Gold GOLD PRO WEEKLY, January 10 - 14, 2022

Sive Morten

Special Consultant to the FPA
Messages
15,522
Fundamentals

Traders on the gold market were watching for the same data this week as FX traders - Fed minutes and NFP. Both we've discussed in detail recently, in our FX report. We suggest that it should have approximately the same effect on the gold market as well. In two words, despite that NFP was below expectations, it is still positive, and with hawkish Fed minutes, hardly FOMC change the way of its policy. Besides, market expectations hardly mean something to them. So, downside reaction mostly will short term, especially if we get strong PPI/CPI numbers and Retail Sales later in the coming week. Besides, additional geopolitical reasons make us think that high inflation level should stay for longer than it is widely expected right now.

Market overview

Gold prices held steady near a six-week high on Monday in thin trade, as safe-haven buying fuelled by an Omicron-driven surge in coronavirus infections countered pressure from higher U.S. Treasury yields.

Continued focus on the Ukraine border with Russia had brought investors' interest back to gold as a safe haven, and a weaker dollar provided further support to the metal, Phillip Futures analyst Avtar Sandu said in a note. U.S. President Joe Biden told his Ukrainian counterpart Volodymyr Zelenskiy that Washington and its allies would "respond decisively" if Russia further invades Ukraine, the White House said in a statement.

"The small setback in gold prices is likely driven by positive risk sentiment as gauged by rising equity markets," said UBS analyst Giovanni Staunovo. Staunovo expects rising U.S. interest rates and declining U.S. inflation over the course of 2022 to weigh on gold and forecasts a price of $1,650 at the end of the year.

Gold prices ended 2021 down 3.6% for the biggest annual decline since 2015, with economies starting to recover from the coronavirus crisis. Despite surging coronavirus cases, the number of deaths and hospitalizations from the Omicron variant are comparatively low, leading many governments to stop short of lockdowns.

Gold inched up on Tuesday after a spike in U.S. bond yields spurred by bets on earlier-than-expected interest rate hikes from the Federal Reserve led to bullion's worst sell-off in six weeks in the previous session.

"When you have this kind of a rise in yields, that undermines the appeal of an anti-inflation hedge ... (it was) really not surprising to see gold start weaker," DailyFX currency strategist Ilya Spivak said. Towards end-2021 interest rate expectations were rising, but inflation worries were building up even faster, so real interest rates remained anchored, giving gold some appeal as a store of inflation-adjusted value, he said.



Jeffrey Halley, a senior market analyst at OANDA, said prices were helped early on Tuesday by some investors covering short positions. Gold is likely to see resistance at $1,830 and $1,840 an ounce, although it would be a huge surprise if we saw those levels this week, he added in a note.

However, "once the dust settles, it is very important to watch what the FOMC does and not what it says," Saxo Bank analyst Ole Hansen said in a note. U.S. real yields may not rise as much as expected by the market "and with that in mind and given the prospect for U.S. stocks coming off the boil, we believe gold, as well as silver and platinum, will offer a positive return in 2022," Ole added.

In the physical market, the world's second-biggest bullion consumer India splurged a record $55.7 billion on gold imports, amid lower prices and pent-up wedding demand.

The year started off with fresh record highs for equities, but since it is hard to determine whether this winning streak will continue, investors have started to go back into safety, said Ed Moya, senior market analyst at brokerage OANDA. The impact of Omicron is going to be mostly felt on the inflationary side and on economic recovery," Moya added.



Concerns surrounding the Omicron variant have sparked a safe-haven bid in gold, TD Securities wrote in a note, adding that, "higher gold prices are inconsistent with global markets pricing in a 70% probability for a Fed rate hike in March, which places a cap on prices."

Renewed inflation concerns could hit the marketplace in the near term and sap risk appetite as bond yields are likely to continue to rise, Jim Wyckoff, a senior analyst at Kitco Metals, said in a note. Gold's gains came despite higher U.S. Treasury yields and a stronger dollar, with Fed funds futures traders pricing in three rate hikes by the Federal Reserve by the end of 2022.

"Despite the weaker than expected ISM today, the market continued to increase how much it is pricing for the Fed to hike in 2022 and 2023 – now more than 5.5 hikes is priced before the end of 2023," Nancy Davis, founder of Quadratic Capital Management in Greenwich, Connecticut, said in an email.

From a technical point of view, "we would have a new positive signal with the surpass of $1,830, while a decline below $1,800 could bring back the price in the lateral channel between $1,760 and $1,800," Carlo Alberto De Casa, market analyst at Kinesis, wrote in a note.

