Gold GOLD PRO WEEKLY, February 28 - 04, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,258
Fundamentals

We have not many comments on the gold market this week, despite it has shown explosive spike on Thursday, just because everybody understands the major driving factor now. But on the next week, gold might return back in the "financial" area, when we start watching J.Powell's testimony in Washington and NFP data on Friday. Investors are now mostly concerned about new speeches about possible stagflation, which could slow down as the global economy as the Fed rate change.

Market overview

Gold hit its highest in nearly nine months on Tuesday before pulling back as investors waiting for developments in the Ukraine crisis repositioned near the pivotal $1,900 an ounce mark.

"(Gold) is holding up well. The last time we moved up to these levels it ended up being a bull trap and the market came off very sharply. We've seen some good flows into the ETFs, which is encouraging," independent analyst Ross Norman said.

Wall Street's main indexes slumped as the prospect of harsh Western sanctions against Russia kept investors on edge, while oil prices hit their highest level since 2014. The Biden administration could deprive Russia of a vast swath of low- and high-tech U.S. and foreign-made goods, people familiar with the matter told Reuters.

"It's not surprising to see gold well supported in this environment given its traditional safe-haven play," said David Meger, director of metals trading at High Ridge Futures. However, inflationary pressures have been a key driver of gold's performance over the last several weeks in its sideways to higher trend and interest rate increases may not overshadow this trend, Meger said.

Analysts attributed gold's slight pullback to some profit-taking. Saxo Bank analyst Ole Hansen said this was "because there is obviously at this point quite an elevated risk premium baked into the price of gold".

Palladium rose 4.5% to a near six-month peak on Wednesday, driven by fears of a hit to supply from top producer Russia, while gold firmed above the key $1,900 level as Ukraine declared a state of emergency. Russia is the world's third-largest producer of gold, while the country's Nornickel is also a major producer of palladium and platinum, both of which are used in catalytic converters to clean car exhaust fumes. Russia produced 2.6 million troy ounces of palladium last year, or 40% of global mine production, and 641,000 ounces of platinum, or about 10% of total mine production.

While it was "still too early" to tell if supply issues would materialize, "if we see a set of sanctions that reduce financing and free flow of the material to the rest of the world, we could see a significant tightening of conditions for palladium probably in the not too distant future," said Bart Melek, head of commodity strategies at TD Securities. Platinum group metals could see a "pretty significant rally" with palladium likely to reach record highs seen last year over $3,000 an ounce, Melek added.

"Should fears over geopolitical tensions subside, that would leave the Fed’s policy tightening path as bullion's primary driver, with further climbs in real Treasury yields likely to unwind the geopolitical risk premiums currently baked into gold prices," Han Tan, chief market analyst at Exinity said.

Exchange-traded funds (ETFs) that invest in gold and other precious metals have seen massive inflows as investors rush to shield themselves against the rising geopolitical tensions between Russia and NATO. Data from Refinitiv Lipper showed gold and other precious metal ETFs have seen an inflow of $4.7 billion this year, after witnessing outflows worth $7.8 billion last year.

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The SPDR Gold Shares led with inflows worth $3.2 billion, while iShares Silver Trust and iShares Gold Trust received over $400 million each.

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Also, physical gold held by exchange-traded funds has risen 2.1% to 69.5 million ounces this year, according to data from Refinitiv. Oil prices broke above $100 a barrel for the first time since 2014, heightening further concerns over inflation levels.

Precious metals reversed course on Thursday with gold slipping below the key $1,900 per ounce level and palladium shedding more than 5% as equities rebounded after U.S. President Joe Biden unveiled harsh new sanctions against Russia. Biden hit Russia with a wave of sanctions on Thursday measures that impede Russia's ability to do business in major currencies along with sanctions against banks and state-owned enterprises.

"If current sanctions are the limit of the response, the economic impact is limited. So we are seeing short-covering in stocks," said Tai Wong, an independent metals trader in New York.

Wall Street advanced in volatile afternoon trading, with the Nasdaq up nearly 2% after Biden's comments on Russia.

"Gold's afternoon selloff accelerated after President Biden unveiled the next round of sanctions, which many thoughts were not hard-hitting enough," said Edward Moya, senior market analyst at Oanda. However, geopolitical tension is a gamechanger, and demand for safe-havens will remain elevated and gold prices will likely see strong support over the short term."

