Sive Morten
Special Consultant to the FPA
- Messages
- 18,715
Fundamentals
Overall fundamental background has not changed for gold and if we would speak on classic driving factors - they are the same. US economy statistics was not bad, Fed has confirmed overall positive condition situation. The only driving factor on this week was coronavirus panic. This explains why gold has turned to rally precisely on Friday, when new wave of nervousness fall upon investors' heads. Not on the gold only but on all markets across the board. Stock markets have shown miserable collapse.
Even in the middle of the week we've warned about changing in sentiment and cancelled all our preliminary setups for bearish positions. In fact, gold has not broken our limits as we said last week that it could fluctuate freely below recent top, but on coming week situation could change as gold brings some surprises.
Gold prices rose on Friday and were heading for their best month in five as worries over economic growth due to the fast-spreading coronavirus boosted appetite for safe havens.
“Coronavirus continues to be a strong factor of support as we are seeing global growth concerns hurting other markets across the board. As a result, we’re seeing safe-haven demand drive into gold,” said David Meger, director of metals trading at High Ridge Futures.“Gold is the quintessential safe-haven asset that money managers are viewing as an alternative for cash.”
The World Health Organization declared the epidemic a global emergency after the virus killed more than 200 people.
“At this point, it’s not something the Chinese economy can shrug off. There will be a hit to growth, the magnitude of which will be difficult to chisel out in detail for quite a while,” said Ilya Spivak, a senior currency strategist at DailyFx.
The virus fears gripped financial markets, overshadowing the latest batch of upbeat corporate earnings.
“Gold is both continuing to find favour as a traditional safe haven and, at the same time, run into strong resistance on the run-up to $1,600, which is keeping a lid on gains,” OANDA analyst Craig Erlam said in a note.
On the physical side, however, an extended holiday in top consumer China due to the outbreak dimmed activity in Asian bullion hubs.
But other commodities are not as lucky as gold market as they direct relation to global economy. Basic metals, palm oil, crude oil were hit. A new coronavirus that has killed 170 people in China and spread to over a dozen other countries has roiled global commodity markets, raising fears of weaker demand and disrupting raw material supply chains in the world’s most populous country. All but around 100 of the nearly 8,000 cases so far identified have been in mainland China, but the virus has caused global alarm because it is still too early to know how dangerous it is and how easily it spreads among people. The World Health Organisation will meet on Thursday to decide whether its rapid spread amounts to a global health emergency.
Oil prices slumped to 3-month lows this week in response to the widening spread of the virus in China, the world’s top oil importer, prompting OPEC to look to extend current oil output cuts until at least June from March, as well as consider deeper cuts if oil demand is badly hit. China is the second-largest oil refiner and a critical growth engine for the global economy, so any material contraction in Chinese economic activity is expected to have far-reaching repercussions across several industries. The aviation sector was a high-profile coronavirus casualty, with scores of flights to and from China cancelled this week. Jet fuel prices and production margins in Asia slumped in response, hurting refiners and fuel exporters. Greatly reduced mobility within China also hit gasoline demand, with Asia’s benchmark gasoline price falling the most in four years on Tuesday.
Palm oil prices slumped as much as 10% on Tuesday as traders reacted to the widening shutdowns of offices, malls and factories within China. Palm oil is used mainly in food courts and by catering companies in China, the second-largest palm importer behind India, so reduced consumption is expected over the near to medium term.
Base metals have also taken a hit as manufacturing plants and factories take protracted Lunar New Year breaks while they assess the fallout from the virus. Toyota Motor Corp and other firms announced extended plant shutdowns.
Industrial bellwether copper fell to near a fourth-month on Thursday and was set for an 11th straight session of losses on fears of an economic slowdown in the world’s top metals consumer.
Commodities futures exchanges have also remained shut longer than planned due to the virus, with the Shanghai Futures Exchange (ShFE) and Dalian Commodity Exchange (DCE) announcing extended closures.
Safe haven gold has won some support during a time of uncertainty, hitting a three-week high early in the week, and analysts expect the precious metal to remain bid while worries about the virus persist.
