Sive Morten
Special Consultant to the FPA
- Messages
- 18,639
Fundamentals
Gold market mostly was driven by US-Iran crisis, and only on Friday, on relief, NFP data makes impact on Gold prices. Big volatility put the shadow on natural long-term factors, because gold actually has started growth before the Christmas. But market overreaction makes them hidden and now we need to wait when political effect will exhaust. This, in turn, makes us to deal with tactic short-term trading setups on the market.
Gold edged higher on Friday, and was on track to post a weekly gain for fifth straight week, as fresh sanctions on Iran by the United States stoked uncertainty supporting demand for the bullion. The targets of the sanctions included Iran's manufacturing, mining and textile sectors as well as senior Iranian officials who Washington said were involved in the Jan. 8 attack on military bases housing U.S. troops.
"The main catalyst for gold prices is the dialogue that's taking place over Iran and weather or not we are going to see an acceleration of the conflict... The instability over that is causing all the volatility," said Jeffrey Sica, founder of Circle Squared Alternative Investments. With the sanctions its becoming obvious that there is going to be even economic consequences, Sica added.
Gold, often considered a safe investment during political and economic turmoil, surged above $1,600 on Wednesday after Iran launched missile strikes on U.S. forces in retaliation for the killing of its top commander in a drone attack. However, prices retreated 4% after the two sides softened their stance.
"The pullback that we saw the last couple of days gave people an opportunity to buy today," said Michael Matousek, head trader at U.S. Global Investors. "There's some resistance at $1,562 but if it trades up through there, that's going to be a key level to where short-term traders are going to be involved."
Meanwhile, data from the U.S. Labor Department showed job growth slowed more than expected in December helping prop up the bullion further. The U.S. dollar also fell from four-week highs against the safe-haven yen and slid versus the Swiss franc on the possibility of renewed tensions in the Middle East.
Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell for the second straight session on Thursday. In first ten days of 2020 reserves has dropped for ~20 tonnes from 895 to 874.52 by the end of 10th of January.
At the same time, CFTC data shows increasing of net long position this week to all time high of 322K contracts. Divergence with SPDR data warns us that we should be careful with treatment of this event. Because it could be just emotional splash in demand on a background of Middle East conflict. Usually when net position hits all time high or low - this is event in favor of reversal, either major or tactical. It means that gold hardly will continue upward action immediately. This, in turn, confirms our view - bullish position that we consider has short-term perspective:
Beyond of Middle East, major topic is US-China relation and now it is interesting what is "Phase 1" agreement and what will be with "Phase 2". In previous update we already said that this journey is not over yet and it definitely will be "Phase 2" as D. Trump will try to squeeze everything from China to improve US international trade income and balance.
As Fathom consulting writes in recent report - ‘Phase 1’ trade deal agreed, but ‘Phase 2’ will be more challenging, phase 1 agreement only sounds as major impact, but total effect just slightly reduces tariffs burden on China:
China and the US have agreed a ‘Phase 1’ trade deal which will be signed on 15 January. Under the terms of the deal the US did not implement tariffs scheduled for 15 December and reduced the rate applied on goods that were tariffed in September from 15% to 7.5%. China, meanwhile, has promised to buy more US agricultural goods and to better protect intellectual property rights. However, around $250 billion worth of US imports from China remain subject to tariffs at a 25% rate. The effective tariff rate will be close to 20% even after the ‘Phase 1’ deal, up from around 3% before President Trump took office.
In our view, the next round of talks will be much more difficult regardless of whoever is in the Oval Office next January. Fathom’s China Exposure Index (CEI) is a proprietary indicator that measures the performance of US-listed firms that do business in China against their domestic peers and as such represents a market-implied gauge of investors’ perceptions about the prospects for US firms doing business in China. Despite the deterioration in trade relations it is above the level it was at in November 2016 and in fact rallied through 2019.
Technical
Monthly
Middle East political events help gold to hit extended weekly and monthly targets. Particular speaking, here, price is testing major monthly 5/8 Fib resistance level. And gold missed XOP just for 20$. It means that our next target here is still 1650.
At the same time, take a look what we have... Gold stands at major monthly resistance level, weekly Overbought, net long position is extremely high and now we have some relief in tensions on Middle East. This combination shifts advantage in favor of retracement and diminish chances on immediate upward action and challenge of our major 1650 target.
Here, on monthly chart we already see pullback out from the level. In general gold has pretty much room for pullback and keeping overall context intact. 40 - 50 $ downside action should not hurt upside scenario.
Weekly
Weekly price action corresponds to our expectations but, with just stronger volatility due well known events. Indeed, 1567 XOP target has been hit, stop orders above recent top have been grabbed and market has failed to break monthly resistance, showing downside pullback. Besides, gold stands at overbought level as here, on weekly, as on daily chart.