A senior U.S. official said the deployment of Russian troops to the breakaway enclaves did not merit the harshest sanctions. Any measures should for now stop short of cutting off Russia's access to international payments systems.

Second, money markets have priced out chances of a 50 basis-point rate hike by the Federal Reserve in March. More policy easing may be on its way in China too; Finance Minister Liu Kun flagged bigger tax and fee cuts to support the economy.

Finally, remember, markets had more or less already priced a Russian incursion into the two eastern Ukrainian provinces; Goldman Sachs estimates U.S. and European stocks already carried discounts of 5% and 8% respectively. Worst case? Further 6%-9% falls. But we are not there - yet.

Federal Reserve policymakers on Thursday signaled the conflict in Ukraine will not budge them from their expected course of rate hikes ahead. U.S. Federal Reserve officials on Thursday began taking stock of how the unfolding conflict in Ukraine might influence the economy and their planned shift to tighter monetary policy, with investors and some officials suggesting it could slow but likely not stop a planned round of interest rate increases.

Oil and commodity price shocks and a possible blow to global growth and confidence were clear risks, analysts said, and one Fed policymaker said the events of the last 24 hours could weigh on upcoming Fed decisions.

"The implications of the unfolding situation in Ukraine for the medium-run economic outlook in the U.S. will also be a consideration in determining the appropriate pace" for raising interest rates, said Cleveland Fed President Loretta Mester.

The risks could be as obvious as high oil prices weighing on consumer spending and raising inflation even further, or as unknowable as how Russia might respond to U.S. sanctions. The Fed plans to raise interest rates beginning in March as it battles inflation that has hit multi-decade highs.

"Underlying demand is strong. The labor market is tight. Inflation is high and broadening," Barkin said, describing the basic case for rate increases. "But I will say that it is unsettling to hear the news. As always happens you have to start and think through where could this thing go that you might not have forecast originally."

Investors have now all but ruled out a larger half-percentage-point rate increase at the Fed's March meeting. CME Group's widely followed FedWatch tool was signaling at one point that the probability of a hike that large had fallen overnight from about 33% to less than 10%. A quarter-point increase is still anticipated as the Fed begins to lift its target policy rate from the near zero level set at the outset of the pandemic.

But the events overnight have dealt the central bank an unexpected new dynamic, an echo of the oil price shocks of the 1970s that were also driven by geopolitical conflict. In that case it was war and other tension in the Middle East, and came at a time when the U.S. economy was far more dependent on imported energy, and U.S. industry far less energy efficient.

Still, Fed officials were beginning to think through the implications of an event that had the potential to both slow growth and add to inflation.

"We'll be watching this closely here in Atlanta and across the Federal Reserve system to assess the economic and financial impacts," Atlanta Fed President Raphael Bostic said during a virtual event. Still, he said the Fed's first-order problem now is controlling inflation, and that he is ready to raise rates by as many as four quarter-point increments this year, "and depending on how things go it may be more than that."

San Francisco Fed President Mary Daly said that with U.S. inflation as high as it is and the labor market strong, the Fed should go ahead with rate hikes even with the uncertainty of a NATO - Russia conflict.

"I really don't see, unless things get materially worse...that this is going to have an effect" on the Fed's decision to start raising rates in March, she said at an event Wednesday in Los Angeles

But officials may now tread a touch more carefully until the breadth of Russia's actions, and how they affect oil prices, financial markets, and the broader economy, become clearer.

"We think probably now we have reached a tipping point where this is a situation that could start to have impacts on confidence...we know that it's affecting financial markets," said Jennifer McKeown, Head of Global Economics Service at Capital Economics. It is unlikely to derail tightening plans, but "central banks are probably more likely now to be starting to err on the side of caution and worry about the adverse effects on their economy."

The immediate economic risk appears larger for Europe than the United States, with European Central Bank policymakers convening Thursday in a previously scheduled "informal" gathering that may become a crisis meeting

Still, the crisis threatens to delay the resolution of prominent factors that have fanned U.S. inflation higher such as global supply bottlenecks, which could keep price pressures high while denting growth prospects.