Gold prices slipped on Wednesday erasing earlier gains, as U.S. bond yields jumped after minutes from the last Federal Reserve meeting showed that the U.S. central bank may need to raise interest rates sooner than expected to curb inflation.

"The gold market has seen a pullback off the recent highs in response to the Fed minutes. The market was already weighed upon by the expectation of a more hawkish Fed," said David Meger, director of metals trading at High Ridge Futures. The bond yields rise is clearly weighing on the gold market. However, the underlying support of premise in this market is the ongoing inflationary pressures and virus concerns brings about a bit of a safe haven demand element."

According to minutes from the Fed's Dec. 14-15 policy meeting, Fed officials said last month that the U.S. labor market was "very tight" and it might need not just to raise interest rates sooner than expected, but also reduce asset holdings quickly. Fed funds futures have priced in an 80% chance of a rate hike in March following the release of the Fed minutes.

Some participants also noted that it could be appropriate to begin reducing the size of the Fed's balance sheet relatively soon after beginning to raise the fed funds rate. The size of the Fed's balance sheet is estimated at $8.5 trillion.

"The tone of the minutes suggested that they're going to start earlier and could extend the tightening. They are very afraid of inflation getting out of hand," said Kim Rupert, managing director, fixed income, at Action Economics. "Looking to shrink the balance sheet more quickly than we thought, that might limit the extent of rate hikes and I think the Fed even sort of mentioned that."

After the Fed's mid-December meeting, rate futures had fully priced in the first hike by May this year. U.S. yields surged and the curve flattened after the Fed minutes as investors braced for what could be multiple hikes that should push short-term rates higher. Some analysts viewed prospects of a March rate hike though as too aggressive given the likely moderation in growth amid the surge in COVID-19 cases and a possible easing of inflation.

"March is definitely aggressive, but the market is ahead of the Fed. I would say it's more May or June," said Ellis Phifer, managing director, fixed income research at Raymond James. If you get data showing pricing pressures and delivery times are easing, I would imagine that would push rate hikes back a little bit...I think we are near peak inflation for the year.

Benchmark U.S. 10-year Treasury yields rose to their strongest level since April 2021, while 30-year yields climbed to more than two-month highs. Higher yields raise the opportunity cost of holding gold.

The rolling seven-day average number of new COVID-19 cases in the United States hit 540,000, a new high for an eighth consecutive day on Tuesday. Hospitalizations of COVID-19 patients in the country have risen 45% in the past seven days and stand at over 111,000, a figure not seen since January 2021.

"What the market has to be concerned with the end goal is how much the Fed is going to surprise going forward," said Stephen Innes, managing partner at SPI Asset Management. If it surprises with one more rate hike, that would be really negative for gold."

The ADP National Employment Report showed private U.S. payrolls surged last month by more than double what economists polled by Reuters had forecast

Spot gold may test a support at $1,801 per ounce, following its failure to break a resistance at $1,830, according to Reuters' technical analyst Wang Tao.

"With the emergence of the new virus, growth is likely to take a hit so after second quarter of 2022 gold should do well," said Kunal Shah, head of research at Nirmal Bang Commodities.

The primary focal point is the number of rate increases and how aggressive the Fed will be with its balance sheet runoff, which has put gold in a vulnerable position, said Ed Moya, senior market analyst at brokerage OANDA. If the movement in Treasury yields goes a lot higher in the short term, that is going to be very disruptive for gold trade, Moya added.

Most currencies will struggle to make any gains against the U.S. dollar in the coming months, as monetary tightening expected from the Federal Reserve will provide the greenback with enough impetus to extend its dominance well into 2022, analysts said. Nearly two-thirds of 49 foreign exchange strategists polled by Reuters between Jan. 4-6 said interest rate differentials would dictate sentiment in major FX markets in the near term, with only two concerned about new coronavirus variants. The vast majority of analysts polled said volatility in FX markets would increase over the coming three months, with well above 80% saying so for both majors and EM currencies.

"There's been a lot of U.S. dollar strength of late, mainly driven by the widening interest rate differentials and inflation dynamics in the U.S. relative to other major markets like Japan and Europe," said Kerry Craig, global market strategist at JP Morgan Asset Management. "The fact the Fed is becoming much more hawkish and reacting to that by tapering much sooner than forecast a few months ago ... (and soon) start raising rates should support the dollar over the first part of the year," he said.

Gold inched up on Friday, hovering close to a two-week low hit in the previous session after the chief of the World Health Organisation (WHO) said the Omicron variant cannot be considered 'mild', while stronger yields capped bullion's gains. The more infectious Omicron variant of COVID-19 appears to produce less severe disease than the globally dominant Delta strain, but it should not be categorized as "mild", World Health Organization (WHO) officials said on Thursday.

