Gold GOLD PRO WEEKLY, January 15 - 19, 2024

Sive Morten

Special Consultant to the FPA
Messages
18,648
Fundamentals

Geopolitical problems are raising like mushrooms after the rain. That's why nobody has signed in between, the CPI numbers. With started war in Yemen, everybody has forgotten about the Fed and inflation, that is, by the way, start raising again. Media mostly operates with emotional background, reporting about events but do not discover big numbers that stand behind one or another event. When we dig a bit deeper and see numbers - it discovers really scaring consequences of these events. The same is about Taiwan elections, by the way... Everybody knows that pro-US candidate has won but few knows what does it mean... Generally speaking, global situation suggest that demand for the gold hardly will drop any time soon.

Market overview

Gold prices eased on Wednesday ahead of U.S. inflation data that could shape the Federal Reserve's outlook on interest rate cuts this year, although a softer dollar kept a floor under prices. A New York Federal Reserve report revealed that consumers expect a decline in inflation, while Fed Governor Michelle Bowman on Monday stated that the U.S. central bank's monetary policy seems "sufficiently restrictive".

"If markets have to dilute bets for a March rate cut, spot gold may see a brief stint back in the sub-$2k domain," said Han Tan, chief market analyst at Exinity Group.
"Still, bullion bulls would have no qualms restoring spot gold back above that psychologically important mark once markets get a firmer grasp on the Fed's policy pivot."

Hotter-than-expected inflation data, and hawkish remarks from Federal Reserve officials fuelled worries that higher interest rates could stay unchanged beyond March. The dollar index (.DXY) extended gains after data showed U.S. consumer prices rose more than expected in December, which could delay a much anticipated U.S. rate cut in March.

Cleveland Fed President Loretta Mester said it would likely be too soon for the central bank to cut its policy rate in March, while Richmond Fed chief Tom Barkin said gains on inflation have been too narrowly focused on goods. Traders see an 80% probability of an interest rate cut in March, according to the CME Fedwatch tool.

"We got a little ahead of ourselves," said Phillip Streible, chief market strategist at Blue Line Futures in Chicago, adding that the hawkish comments call into question the timing and number of rate cuts that the market anticipates this year. "There has been a lot of hype behind bitcoin, so people tend to rotate out of different asset classes and that could also be behind some degree of the selling," Streible added.

Gold prices scaled a one-week peak on Friday as an escalation in the Middle East conflict fuelled safe-haven buying, while softer U.S. producer price inflation boosted bets that the Federal Reserve might cut interest rates sooner. Bullion was mostly flat on the week, but extended its run above the $2,000 level to nearly a month. U.S. gold futures settled 1.6% higher at $2,051.60.

U.S. and Britain launched air strikes across Yemen in retaliation against Houthi forces for attacks on Red Sea shipping that the Iran-backed fighters cast as a response to the war in Gaza. Iran condemned the attacks, warning that it will fuel "insecurity and instability" in the region. A rise in geopolitical risk is pushing gold prices up, and at the same time, the U.S. central bank may be getting ready to start moderating its restrictive monetary policy, said Bart Melek, head of commodity strategies at TD Securities.

U.S. producer prices unexpectedly fell in December amid declining costs for goods such as diesel fuel and food, suggesting inflation would continue to subside. Investors typically seek haven in gold in times of geopolitical and economic uncertainty. At the same time, they want to own the precious metal in a rate-cutting cycle. Bullion usually has an inverted relationship with rates — the lower rates, the higher it climbs.

While recent US economic data point to a bumpy path ahead for policymakers trying to bring down inflation to a 2% target, traders appear to be focused on the timing and size of the Federal Reserve’s shift to lowering borrowing costs.

“Gold has responded to the increase in tensions, which clearly indicates that the West is slowly being drawn into the Middle East conflict,” said Nicky Shiels, head of metals strategy at Geneva-based MKS PAMP SA. “It’s another added support to gold.”