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Beyond the very near term, "the impact of the stagflationary shock is ambiguous and could be net hawkish," Evercore ISI analysts wrote. "Both the adverse sides of the macro distribution move up: the right tail risk of continued excess inflation in the medium term and the left tail risk that efforts to curb this inflation...end up causing a recession."

"In the context of the sizeable disruptions to supply chains and energy prices already, this will...complicate the policy response of central banks," wrote analysts with TD Securities. "The Fed and the U.S. may be removed enough to keep to hiking as planned, though risks shift in terms of 25 (basis point) increments rather than anything more aggressive."

But the impact on the U.S. economy could be felt in sundry ways, from the price people pay for gasoline at the pump to a hit to household wealth. Here is a look at a few of them. If oil prices stay at about $100 a barrel, energy costs for U.S. households could rise by $750 on average this year from last year, leaving them with less money to spend on other goods and services, said Gregory Daco, chief economist for EY-Parthenon. Those added expenses could also be a drag on economic growth, said Daco, who projects that higher oil prices could lift inflation by 0.6 percentage point this year and slow economic growth by 0.4 percentage point.

Consumer prices last month rose 7.5% from a year earlier, the fastest pace in nearly 40 years.

"A lot of people, especially lower-income folks, a huge amount of their income goes towards gasoline," Richmond Federal Reserve President Thomas Barkin told reporters after an economic symposium in Colonial Heights, Virginia. "So if those prices go up it dampens consumer spending and dampens the economy.”

With American consumers already straining against steep rises in the cost of living for everything from autos to food as supply chains continue to be snarled by the COVID-19 pandemic, the invasion and any further escalation in the conflict could help keep inflation pressures elevated. The price of palladium rose to its highest level since July on Thursday, and any disruption of Russian supplies would impact auto production, still suffering from pandemic-related supply shortages of semiconductor chips.

Major U.S. stock indexes dropped in the hours after Russia's Ukraine invasion, and though they recovered after U.S. President Joe Biden announced sanctions on Russia, "absent any improvement in the situation (in Ukraine), they may have further to run," wrote Capital Economics' Jonas Goltermann. Any drop erodes - at least on paper - a mainstay of U.S. household wealth, potentially dealing a blow to consumer confidence and squelching demand. After an initial plunge at the start of the pandemic, stocks have doubled in value, and direct holdings of stocks and mutual funds swelled to account for a record share of household wealth.

That could drive consumer sentiment gauges - some of which are already at a decade low due to stiff inflation - even lower still and threaten the outlook for consumer spending.

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That being said, as Monetary Policy Analytics' Larry Meyer wrote, "weak demand in the U.S. is far from being a concern," and with inflation already high, policymakers may be less sanguine about the jump in energy prices than would otherwise be the case. "Should demand weaken substantially, the Fed would certainly have tough decisions to make, and we think the Fed would react," he wrote. "But today’s risk environment does not afford them the luxury of focusing only on downside risks when it comes to risk management."

Some analysts clanged alarm bells.

High-Frequency Economics' Carl Weinberg said he expected Vladimir Putin's move into Ukraine to shift the economies of Europe, and possibly the United States, onto a "wartime footing," resulting in goods shortages and further upward price pressure. He also warned that Russia could try to counter sanctions with cyber attacks on U.S. or European financial infrastructures, among other possibilities.

Another economist, Carl Tannenbaum of Northern Trust, wrote, "a broader conflict in Eastern Europe could provoke a wholesale reevaluation of the outlook" for monetary policy, fueling uncertainty and pushing down sentiment. But he added: "For now, risks are tilted to the upside, and central banks will be tightening policy in response."

Western economic sanctions to punish Russia for its invasion of Ukraine heap a new set of unknowables on a global economy already distorted by the coronavirus pandemic and a decade of ultra-cheap money. The bid to exclude from the trading system whole chunks of the world's 11th largest economy -- and supplier of one-sixth of all commodities -- has no precedent in the globalized age.

Sanctions unveiled so far will hit Russian banks' business in dollars, euros, pounds and yen. U.S. export curbs will restrict Russian access to electronics and computers while European capitals are fine-tuning similar export controls and measures to target the energy and transport sectors.

Oxford Economics said it now sees global inflation this year at 6.1%, up from 5.4%, citing the impact of sanctions, financial market disruption and higher gas, oil and food prices.

