10-year yield has dropped 3.8% this week.

"The gold market is benefiting from high inflation, which is outweighing the Fed's hawkish stance. U.S. 10-year real yield moved deeper into negative territory, keeping the investment backdrop supportive. Physical off takes of gold by major consumers are holding up well," ANZ analysts said in a research note.

"A combination of real yields falling back to minus one along with a weaker dollar, has prompted this short covering rally in gold," said independent analyst Ross Norman, adding gold could test the $1,835 level in early January. Observers are watching to see to what extent gold can build any sort of momentum on this move, and it seems to struggle towards the upside."

Safe-haven gold also seemed to take some cues from reduced risk appetite due to fears over the Omicron coronavirus variant.

MARKETS DON'T BUY FED HAWKISH VIEW

Global bond funds posted huge outflows in the week ended Dec. 15, as investors anticipated that major central banks would shift the direction of their monetary policy during key policy meetings this week, pressured by soaring inflation levels. Investors offloaded global bond funds of $6.91 billion, marking their biggest weekly net selling since April 8, 2020, Refinitiv Lipper data showed.

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U.S. bond funds witnessed net selling of $7.48 billion, although investors purchased European and Asian bond funds of $1.45 billion and $0.19 billion respectively.
Investors sold global equity funds of $13.14 billion, compared with net purchases of $3.43 billion in the previous week. Global money market funds also saw outflows, worth a net $20.46 billion, after eight straight weeks of inflows.

The Federal Reserve's more hawkish turn this week came amid heightened worries about economic recovery and inflation, but it has barely changed the bond market's view that short-term interest rates could top out below the U.S. central bank's estimated peak. Current betting even has rates staying below the inflation level the Fed projected over the next few years.

Since the Federal Open Market Committee released its policy statement Wednesday, markets have priced the terminal rate where policy rates will stop going up, at between 1.4% to 1.7%, according to eurodollar futures' view of U.S. rates in three years. The Fed does not forecast a terminal rate, but the market's expectation of when the current hiking cycle will peak is well below the U.S. central bank's view of 2.5%, and lower still than the revised core inflation estimate of 2.6% next year.

"The market is penciling in a potential policy mistake by the Fed, wherein it hikes rates too aggressively near term and is unable to hike past 1.4%," said Gennadiy Goldberg, senior rates strategist, at TD Securities in New York. The recent price action is indicative of worries that Omicron will set back the recovery and will allow the Fed to moderate rate hikes," he added, referring to the highly-transmissible coronavirus variant.


On Wednesday, the Fed flagged three interest rate increases in 2022 and another three in 2023, with the policy rate climbing to 2.1% in 2024.

The Fed typically lifts its benchmark rate higher until the economy is able to run on its own without any monetary policy action, typically hitting or exceeding what is known as the "equilibrium rate". The previous Fed rate hike cycle in 2018 peaked at 2.25%-2.5%.


"The Fed waited too long, certainly in our opinion, to wait for inflation to get here and fight it," said David Petrosinelli, managing director and senior trader at broker-dealer InspereX in New York. Because they're running behind on inflation, the Fed has to raise rates faster with more rate increases front-loaded in 2022. The fear is that this is going to slow down the economy."

The U.S. Treasury yield curve typically bear flattens as the Fed shifts toward tightening, with smaller rises in long-term than in short-term yields. But recently, long-term U.S. Treasury yields have dropped from already very low levels, implying the historically low Fed terminal rate.

"Perhaps this outcome reflects the limits to how much the Fed can tighten in a heavily-indebted, pandemic world," said R.J. Gallo, senior portfolio manager at Federated Hermes with assets under management.

The decline U.S. long-term yields has baffled market participants given a backdrop of persistent inflation pressure, stronger and tighter labor market, as well the Fed's tapering of its bond buying.

Jonathan Cohen, head of rates trading strategy at Credit Suisse in New York, said the decline in yields could be attributed, in part, to supply-demand factors, which include rapid buying of U.S. Treasuries by banks, the reduction in available supply even after accounting for Fed tapering, and the de-risking of pension funds as they gravitate toward bonds.

Still, some analysts believe the terminal rate is way too low and may well end up higher than what markets expected.

"The risks to the hiking cycle are numerous. But it is important to stress they are just that – namely, risks – and it seems strange for the Fed and markets to be positioned for a risk scenario," said Andrea Cicione, head of strategy at TS Lombard. In our view, it is more likely that the Fed and markets will move toward the economic reality once risks fail to materialize."

Indeed, as we've shown yesterday in FX research, the Fed rate change could be more aggressive than market thinks right now, at least by Fathom Consulting opinion. Mostly because of the wage inflation - not only in the US but in EU as well. The phenomenon that has not been seen in developed countries for the long time.

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Even J. Powell, before the official Fed meeting gave the hint that planned rate change seems to be too slow. Particular this moment bond market confirms by ignoring hawkish Fed steps. Just days before the Fed's November meeting, however, when the plan was to be announced, Powell got his first inkling that the pace might be too slow: The Labor Department reported labor costs in the third quarter had shot up by the most since 2004.