CFTC Data
But most interesting thing we see in CFTC report guys. Previously we've said that long positions on gold market are highly saturated and this is holding factor of any attempt to grow more. Actually it remains as well. But, this week we see that gold has formed new all time top of net long position breaking recent record that was set few weeks ago. Of course, sooner or later but this overbought condition echoes on the market and relief will start, but the major question is - when this will happen. This makes overall situation tricky. Common sense tells that it is not good point for taking long-term bullish positions on gold market but extreme driving factor, which coronavirus panic is, could push market significantly higher, before normal factors, common drivers will start to work. And the major problem here is we can't foresee this moment and somehow predict it by making analysis of any kind.
Source: cftc.gov
Charting by Investing.com
In addition to said above, we believe that major driving factor for gold will be stock market. Since last year we talked about overbought situation on all stock markets. Now this overbought condition takes absolutely phantasmagoric level. This makes market very sensitive to any bearish trigger and recent collapse just confirms this. It is too wide topic with this virus - whether it is natural or maybe somebody intentionally launched it for multiple purpose. One of them could be panic and chaos spreading on the markets and trigger massive controlled sell-off to re-shape global markets, fix profits in stocks and put them into gold. We do not know this.
But we do know all time cycle. It repeats again and again since markets have appeared in the beginning of 20th century. The Great Depression of 20's was the "first practical test" of this great idea. Once big whales have made a lot of money on stocks - they have to move them into gold. And we do not exclude scenario where this flow already has started. By monitoring of stock market we will see whether we are correct or not. Now it seems that we are....
Technical
Monthly
Monthly picture mostly stands the same as whole January gold fluctuates in the same range. Price is coiling around major monthly 5/8 Fib resistance level. And gold missed XOP just for 20$. It means that our next target here is still 1650.
As coronavirus panic comes on the first stage, we have to review our priorities and put normal factors on the second one. In current situation we have to acknowledge that indeed, reaching of 1650-1655 XOP is possible, at least when weekly overbought condition will let it to do. Total overbought on gold is not a barrier by far as panic driver is stronger. That's being said, now we have to postpone our idea of healthy retracement as overall background has changed.
Normal driving factors will work some time when situation will calm down a bit. As more extended downside target, if somehow it will happen - we could point YPP at 1445 area.
Weekly
On a weekly chart market follows to trading plan. There are two major things stand here - huge doji pattern and failed downside breakout of its range. As we've said, from technical point of view - gold price will follow to direction of doji breakout side. From this point of view, the key moment is failed attempt of downside breakout last week, when price has tested doji's lows. It means that gold could spend more time in doji range and even show some upside action as it is not at overbought anymore - market easily could reach 1590 level - and what it does.
As overbought level drifts higher and lower border already has been tested - it is logical to suggest the test of upper border and the 1611 top. Potentially gold could try to hit monthly 1655 target as it stands not too far from weekly overbought level.
Daily
Just few weeks ago, when we've talked about potential upside action our targets were humble and we had real doubts that market could reach at least 5/8 Fib resistance. Upside action has started very choppy as well. Now market breaks bearish context and creates background for further upside action. Indeed, the grabber has been erased as Friday's close stands above its top, 5/8 level is broken up and, finally, market is forming signs of bullish dynamic pressure - MACD shows bear trend while price is creeping higher.
All these moments agree with weekly chart and ability of the market to test previous top:
Intraday
So, we have bullish context, trend stands bullish at all time frames as well. 4H chart lets us to estimate nearest target. This is XOP of the same AB-CD pattern which coincides with butterfly destination point as well. Both stand around 1600 area. Trading process could be planned twofold here. First is we could consider taking short-term bullish position on a way to 1600 target, or, second - we could wait when market starts pullback after XOP will be hit and then consider some another setup. These plans are not mutually exclusives, but the first one is more scalping and short-term.
As market is tending to major target - we do not need deep support levels. Any retracement should be small until gold hits XOP target. It means that we need only most recent upside swing for Fib levels. Personally I like 1585 level, because it coincides with previous tops which have been broken and now should work as support area. Invalidation point is 1580 lows, under K-support. Market has to keep them to save existing bullish scenario.
Conclusion:
Major driving factors on gold still exist and sooner or later will make impact and trigger some relief action. But now they take a backseat as coronavirus panic shifts markets across the board and makes gold to climb higher. This makes us to review short-term scenario and agree that gold indeed could as re-test recent 1611 highs as try to hit monthly 1655 major target.
The only problem with this that virus panic factor is out of our control and we can't forecast on plan its impact by any kind of analysis. In this situation we could only try to follow short term hints that price gives us.