Gold prices edged up from three-week lows on Friday after data showed U.S. jobs growth was slower than expected last month even as the Federal Reserve signaled faster rate hikes, which sent bullion on track for a weekly fall.

"With less than expected jobs added in December, but with the unemployment rate in the U.S. falling back toward a multi-year low, it was somehow a mixed report for gold," UBS analyst Giovanni Staunovo said.

Nonfarm payrolls rose by 199,000 jobs last month amid worker shortages, lower than a forecast of 400,000, with moderate job gains expected in the near term as spiraling COVID-19 infections disrupt economic activity.

"A stronger than expected print was more likely to have pressured prices lower, but a weaker print has not significantly altered market rate hike expectations," Standard Chartered analyst Suki Cooper said. The gold price reaction suggests the market is more focussed on inflation risks ahead of the FOMC meeting."

COT Data

This week we do not see big changes in positions, mostly because of holidays. Minor sell-off is reflected in a recent report, but it stands on both sides and indicates the preparation for the NFP release. Speculators just contracted their positions:

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Hedgers were praparing to bearish gold dynamic and they in general were right - they opened new longs and closed some shorts. SPDR fund shows no big changes in sentiment as well.

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US geopolitical strategy brings first fruits

Our long-term view suggests that pandemic in general and supply bottlenecks, in particular, are not occasional and represent an actively managed process that is aimed at achieving definite geopolitical targets by the US. One of them is the weakening of the Chinese economy. We suppose that pandemic terms directly depend on how fast (or slow) the US will reach this target. This, in turn, makes a direct impact on inflation and the level of interest rates. Additionally, on a background of these processes, the geopolitical tension gradually should come on the first stage, as we already see it on an example of military rhetoric around Ukraine, verbal (by far) conflict between Russia and NATO, and recent unrest in Kazakhstan. We suppose that they are parts of the same chain. In our view, 2022 might become the year of geopolitical struggle, and provide unexpected support to the gold market.

It means that the high inflation period should last longer than it is widely suggested right now. It should not stabilize until the summer of 2022. Fed can't raise rates constantly, and at some moments it leads to conflict with fragile economic recovery. We suggest that it might be the major turning point for the gold market. We have doubts that the US turns out a trade war against China, until it triggers a chain-crushing reaction in the Chinese economy, blowing its economic strength. Such campaigns are never started occasionally, so they can't be closed until it reaches the predefined targets. And this strategy is bringing first results...

Eurozone economic sentiment dropped more than expected last month while inflation hit another record high, indicating the economy is under renewed stress as surging coronavirus infections force governments to tighten restrictions. With infections breaking records almost daily as the Omicron variant sweeps across Europe, growth is likely to take a hit around the turn of the year even though governments have largely avoided the debilitating measures that brought their economies to a standstill year ago.

Foreshadowing the pain, the European Commission's Economic Sentiment Indicator, a key gauge of the bloc's economic health, fell more sharply than forecast in December to a level last seen in May. The outlook for services worsened significantly and employment expectations also fell. In Germany, the euro zone's biggest economy, the slowdown is already evident in hard data. Output fell 0.2% on the month, despite expectations for a 1% rise, reinforcing views that Europe's biggest economy came to a halt in the fourth quarter of 2021, with no relief in sight for months.

"Unfortunately, this is where the rebound of German industry stops for the time being. The fourth wave of the pandemic and Omicron should send industrial activity back into hibernation," ING economist Carsten Brzeski said. "It will take until spring before German industry is back on a fully sustainable recovery path."

Eurozone inflation rose unexpectedly last month, likely making for more uncomfortable reading at the European Central Bank, which has consistently underestimated price pressures and come under fire for this from some of its own policymakers. Inflation in the 19 countries sharing the euro rose to 5% from 4.9% in November, a record high for the currency bloc and well ahead of analysts' expectation for 4.7%.

IKEA to Raise Prices as Global Supply Costs Keep Rising - Ingka Group, the owner of 79% of Ikea stores, said Friday that it’s boosting prices by an average of 9% at the world’s biggest furniture retailer. Ingka owns 367 of Ikea’s 463 stores.

Dollar Tree hikes prices 25%. Most items will cost $1.25 - one of America's last remaining true dollar stores — said Tuesday it will raise prices from $1 to $1.25 on the majority of its products by the first quarter of 2022. The change is a sign of the pressures low-cost retailers face holding down prices during a period of rising inflation. Dollar Tree has sold products at $1 for 35 years (!!!).