"For the major advanced economy central banks the intensification of the war now leaves them in a distinctly worse position," Oxford Economics analysts wrote.
"The high starting point for inflation...will make it hard for central banks to ignore the near-term upward forces on inflation. But at the same time, they will be aware that the latest developments increase the risks of very low inflation in late 2023 or 2024 due to a weaker growth outlook."

That small dose of "stagflation" is a headache for central banks trying to reduce stimulus and return base rates to something like normal after a decade near zero.

High inflation in the United States and elsewhere makes it unlikely the Federal Reserve, the European Central Bank, and the Bank of England will fully pause what has been a joint turn towards tighter monetary policy.

Soaring energy prices fuelled a dash for inflation-linked bonds - securities whose payouts rise in line with inflation. That has sent real yields - borrowing costs after adjusting for inflation - sharply lower, while so-called breakevens, indicating where markets see future inflation, rose sharply. Essentially, that implies belief that central banks may have to go slower than earlier forecast with interest rate rises to battle inflation as economic growth also takes a hit.

Yields on rate-sensitive Treasury Inflation-Protected Securities (TIPS) slipped while breakevens rose towards 3% this past week. In Germany, vulnerable to surging European gas prices, two-year real yields slumped around 30 bps and breakevens rose as high as 3.7% TIPS funds received net inflows for the first time in five weeks, BofA data shows.

Gold prices reversed course to slide 1% on Friday, and palladium also slipped, as a military escalation in Eastern Europe triggered sharp swings in the precious metals market.

"We think the price drop is premature, there is a risk of further escalation in the conflict and it could be just a temporary correction," said Commerzbank analyst Daniel Briesemann.

"The dramatic rise followed by the just as dramatic fall is very technically motivated," said David Meger, director of metals trading at High Ridge Futures.

"The risk premium and safe haven demand will continue to support gold, but the upside is limited by the possible rate hike by the U.S. Federal Reserve this March," said Xaio Fu, head of commodities markets strategy at Bank of China International.

COT Report

Here is guys, commentaries are not necessary. Obviously we should have got big jump in net long positions and we've got it. Numbers shows big increase of positions and ~ 10-12% jump in open interest:

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SPDR Fund also shows inflows:
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From a short-term perspective, the major question is a gold market response to Fed rate change. Now, as the US doesn't impact by conflict in Europe directly, and it has minimal trading relationships with Russia and with Ukraine, it could get only indirect impact through global factors, such as petrol and metal prices. At the same time, this impact comes at the most wrong time. The US already has high inflation which hurts the wealth of households and now they intend to hike the rate which makes debt servicing more expensive. Currently it is not vital - although Debt-to-Income ratio stands around 90%:
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But Debt service costs about 8% by far:
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But potentially it could rise more as far Fed will go with the rate increase. Now chances that the rate will be changed only for 25 points is positive for the gold, which probably will be treated as a dovish decision. Especially when real interest rates turn down again, back to negative values.

In the longer-term, geopolitical conflicts have a unique feature to be hardly forecasted and you never know in what direction it could turn. Right now there are two questions on the table - whether Russia imposes mutual sanctions, say on commodities export, and whether NATO intrudes the conflict. But even these two things are enough to keep investors nervous. Thus, hardly we get a real downside reversal on gold and a big drop in demand. Most probable, that in some easing moments, it turns to sideways action. Now, for instance, it might be 1850-1900$ until the next geopolitical step will be made.
 

Sive Morten

Special Consultant to the FPA
Messages
16,258
Technicals
Monthly

As gold has achieved target cluster around 1950-1960$ area and hit YPR1 - downside pullback seems logical. The major intrigue on the monthly chart is whether gold will be able to break YPR1 and keep moving higher.

Meantime, we've got a bearish grabber that suggests dropping somewhere to 1750$, if of course gold will not jump above 1970$ on Monday. Close above YPR1 will change the technical picture drastically, as well as change the potential depth of retracement, which definitely will be much smaller. The moves of such scale are possible only by geopolitics news that makes no sense trying to predict...