Results of the week

As we've mentioned yesterday, the Fed has got bad surprise, because their long term plan could fail. The Fed now sees the major task as to spend 2024 Election year without big jump in inflation and simultaneously with stable households' wealth. As personal savings are melting, somewhere in April-May the Fed supposedly should come with some type of QE, no matter what it will be. In this case, they could last time to postpone aggressive inflation spike on 2025. Now, with raising CPI everything is breaking apart - they haven't started yet to cut rates but inflation is already raising. Oil is turning up again due widening Middle East conflict. And it is total disaster in Global logistics:
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Every second ton of cargo passing through the Red Sea (Suez, Bab El Mandeb) travels in a container, he most marginal market of all listed is the transportation of containers, and the Red Sea is the most important artery connecting European and Asian markets.

Economical consequences are awful. First is, a military operation in the Bab el-Mandeb Strait and the Red Sea could stop all sea traffic between Europe and Asia that goes through the Suez Canal, which is almost 15% of all world trade. This route transports 12% of all marine oil and 8% of all natural gas annually. Brent oil, for example, has already responded with a sharp rise and rose 2% overnight to $78.86 .

Many shipping companies have already begun sending ships around Africa, but this adds 10 days to delivery times and at least $1 million in extra fuel per ship. The insurance premium will naturally increase.

Europe will feel the logistical blow the most. In “normal” times, maritime import logistics accounts for about 7% of the cost of goods, but now this figure can easily exceed 20% . In Covid 2021, when the Evergreen accident occurred in the Suez Canal, this figure reached 25% .

The Shanghai container shipping index very quickly grew from 1 to 2.2 thousand points, and the cost of delivering one 40-foot container from China to Europe rose from $1,148 to $4,000 . In general, if Western countries fail to quickly resolve the issue with Yemen, then inflation in an already unhappy Europe will begin to rise, and population consumption will rapidly fall.

Cargo ship traffic is down 50% since the end of November.
Shipping insurance does not cover war risks. Insurance increased by 300–500% (0.2–0.7% of the value of the vessel/cargo). Cargo ships, not tankers, are hit the hardest. Egypt loses about $10 million a day on this. While Volvo and Tesla already report on interruption of parts delivery and stop production until mid February, because bulk of components are made in China. In Volvo case, this is transmission parts.

Maersk, in a desperate situation, is trying to compensate for the double blow - the blocking of transit in the Red Sea and the drying up of the Panama Canal . To solve the problem, the company is moving some of the containers to the railway running through Panama. But all these efforts are doomed.

Due to Red Sea crisis, the cargo shipping market is reshaping. 4 of the top 5 world leaders in container shipping have their headquarters in continental Europe. Only the Chinese operator Cosco was randomly included in this list:

- Mediterranean Shipping Company (MSC) Geneva, Switzerland;
- AP Moller-Maersk Group (Maersk) – Copenhagen, Denmark;
- CMA CGM Group (CMA) – Marseille, France;
- Hapag Lloyd – Hamburg, Germany.

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The world's largest logistics container operators do not include companies from the United States or Great Britain, but the navies of these countries have been protecting commercial shipping through the Red Sea, chasing Houthi drones for almost a month.

As a result of this mess, Chinese operators Cosco and Evergreen have already received huge competitive advantages: there has been a multiple increase in prices for transporting containers from Asia to Europe. At the same time, Cosco and Evergreen maintained their traditional sailing routes through the Red Sea, that is, they kept costs at pre-war levels.

But this is not the end of the story yet. Petrodollar system is broken. It means that the US now can't export inflation in other countries and finance it by devaluation of other currencies. For decades, the petrodollar played on the financial system of the US and its allies - Japan, EU etc. To combat inflation, the Fed begins to raise rates, which leads to an influx of capital into the American dollar. This influx raises the dollar's value against other currencies, primarily developing countries.