The demand-side factors contributing to higher inflation may fade as the fiscal support rolled out to bolster the U.S. economy throughout the pandemic winds down but it is not clear how long it will take to resolve supply-side imbalances, Minneapolis Federal Reserve Bank President Neel Kashkari said on Tuesday.

"When is the supply side going to normalize? When are workers going to return?" Kashkari said during a virtual event organized by the Wisconsin Bankers Association. "On that side, it's much less clear how long it's going to take."

For millions in China, the new year began as the old ended - under lockdown. COVID-19 cases are few, particularly of the Omicron variant, but restrictions are spreading fast as authorities keep a zero-tolerance policy before next month's Winter Olympics.

Xian is more than two weeks into a lockdown and harsh rules are rolling out across central China. All 400,000 residents of Yongji, in Shanxi Province, were ordered to remain indoors this week after the virus was detected on a railway turnstile. The measures could render moot any further easing of zooming producer prices in December data due on Wednesday, especially if they trigger fresh supply-chain disruption around the world.

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The historically high pressures on global supply chain networks that have contributed to shortages of key goods and materials and a surge in inflation may have peaked, according to a new index released by the New York Federal Reserve on Tuesday. The Global Supply Chain Pressure Index (GSCPI) surged early in the pandemic when China imposed lockdown measures. Pressures eased as production resumed but picked back up during the winter of 2020 as COVID-19 infections jumped.

"More recently, the [index] seems to suggest that global supply chain pressures, while still historically high, have peaked and might start to moderate somewhat going forward," the researchers wrote in a blog post.
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The researchers also noted that container shipping rates rose more significantly during the most recent economic recovery than after the Global Financial Crisis. But the costs of shipping raw materials, such as coal or steel, rose "on par" with the post-GFC recovery, they added.

Researchers said they adjusted for shifts in demand, but noted that the index is "not a perfect" measure and likely still reflects some demand factors.

In the chart below, we plot GDP-weighted averages of the subcomponents of our countries’ manufacturing PMIs. The measures of supply bottlenecks have risen dramatically during the recent recovery period, and this rise has been most notable for the “delivery time” subcomponent of the PMIs across our seven economies.

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Air Freight Prices Reached Historic Highs during the Pandemic
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The HARPEX (HARPER PETERSEN Charter Rates Index) is published by HARPER PETERSEN and reflects the worldwide price development on the charter market for container ships.
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To understand the cost of shipping, you could take a look at this table -
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Other shipping indexes, such as the Baltic Dry index and indexes that we've taken a look at previously of shipping from Asia to the US and Europe also stand around all-time highs. No relief has happened by far. Atlantic shipping from the US to Europe and back stands the same around 1000$ per container, the same price is for shipping from the US to the China, but opposite direction costs $12-14K.
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We think that if the US appears to be powerful enough to keep these shipping rates for a few months more - the US and EU citizens should start preparation to feasible rate changes for the majority of goods "Made in China" as they should come closer to the goods with "Made in the USA" and "Made in EU" tags. Life should be more expensive. This is a big globalists' programme and stands beyond the scope of this report, but in two words - "green economy", "Green Food", "Green energy", pandemic are set to make life more expensive that people stop enjoying it and turn to "META" Universe, start isolating from each other. With the current processes in long-term perspective gold just can't be cheap.

Still, in the short-term, we expect the headwind as the rate hiking cycle is ready to start, and it is a relatively long run until the moment when inflation remains the same high, while interest rates will increase to 2-2.5% and the economy starts to show first signs of chilling. The gold's drop under the impact of Fed action might become one of the best chances for investing. Geopolitical tensions could smooth the negative effect and may be overcome it if tensions will go out of the reasonable suggestions.
 

Sive Morten

Special Consultant to the FPA
Messages
15,522
Technicals
Monthly

The monthly picture is changing slowly by far. As we've suggested, right on 1st week of the year gold market has tested the new YPP but failed to break it up, suggesting that deeper retracement might happen, especially on a background of stronger PPI/CPI and Retail Sales data next week. Other details mostly stand the same.

Once we've mentioned already 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 the potential appearance of the pennant pattern just confirms this. This, in turn, cares signs of bullish dynamic pressure, as the market stands tight while MACD is going down...