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Weekly

Here market hits the overbought area and completed a few important targets - butterfly and major AB-CD point right around major 5/8 resistance. Downside pullback already takes around 30% and if we wouldn't have the monthly grabber, it is logical to suggest appearing of demand at 1860$ area. Grabber confuses the situation by far. Still, at the current level is not very comfortable to take any new bearish positions as well:

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Daily

Here, with Thursday's spike, Gold has completed all major targets as well. At the same time around 1880-1900, we see long tails that suggest existing of the demand for Gold. Now, the 1855-1860 area looks suitable to consider taking of the long position, at least from the technical point of view. We have solid K-support and daily oversold around it

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Intraday

Here is the pattern that we've discussed on Friday as well. Although its OP stands around 1825, I would consider COP still, because it makes Agreement with powerful support cluster on the daily chart:
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Sive Morten

Special Consultant to the FPA
Messages
16,258
Greetings guys,

Gold keeps bullish sentiment, which is understandable in the current situation. Hardly we could count on easing geopolitical tensions any time soon, and this should keep demand for gold. Besides, it seems that markets start to suspect that J. Powell could start preparing the background for a lighter rate change, just for 25 points. Probably he should touch on this topic in the speech on Thursday.

With the bullish grabbers on daily chart probably it makes no sense to consider any bearish positions:
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On 4H chart we have minor opposite grabbers, that's why we can't totally exclude probable fast spike before major upward action starts. Speculators might start shaking the boat at the eve of NFP and Powell's testimony.
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Other words, speaking - COP still has some chances to be reached:
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It means that potentially there are two ways exist - either to use Stop "Buy" order around "C" point, or Limit order around COP. It is possible to combine both as well. Stops is better to hide under daily K-area of 1855...
 

Sive Morten

Special Consultant to the FPA
Messages
16,258
Greetings everybody,

So, our recent suggestion starts working, as gold keeps going higher. Now price is overextended a bit and hit daily overbought, but we suggest that grabber target should be completed and price hits the top.

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The anticipation of a dovish turn from the Fed and the drop of the interest rates on a background of war escalation is great supportive factors for the gold. Besides, the US is starting to rob the EU, forcing them to impose sanctions that are harmful to the EU and almost indifferent to the US. As a result, the inflation in the EU could accelerate when capitals start flowing to the US, according to our long-term scenario.

Today we expect minor retracement somewhere to 1925 K-support area and upward continuation then. Let's keep watching for EU CPI, J. Powell's testimony, and ADP report. Sometimes, as you can see, using Stop entry orders is a good tool to apply.
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Sive Morten

Special Consultant to the FPA
Messages
16,258
Greetings guys,

Gold shows relatively quiet action, retracement that we've discussed yesterday, stands underway. J. Powell calms down a bit investors and said that Fed intends to raise rates by 25 points but it could act more aggressively if needed. This has brought confidence back and interest rates have moved higher. Hardly we get big changes until NFP data.

So, technically, daily performance looks strong, CD leg shows the acceleration that supposes upward continuation. And, in general, price stands above the broken top, which is also a positive sign.
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On 4H chart market stands in the same flag consolidation. THe fact that price has not reached the lower border, might be the early bullish sign, we'll see. As 25 points is a definite fact in March, jump in inflation tomorrow, could support gold.
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On 1H chart we have short-term bullish context. It should stay valid until market is above 1913. If somehow price breaks it down - wait for larger-scale downside retracement, somewhere to 1870 support area.
gold_1h_03_03_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,258
Greetings everybody,

So, gold stands relatively quiet, waiting for NFP numbers. Upward bounce from 1913 has happened, so you could move stops to breakeven, if you have taken any positions.

In general, by looking at daily chart - gold keeps bullish sentiment. Price stubbornly coiling above 1916 broken top and near the previous spike. With the daily grabber suggesting action to 1975$, we could treat the context as bullish.
gold_d_04_03_22.png


On 4H chart we've got the minor grabber as well
gold_4h_04_03_22.png


While on the 1H chart, short-term bullish context suggests that gold should start next extension swing to the XOP, as retracement after OP is over already. Now we do not see yet any thrusting action but maybe situation will change later, when NFP releases:
gold_1h_04_03_22.png


Concerning new position taking - personally, I'm a bit conservative and prefer not to take positions ahead of important events, especially when major entry point is missed already. But, tastes differ....
 
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