"I thought for a second there whether we should increase our taper," Powell said at a press conference on Wednesday, but decided to go ahead with the pace that had been "socialized. I honestly at that point really decided that I thought we needed to look at speeding up the taper and we went to work on that," he said. It was essentially higher inflation and, and faster - turns out much faster - progress in the labor market," Powell said.

As a result, the employees' sentiment becomes more sensitive to wage growth in relation to inflation and that could force employers' to boost wages more aggressively, leading to another spiral of inflation. This combination could turn to chain reaction and self-fulfilled prophecy, forcing Fed to move rates faster.

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The same things we see in EU, after supposed "slightly hawkish" comments from the ECB. Euro zone bond yields slipped back on Friday as markets assessed the reduction of monetary stimulus from the European Central Bank as being roughly in line with expectations. Germany’s 10-year government bond yield, the euro zone's benchmark, was down 2.5 basis points at -0.371%, after rising 1.5 bps on Thursday.

"We consider the ECB package bullish for the front end of the euro zone curve, but challenging for spreads, particularly in the periphery," Commerzbank analysts said to customers.

Adrian Hilton, head of global rates and currency at Columbia Threadneedle Investments, said central banks chose to focus "on cementing their inflation-fighting credibility. Time will tell whether this shift is justified, but the enduringly low levels of long-dated bond yields suggest that the market is so far reluctant to price in sustainably higher rate regimes," he said.


COT Report

Precious metal funds saw net selling of $402 million, posting a second straight week of outflow. CFTC data shows jump in speculative short positions this week, but this was at the eve of Fed meeting, so it could be just the preparation for the statement, as gold has dropped before the meeting as well. Since we've got the rally since then, it would be interesting to take a look how situation will change next week.

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As a bottom line:

We intentionally put investors' expectations on Fed statement in the beginning of our report just to show how different they were to real market reaction. Obviously markets have expected some hawkish tones and prepared to corresponding reaction of higher US dollar and rally in the interest rate market. This kind of reaction seems absolutely reasonable. But reality was different. This makes vital meaning to the gold. We get no changes from the Fed until March meeting and currently gold rally is based on weak interest rates reaction. Market doubts that Fed will execute steps that are planned. As Fed was waiting too long to make first steps in holding of inflation, it goes out of control a bit, which suggests more radical Fed reaction in near-term. But investors worry that it could hurt the economy pace, which is still fragile, as well as job market. Besides, fears around Omicron impact, that it could slowdown economy as well also suggest that Fed will not be able to keep promised pace of rate change. That puts the upside limit on the upper border of interest rates, as investors suggest that Fed steam will out of the pot earlier than it needs to change rate and push it to 2.1%.
And now we're coming to the major question - who is right? Fed, that suggests faster rate change and pushing it to 2.1%, Fathom consulting, that suggests even faster price hike or bond market that doesn't believe in this and suggests slower interest rates dynamic. This makes crucial meaning for the gold. Because if bond market appears to be wrong - interest rates jump and makes bearish impact on gold, pushing real interest rates higher. Conversely if bond market is right - gold will keep climbing higher. How it is possible to clarify? Only by monitoring of statistics, such as GDP, Sales, Consumption, production and inflation. The strong performance supports the Fed opinion and negative to the gold. Weak data suggests that bond market is right and Fed will adjust its forecasts later.
The pandemic theme and Omicron also have a big importance as well. Because the turning off the pandemic should eliminate fears and concerns around economy performance and also support rally on interest rates. Now it is unclear the plans of "pandemic masters". From the one side - China just is starting to get first negative fruits on breaking supply chains, that is primary US target. From this point of view, pandemic should last longer, at least for 1-2 years more. And that is what Pfizer told - they suggest that it lasts till 2024. From the other side - Omicron (as I read about it) includes all other major variants and with high degree has been made manually. It leads to lighter disease way and provides immunity to the whole family of the variants. Virologists tell that usually "masters" produce this variant when they want to finish the pandemic. It difficult to say right now who is right. But here we specify the major points, driving factors that we have to keep an eye on in long-term.
In short-term, market stands in information vacuum, until March-22 probably, that should be supportive to the gold. The "doubt" sentiment should hold here until new statistics will be released that either confirm or deny bond traders suspicions. Interest rates probably should fluctuate around current levels and gold, with current momentum has chance to climb higher.


Technicals

Monthly

December still is an inside month and makes no impact on the picture. The major achievement of the last week is reaching of 1758$ major support with following healthy upside bounce.

Once we've mentioned that overall price performance doesn't look truly bearish in long term. Market stands too close to the top, forming tight consolidation and has not reached even 3/8 major support. And potential appearing of pennant pattern just confirms this. This in turn, cares signs of bullish dynamic pressure, as market stands tight while MACD is going down...

In short-term market is flirting with YPP and breaking of 1875 top might become important moment. The support line that makes shape of triangle here seems to be more important at current moment.

Speaking about upside target, we have very thrilling combination. Major COP is completed, but we also have all-time COP, when A point equals to ~ 40$ - fixed gold price to US dollar before the Bretton Wood. In this case all time COP agrees with YPR1 around 2165$. This is next nearest target on gold...