In the short-term market is flirting with YPP and breaking of 1875 top might become an important moment. The support line that makes the shape of the triangle here seems to be more important at the current moment. MACD trend stands bearish, so how the price will flirt with the indicator's line is another interesting moment within a few months.
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Weekly

This timeframe is the quintessence of surprises. First is, weaker NFP data has let the Gold market to bounce, forming a new bullish grabber. If you take a look at the gold futures - you could see that all recent 6 weeks are the bullish grabbers. Price was able to stay above 1750$ lows, keeping bullish context here intact. Finally, the 10-year interest rates have completed predefined 1.8% target, forming bearish butterfly, suggesting that some pullback should happen on next week, forming positive sentiment around the gold market:
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Daily

It means that until the price stands above 1975$, it keeps chances to move higher. If upside action starts, we could consider as 1870$ previous top target as upside extension to 1910-1920$ area where we have cluster of daily/weekly targets:
gold_d_10_01_22.png


Intraday

Despite that we have some bullish moments here - we have to be careful. Now we can't say that 1782$ low is an invalidation point for the bullish scenario because we have other grabbers on the weekly chart. The Fed minutes sell-off was strong and this is the reason why previously we said that reaching of XOP target is highly likely.
Indeed, with the recent drop market moved below OP and K-support area, and was staying there. NFP data has provided some relief but it doesn't look as powerful by far. Besides we do not have any bullish reversal patterns here.
It means that with any position taking we have to place stop somewhere under $1770 area, which seems a bit far right now. Thus, if this scenario doesn't fit you - wait for another pattern that could let us place tighter stop:

gold_4h_10_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,522
Greetings everybody,

Daily setup holds well by far. With the performance of interest rates and FX market, it seems that positive mood is prevailing and gold should follow in the same trend.
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So, with recent upward action, chances on reaching of the XOP target have dropped and now we take it off the table. Powell's speech could bring some surprises today, but we hope that they do not appear to be decisive.
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Right now gold is coming to the 1H Agreement resistance area of 1811. The pullback to the 1800-1805 area might be a good one to consider the long entry:
gold_1h_11_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,522
Greetings everybody,

So, upward action has started accurately. Today is the only source of volatility - CPI report later in the session. We do not expect big surprises in numbers but volatility could rise around its release. Thus, based on market mechanics, Gold market should show any deep retracement anymore, at least until move above the 1830 top on daily chart. Here should be straightforward action.
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Thus, those who have bought yesterday could move stops to breakeven or manage position as you wish. Others who just think about the entry could consider the same tactics as we've followed yesterday. Gold hits local XOP target and minor pullback again could happen. As yesterday, it makes sense to consider nearest two levels 1815 and 1810. Invalidation point for this setup is 1800 lows:
gold_1h_12_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,522
Good morning,

Although our entry point yesterday at 1814 was perfect - gold was not able to show the same degree of happiness as FX market, showing just minor upward action. There are few reasons for that, which we've discussed in video. To keep it short - right now we suggest that the chances for retracement stand high, before gold could keep going higher. This is because US Dollar is oversold right now and interest rates reaction on recent CPI numbers was muted. Thus, today we do not consider any new long position taking again:
gold_d_13_01_22.png


Direct and cross-market analysis makes us think that before gold could going higher - chances on retracement to 1810 or even 1800 area looks high. In fact, we consider reverse H&S pattern to be formed on 4H chart:
gold_4h_13_01_22.png


Which means that you have to decide what to do with your long positions. On 1H chart the downside action could start from minor H&S pattern on top. Divergence is already stand in place.
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This makes us to stay aside from any new long positions by far.
 

Sive Morten

Special Consultant to the FPA
Messages
15,522
Good morning,

So, with the recent gold action we have as positive as tricky moments. First is, the shape of recent pullback shows that positive mood is strong. Take a look at 1H chart - divergence target barely has been completed and gold shows immediate jump out of the support. Second - H&S shape has been erased, which suggests just "V" shape of retracement:
gold_1h_14_01_22.png


On 4H chart we could identify a kind of reverse H&S that we've mentioned yesterday but right shoulder is very fast, which is also probably should be treated as positive sign:
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But, at the same time - we have very strong upside action on 10-year yields, forming the butterfly shape. Technically, it suggests that sooner rather than later but upward continuation to 1.618 should happen. And only weak statistics with inflation standing high could stop it. Combination of "high inflation and high US economy performance" potentially negative to the gold as it lets Fed to act freely. Currently market is just searching balance between these two factions and pricing out excess of dollar value because of acceptable statistics and fading virus fears.
Second - short-term oversold of the dollar. It just brings technical barrier for immediate gold appreciation.
That's why today chances on upward action stand low. And personally I do not consider entry right now.
Still, if you intend to buy - use 1810 support area as some kind of signal line and validity of short-term bullish context and try to take position as closer to it as possible to minimize the risk.
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