Overall fundamental background has not changed for gold and if we would speak on classic driving factors - they are the same. US economy statistics was not bad, Fed has confirmed overall positive condition situation. The only driving factor on this week was coronavirus panic. This explains why gold has turned to rally precisely on Friday, when new wave of nervousness fall upon investors' heads. Not on the gold only but on all markets across the board. Stock markets have shown miserable collapse.
Even in the middle of the week we've warned about changing in sentiment and cancelled all our preliminary setups for bearish positions. In fact, gold has not broken our limits as we said last week that it could fluctuate freely below recent top, but on coming week situation could change as gold brings some surprises.
Gold prices rose on Friday and were heading for their best month in five as worries over economic growth due to the fast-spreading coronavirus boosted appetite for safe havens.
“Coronavirus continues to be a strong factor of support as we are seeing global growth concerns hurting other markets across the board. As a result, we’re seeing safe-haven demand drive into gold,” said David Meger, director of metals trading at High Ridge Futures.“Gold is the quintessential safe-haven asset that money managers are viewing as an alternative for cash.”
The World Health Organization declared the epidemic a global emergency after the virus killed more than 200 people.
“At this point, it’s not something the Chinese economy can shrug off. There will be a hit to growth, the magnitude of which will be difficult to chisel out in detail for quite a while,” said Ilya Spivak, a senior currency strategist at DailyFx.
The virus fears gripped financial markets, overshadowing the latest batch of upbeat corporate earnings.
“Gold is both continuing to find favour as a traditional safe haven and, at the same time, run into strong resistance on the run-up to $1,600, which is keeping a lid on gains,” OANDA analyst Craig Erlam said in a note.
On the physical side, however, an extended holiday in top consumer China due to the outbreak dimmed activity in Asian bullion hubs.
But other commodities are not as lucky as gold market as they direct relation to global economy. Basic metals, palm oil, crude oil were hit. A new coronavirus that has killed 170 people in China and spread to over a dozen other countries has roiled global commodity markets, raising fears of weaker demand and disrupting raw material supply chains in the world’s most populous country. All but around 100 of the nearly 8,000 cases so far identified have been in mainland China, but the virus has caused global alarm because it is still too early to know how dangerous it is and how easily it spreads among people. The World Health Organisation will meet on Thursday to decide whether its rapid spread amounts to a global health emergency.
Oil prices slumped to 3-month lows this week in response to the widening spread of the virus in China, the world’s top oil importer, prompting OPEC to look to extend current oil output cuts until at least June from March, as well as consider deeper cuts if oil demand is badly hit. China is the second-largest oil refiner and a critical growth engine for the global economy, so any material contraction in Chinese economic activity is expected to have far-reaching repercussions across several industries. The aviation sector was a high-profile coronavirus casualty, with scores of flights to and from China cancelled this week. Jet fuel prices and production margins in Asia slumped in response, hurting refiners and fuel exporters. Greatly reduced mobility within China also hit gasoline demand, with Asia’s benchmark gasoline price falling the most in four years on Tuesday.
Palm oil prices slumped as much as 10% on Tuesday as traders reacted to the widening shutdowns of offices, malls and factories within China. Palm oil is used mainly in food courts and by catering companies in China, the second-largest palm importer behind India, so reduced consumption is expected over the near to medium term.
Base metals have also taken a hit as manufacturing plants and factories take protracted Lunar New Year breaks while they assess the fallout from the virus. Toyota Motor Corp and other firms announced extended plant shutdowns.
Industrial bellwether copper fell to near a fourth-month on Thursday and was set for an 11th straight session of losses on fears of an economic slowdown in the world’s top metals consumer.
Commodities futures exchanges have also remained shut longer than planned due to the virus, with the Shanghai Futures Exchange (ShFE) and Dalian Commodity Exchange (DCE) announcing extended closures.
Safe haven gold has won some support during a time of uncertainty, hitting a three-week high early in the week, and analysts expect the precious metal to remain bid while worries about the virus persist.