The rising dollar, among other things, reduced the cost of oil, the main resource of civilization. Cheaper oil had a deflationary effect on the dollar. Dollar inflation slowed sharply, but living standards fell in oil-exporting countries. The petrodollar is one way to transmit inflation from the United States to the developing world.

This instrument, as been broken. The dollar has risen in price in recent months, but oil has held back from falling and vice versa.

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Taking in consideration the scale of ongoing processes and that the war in Yemen has not even started yet, we suspect that it will be nightmare effect, when real interest rates could drop under the floor and even deeper. So, the second stage of inflationary spiral unavoidable.

If the acceleration of inflation begins in 2024 and reaches its peak by the winter of 2024-2025, then a third peak can be expected in 2026, and a fourth in winter 2027-2028. At the first peak, the official CPI was 8-9%, the second - the minimum is worth waiting for 10-12%, about the third and fourth it is still difficult to say - if everything does not go into hyper, then it is possible that the CPI will go somewhere for the rest of the period range 10-15%.

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Simple question is - what the Fed could do to avoid it? Could it, say, raise rate more? Nope, besides, 0.25-0.5% rate hike will not help at all. While the Fed is already at the edge. Economy is breaking apart. And here is valuable comments come.

First is, from Commerzbank, but for the truth sake, it is needed to say that this is the only meaningful comment.

The important thing for the Fed is that the last mile in returning inflation to the target level seems more difficult. Therefore, we believe that the Fed will not cut interest rates in March, as the market expects, but only in May

Former PIMCO boss, Bill Gross aka "Bond King" tells that US Treasuries are not attractive right now and overpriced. He does not consider its purchase for now.

BlackRock, the heart of the shadow banking system, has stepped up its infrastructure/real asset purchases. The largest private manager in the world is buying the investment fund Global Infrastructure Partners for $12.5 billion.

“In terms of its potential consequences for the United States and Great Britain, this event may turn out to be more significant than demonstrative attacks on Houthi positions and Rishi Sunak’s no less demonstrative visit to Kiev.”

GIP’s portfolio includes investments in the assets of London Gatwick Airport, Edinburgh and Sydney airports, the ports of Melbourne and Brisbane, the SUEZ Group of companies, etc.” + add: Saavi Energía, the largest private electricity supplier in Mexico, LNG plants: Freeport (second largest in the USA) and Rio Grande projects in Texas, Gladstone LNG in Australia, as well as ADNOC gas pipelines (UAE network).

This is no longer a bell, but a beep that we need to escape from government bonds and other bubbles. The sovereign debt crisis is "Nigh", as they say.

This tells very simple thing - the yield of the US bond will be unattractive and insufficient to compensate inflation. Actually they have said this in May 2023.

Liquidity Problems are already here

Meantime, while traders dream about QE, it seems its already here. In recent week the outflows from the Fed REPO accounts have stopped. Despite that now all banks who have free liquidity are making arbitrage:

The rate under the Fed's term bank facility is 4.83% compared to 5.59% in September. ️Institutions with Fed accounts can borrow from BTFP at 4.83% and keep them at the central bank to earn 5.40% interest on reserve balances. This explains why REPO accounts are falling - everybody transfer money to Reserve accounts.

But this week, REPO accounts outflows stops and Fed balance has increased at highest level since March 2023, which is not surprising due massive contraction of M2 :
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Frome this point of view coming government shutdown brings a fresh coat of paint. And the US coming to this point with shocking numbers. Besides, things have gotten worse in backyard of the US stock market.

if you look at the jobs created in 2023, you can see that consumer demand was greatly supported by job growth among public sector employees (in a broad sense), although before that the trend was flatter.

By and large, this is a great way to avoid a recession by increasing government spending (and the budget deficit). And this is not very good, because civil servants generally do not create value in the economy, but only redistribute it. I think everyone remembers last year’s story with the hiring of tens of thousands of people in the tax service - the best example of re-distributors.

The shutdown will potentially have a greater and greater effect on demand as time goes on, since when the work of various departments is stopped, more and more government employees will lose income, and jobs in other industries will not appear much.