Outside of political background that could change situation in a blink of an eye, technical picture supports idea of deeper downside retracement. In fact, direction relates to the doji pattern that has been formed and its breakout. Gold could spend some time inside of it, to accommodate new price level. But sooner or later its range will be broken and price will follow in the same direction. Existing of 1446 Yearly Pivot that has not been tested yet - also adds point in favor of deeper retracement down in medium-term perspective.
Anyway, based on the monthly picture, we definitely do not want to take long-term bullish position and will be watching for better entry levels. Our daily bullish setup has a tactical, short-term purpose.
Daily
Our setup here is B&B "Buy" Dinapoli trade. It looks inspiring but we have to follow conservative targeting for this setup because of situation on weekly chart. It is good, if upside action will follow but probably we should stop just at 5/8 Fib resistance level and do not count on upside continuation and breakout.
This B&B has specific issue. Take a look market hits 3/8 Fib level on Thu, while first close below 3x3 DMA has happened only on Friday and at higher level, when upside pullback already has started. Still, this B&B is still valid and we will try to use it:
Intraday
As a target we should use 1584 Fib resistance as we've said above. This is classical DiNapoli targeting for B&B trades. Now, price has completed minor AB-CD upside action which has been trigger weak NFP report. It means that we could consider minor pullback on 1H chart for position taking:
On 30m chart it seems that 1552-1554 K-support area is the one that we should keep an eye on. Also it corresponds to harmonic type of action as previous lows stand at the same level. As usual - we do not want to see just one thing - miserable collapse. Downside action should be slow and gradual, showing the shape of retracement.
As soon as this pullback will happen, B&B should turn to most active stage. Let's see whether this will happen or not...
Conclusion:
Thus, it seems that gold continues long-term upside trend and shows next stage of our long-term scenario. As we've said above, we suggest that it is solid driving factors stand on a background of this action and stock market is the first one which should feel the pressure of this rally. Despite of solid political factors that hit market few days ago - rally has started a bit earlier. This is the reason why we think that upside action should not end when this political factor will exhaust. Even despite political shakes - gold has enough factors of geopolitical instability.
In short-term perspective, market was a bit too busy with political component. Market has no potential to show motion to new top and probably will spend some time in retracement or existing trading range. That's why or trading setup mostly is tactical.
Gold market mostly was driven by US-Iran crisis, and only on Friday, on relief, NFP data makes impact on Gold prices. Big volatility put the shadow on natural long-term factors, because gold actually has started growth before the Christmas. But market overreaction makes them hidden and now we need to wait when political effect will exhaust. This, in turn, makes us to deal with tactic short-term trading setups on the market.
Gold edged higher on Friday, and was on track to post a weekly gain for fifth straight week, as fresh sanctions on Iran by the United States stoked uncertainty supporting demand for the bullion. The targets of the sanctions included Iran's manufacturing, mining and textile sectors as well as senior Iranian officials who Washington said were involved in the Jan. 8 attack on military bases housing U.S. troops.
"The main catalyst for gold prices is the dialogue that's taking place over Iran and weather or not we are going to see an acceleration of the conflict... The instability over that is causing all the volatility," said Jeffrey Sica, founder of Circle Squared Alternative Investments. With the sanctions its becoming obvious that there is going to be even economic consequences, Sica added.
Gold, often considered a safe investment during political and economic turmoil, surged above $1,600 on Wednesday after Iran launched missile strikes on U.S. forces in retaliation for the killing of its top commander in a drone attack. However, prices retreated 4% after the two sides softened their stance.
"The pullback that we saw the last couple of days gave people an opportunity to buy today," said Michael Matousek, head trader at U.S. Global Investors. "There's some resistance at $1,562 but if it trades up through there, that's going to be a key level to where short-term traders are going to be involved."
Meanwhile, data from the U.S. Labor Department showed job growth slowed more than expected in December helping prop up the bullion further. The U.S. dollar also fell from four-week highs against the safe-haven yen and slid versus the Swiss franc on the possibility of renewed tensions in the Middle East.
Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell for the second straight session on Thursday. In first ten days of 2020 reserves has dropped for ~20 tonnes from 895 to 874.52 by the end of 10th of January.
At the same time, CFTC data shows increasing of net long position this week to all time high of 322K contracts. Divergence with SPDR data warns us that we should be careful with treatment of this event. Because it could be just emotional splash in demand on a background of Middle East conflict. Usually when net position hits all time high or low - this is event in favor of reversal, either major or tactical. It means that gold hardly will continue upward action immediately. This, in turn, confirms our view - bullish position that we consider has short-term perspective:
Beyond of Middle East, major topic is US-China relation and now it is interesting what is "Phase 1" agreement and what will be with "Phase 2". In previous update we already said that this journey is not over yet and it definitely will be "Phase 2" as D. Trump will try to squeeze everything from China to improve US international trade income and balance.