CFTC Data
But most interesting thing we see in CFTC report guys. Previously we've said that long positions on gold market are highly saturated and this is holding factor of any attempt to grow more. Actually it remains as well. But, this week we see that gold has formed new all time top of net long position breaking recent record that was set few weeks ago. Of course, sooner or later but this overbought condition echoes on the market and relief will start, but the major question is - when this will happen. This makes overall situation tricky. Common sense tells that it is not good point for taking long-term bullish positions on gold market but extreme driving factor, which coronavirus panic is, could push market significantly higher, before normal factors, common drivers will start to work. And the major problem here is we can't foresee this moment and somehow predict it by making analysis of any kind.
Source: cftc.gov
Charting by Investing.com
In addition to said above, we believe that major driving factor for gold will be stock market. Since last year we talked about overbought situation on all stock markets. Now this overbought condition takes absolutely phantasmagoric level. This makes market very sensitive to any bearish trigger and recent collapse just confirms this. It is too wide topic with this virus - whether it is natural or maybe somebody intentionally launched it for multiple purpose. One of them could be panic and chaos spreading on the markets and trigger massive controlled sell-off to re-shape global markets, fix profits in stocks and put them into gold. We do not know this.
But we do know all time cycle. It repeats again and again since markets have appeared in the beginning of 20th century. The Great Depression of 20's was the "first practical test" of this great idea. Once big whales have made a lot of money on stocks - they have to move them into gold. And we do not exclude scenario where this flow already has started. By monitoring of stock market we will see whether we are correct or not. Now it seems that we are....
Technical
Monthly
Monthly picture mostly stands the same as whole January gold fluctuates in the same range. Price is coiling around major monthly 5/8 Fib resistance level. And gold missed XOP just for 20$. It means that our next target here is still 1650.
As coronavirus panic comes on the first stage, we have to review our priorities and put normal factors on the second one. In current situation we have to acknowledge that indeed, reaching of 1650-1655 XOP is possible, at least when weekly overbought condition will let it to do. Total overbought on gold is not a barrier by far as panic driver is stronger. That's being said, now we have to postpone our idea of healthy retracement as overall background has changed.
Normal driving factors will work some time when situation will calm down a bit. As more extended downside target, if somehow it will happen - we could point YPP at 1445 area.
Weekly
On a weekly chart market follows to trading plan. There are two major things stand here - huge doji pattern and failed downside breakout of its range. As we've said, from technical point of view - gold price will follow to direction of doji breakout side. From this point of view, the key moment is failed attempt of downside breakout last week, when price has tested doji's lows. It means that gold could spend more time in doji range and even show some upside action as it is not at overbought anymore - market easily could reach 1590 level - and what it does.
As overbought level drifts higher and lower border already has been tested - it is logical to suggest the test of upper border and the 1611 top. Potentially gold could try to hit monthly 1655 target as it stands not too far from weekly overbought level.
Daily
Just few weeks ago, when we've talked about potential upside action our targets were humble and we had real doubts that market could reach at least 5/8 Fib resistance. Upside action has started very choppy as well. Now market breaks bearish context and creates background for further upside action. Indeed, the grabber has been erased as Friday's close stands above its top, 5/8 level is broken up and, finally, market is forming signs of bullish dynamic pressure - MACD shows bear trend while price is creeping higher.
All these moments agree with weekly chart and ability of the market to test previous top:
Intraday
So, we have bullish context, trend stands bullish at all time frames as well. 4H chart lets us to estimate nearest target. This is XOP of the same AB-CD pattern which coincides with butterfly destination point as well. Both stand around 1600 area. Trading process could be planned twofold here. First is we could consider taking short-term bullish position on a way to 1600 target, or, second - we could wait when market starts pullback after XOP will be hit and then consider some another setup. These plans are not mutually exclusives, but the first one is more scalping and short-term.
As market is tending to major target - we do not need deep support levels. Any retracement should be small until gold hits XOP target. It means that we need only most recent upside swing for Fib levels. Personally I like 1585 level, because it coincides with previous tops which have been broken and now should work as support area. Invalidation point is 1580 lows, under K-support. Market has to keep them to save existing bullish scenario.
Conclusion:
Major driving factors on gold still exist and sooner or later will make impact and trigger some relief action. But now they take a backseat as coronavirus panic shifts markets across the board and makes gold to climb higher. This makes us to review short-term scenario and agree that gold indeed could as re-test recent 1611 highs as try to hit monthly 1655 major target.
The only problem with this that virus panic factor is out of our control and we can't forecast on plan its impact by any kind of analysis. In this situation we could only try to follow short term hints that price gives us.