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Weekly

Here is again - the tricky moment, especially if you're not watching for CME futures charts. Retail broker chart shows that we have nothing special, but in reality we've got two side-by-side bullish grabbers here, suggesting action above 1870$ area and completion of wide AB-CD OP target around major 5/8 resistance area of 1922$ (Futures price is different from spot one). Second important issue that we have is vital point for short-term context - current week lows.

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Daily

Here we do not have any patterns by far. Market has completed grabber's target and hit the level that we've set as approximate target - around overbought and 1815$ resistance. Trend turns bullish.

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Intraday

So, on Friday Gold has reached the levels that we've suggested around 1815$, which is local top. Now it stands in minor pullback, but thrust action is nice. As you understand - potentially we could get nice B&B "Buy" setup that could let us to step in on a long side. Besides, we also talked about reverse H&S shape here.
Second - market is flirting with MACD and we could get bullish grabber as well...

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On 1H chart we follow to the trading plan that discussed on Friday. As gold is coming to B&B pattern on 4H chart - we have also K-support here:
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Sive Morten

Special Consultant to the FPA
Messages
16,107
Morning guys,

Let's keep up with our scenario. Gold by far accurately follows it. Started retracement is coming to the point where we suggest it might be over. On the daily chart we have nothing new, trend stands bullish:
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On 4H chart market is coming to the 1st support area, where, theoretically retracement could be over. But both levels do not break the bullish context. The 2nd 5/8 support corresponds to idea of reverse H&S pattern here, and we consider it if Gold will not turn up from the first one:
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1H chart shows that we have the OP target around 1786. Thus, the first area to watch for is 1786-1790, when OP will be reached. CD leg of AB-CD pattern is slower and it is clear that bears have problems with pushing price lower. It is rather choppy.
The most obvious pattern that might be formed here - minor reverse H&S. To see it, you need to drop your time frame to 15-min chart. If it will be formed - it supposedly might be used for long entry. IF nothing happens and gold just keep dropping further - we keep an eye on next, major 5/8 support area and XOP Agreement. This is also vital area for bullish context. If Gold is bullish it has no choice but stay above this level. Otherwise bullish context will be broken.
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Sive Morten

Special Consultant to the FPA
Messages
16,107
Greetings everybody,

So, today we need to take a look only on 1H chart, as we're watching for retracement down and for two potential areas where gold could try to turn up again. Yesterday market has completed our first condition - reaching of the downside OP target. Now, before consideration on long entry we need to get response first - the pattern. Now we do not see it. Besides, as downside acceleration to OP yesterday as lazy upward bounce today point on solid chances of another leg down to XOP.
It seems that here we could get minor "222" Sell and gold keep dropping. Still, the one of the possible bullish patterns that should satisfy us might be the reverse H&S here. In fact, as we do not have any others - the H&S is the only one that could confirm bullish reversal here. But, once again - it seems that action to XOP still looks very probable:

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As a result, on 4H chart - the reverse H&S might become our primary pattern:
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Sive Morten

Special Consultant to the FPA
Messages
16,107
Morning guys,

So, gold has started upward action from the first support area that we've discussed recently. In fact, it was on some curious news background, such as "Omicron fears eased", but mostly it was due thin market, we suppose. Thus, despite that action stands nice it would be better to not overvalue its importance as it could be reversed as fast as it has started.
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Anyway, as this performance agrees with out trading plan, we suggest that it would be better to focus on the nearest target, which is COP at 1822$ area. OP stands around 1846$.
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Those who would like to buy but haven't done this yesterday now could consider minor downside retracement to one of the Fib support levels on 1H chart. In fact, on 4H market could form upside butterfly as BC 1.27 extension agrees with the COP target. Thus, here, the chance to buy should be around one of the support levels. 1800$ looks more interesting as this is also previous local top inside the channel.
Invalidation point of all this stuff is 1784 lows - gold has to stay above it to keep short-term bullish context.
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Sive Morten

Special Consultant to the FPA
Messages
16,107
Morning everybody,

Here are few moments that we've got on the gold for those who still will be watching this today;)

So, on 4H chart we still stand focused on COP target, our yesterday's retracement has worked perfect. But based on few indirect signs it could happen that market will show deeper retracement first and action to COP second. It means that on 4H chart we could get the upside butterfly, and now only left wing stands in place, while right is yet to be formed.

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The reasons are - potential "222" Sell on US interest rates. Although it is bearish pattern, and stands in favor of gold's appreciation, it is not completed yet, and suggests slightly higher level of the rates:
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Second - on 1H chart, despite our recent perfect retracement setup, we've got two bearish grabbers. Maybe this is because of thin liquidity, but, as they agree with interest rates setup - we have to take them in consideration.
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That's being said - if you have taken position yesterday with our 1800 retracement, keep it, just move stops to breakeven or manage it in a way as you suppose to be correct. But, if you do not have any position by far - stay aside for awhile with new long entry. At least until situation with the grabbers become clear.
 
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