As Fathom consulting writes in recent report - ‘Phase 1’ trade deal agreed, but ‘Phase 2’ will be more challenging, phase 1 agreement only sounds as major impact, but total effect just slightly reduces tariffs burden on China:
China and the US have agreed a ‘Phase 1’ trade deal which will be signed on 15 January. Under the terms of the deal the US did not implement tariffs scheduled for 15 December and reduced the rate applied on goods that were tariffed in September from 15% to 7.5%. China, meanwhile, has promised to buy more US agricultural goods and to better protect intellectual property rights. However, around $250 billion worth of US imports from China remain subject to tariffs at a 25% rate. The effective tariff rate will be close to 20% even after the ‘Phase 1’ deal, up from around 3% before President Trump took office.
In our view, the next round of talks will be much more difficult regardless of whoever is in the Oval Office next January. Fathom’s China Exposure Index (CEI) is a proprietary indicator that measures the performance of US-listed firms that do business in China against their domestic peers and as such represents a market-implied gauge of investors’ perceptions about the prospects for US firms doing business in China. Despite the deterioration in trade relations it is above the level it was at in November 2016 and in fact rallied through 2019.
Technical
Monthly
Middle East political events help gold to hit extended weekly and monthly targets. Particular speaking, here, price is testing major monthly 5/8 Fib resistance level. And gold missed XOP just for 20$. It means that our next target here is still 1650.
At the same time, take a look what we have... Gold stands at major monthly resistance level, weekly Overbought, net long position is extremely high and now we have some relief in tensions on Middle East. This combination shifts advantage in favor of retracement and diminish chances on immediate upward action and challenge of our major 1650 target.
Here, on monthly chart we already see pullback out from the level. In general gold has pretty much room for pullback and keeping overall context intact. 40 - 50 $ downside action should not hurt upside scenario.
Weekly
Weekly price action corresponds to our expectations but, with just stronger volatility due well known events. Indeed, 1567 XOP target has been hit, stop orders above recent top have been grabbed and market has failed to break monthly resistance, showing downside pullback. Besides, gold stands at overbought level as here, on weekly, as on daily chart.
Outside of political background that could change situation in a blink of an eye, technical picture supports idea of deeper downside retracement. In fact, direction relates to the doji pattern that has been formed and its breakout. Gold could spend some time inside of it, to accommodate new price level. But sooner or later its range will be broken and price will follow in the same direction. Existing of 1446 Yearly Pivot that has not been tested yet - also adds point in favor of deeper retracement down in medium-term perspective.
Anyway, based on the monthly picture, we definitely do not want to take long-term bullish position and will be watching for better entry levels. Our daily bullish setup has a tactical, short-term purpose.
Daily
Our setup here is B&B "Buy" Dinapoli trade. It looks inspiring but we have to follow conservative targeting for this setup because of situation on weekly chart. It is good, if upside action will follow but probably we should stop just at 5/8 Fib resistance level and do not count on upside continuation and breakout.
This B&B has specific issue. Take a look market hits 3/8 Fib level on Thu, while first close below 3x3 DMA has happened only on Friday and at higher level, when upside pullback already has started. Still, this B&B is still valid and we will try to use it:
Intraday
As a target we should use 1584 Fib resistance as we've said above. This is classical DiNapoli targeting for B&B trades. Now, price has completed minor AB-CD upside action which has been trigger weak NFP report. It means that we could consider minor pullback on 1H chart for position taking:
On 30m chart it seems that 1552-1554 K-support area is the one that we should keep an eye on. Also it corresponds to harmonic type of action as previous lows stand at the same level. As usual - we do not want to see just one thing - miserable collapse. Downside action should be slow and gradual, showing the shape of retracement.
As soon as this pullback will happen, B&B should turn to most active stage. Let's see whether this will happen or not...
Conclusion:
Thus, it seems that gold continues long-term upside trend and shows next stage of our long-term scenario. As we've said above, we suggest that it is solid driving factors stand on a background of this action and stock market is the first one which should feel the pressure of this rally. Despite of solid political factors that hit market few days ago - rally has started a bit earlier. This is the reason why we think that upside action should not end when this political factor will exhaust. Even despite political shakes - gold has enough factors of geopolitical instability.
In short-term perspective, market was a bit too busy with political component. Market has no potential to show motion to new top and probably will spend some time in retracement or existing trading range. That's why or trading setup mostly is tactical.