In a government shutdown, broader spending cuts are more likely to have an impact, since GDP growth is currently driven by a colossal budget deficit of 8% of GDP, which is financed by rising public debt. Take away this deficit and GDP will collapse, and unemployment will fly somewhere to 10-12%.

But in order to start this fatal process, political will and correct timing are needed. Trump said here that he does not want to become the next Herbert Hoover. A seasoned conspiracy theorist will say that this could be a bold hint to the Republican majority that it is necessary to finish negotiating the budget and initiate a recession and crisis, so that Trump, along with the Republicans, will appear as saviors in the next election cycle, raking up the problems created by the Democrats. But this is what conspiracy theorists will say.

So, it seems that it is prosperous time for gold market, and first signs we should see in 2-3 months, when fruits of global collapse will find the way in the US statistics. See, today we were talking about absolutely different topics, at first glance having no relation to the gold market. But, with a deeper look, we could see how everything is related to each other in modern world.
 
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Technicals
Monthly

So, on monthly picture everything mostly is the same. Trend remains bullish. As we've got High Wave pattern in December, now direction depends on breakout. Meantime, January is inside month. Price now is flirting with YPP but has not tested it yet. As market stands very close - it is very probable that it should try to test it in January.

Our primary scenario here is the same - big reverse H&S on top with 2270$ upside OP target. It stands very close to new YPR1 area of 2200$. Now, with new escalation spiral in Middle East, gold could turn to higher activity on next week:

gold_m_15_01_24.png


Weekly

Here we do not see any specific patterns by far. Gold keeps weekly trend bullish, price is not at overbought. So, formally it has no strong barriers above. Now we just see that market shows healthy reaction on 2016 weekly support area. Thing that we still need to find out - whether this bounce will turn to major trend continuation or, we still will get deeper retracement. Fundamental background stands in favor of former scenario...

gold_w_15_01_24.png


Daily

Here market actually has shown performance that we've expected. As it has failed to break HW pattern down - it was logical to suggest opposite action. But, this action was stronger than we thought. In fact, on next week we intend to keep an eye on two patterns. First one is here - potential bearish grabber might be formed. Besides, context here still remains bearish:
gold_d_15_01_24.png


Intraday

Second is large reverse H&S pattern on 4H chart. Initially we thought to consider two different H&S patterns. But, since upside action was very strong, now we have only larger one:
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Next week we start with monitoring two Fib support levels for potential long entry. Picture suggests that it is reasonable to watch for 2030$ area, but we suggest that 2043$ support could work, because this is former K-resistance that was broken without respect. Very often it becomes support area that market re-testing by retracement. So, once again, maybe using two stage entry is not bad idea. For now we do not consider any new shorts by far. They could become possible, if market drops under 2030$ at least.
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Greetings everybody,

So, in general everything goes with our trading plan. Although it was nice bounce from 2043$ support on intraday charts, it seems that we still are getting 2-leg downside action. Situation is complicated by potential bearish grabber that might be formed today on daily chart. We talked about it last week.

Now gold is moving lower, despite recent Iranian attack, but it is for now. Situation could change rapidly, when everybody understand what is really going on. Media now mistakenly describe the attack as "failed", but in reality it was very successful, we will explain this in Telegram today.
gold_d_16_01_24.png


On 4H chart we're going with our H&S pattern. Now it seems that we still have to start watching for 2030 support area as potential bottom of right arm:
gold_4h_16_01_24.png


As I said, it was healthy bounce up from 2043$ support, but it was not strong enough to re-start major upside tendency. So, downside AB-CD is possible. Now we will be watching for 2030$ area as our 2nd entry zone.
For some case I put the butterfly shape here. If miracle happens and "B" point lows survive, gold keeps chances on upside continuation. But now this chance looks phantom. Anyway, let's have a look...
gold_1h_16_01_24.png
 
Greetings everybody,

So, daily grabber is formed and gold was not able to stay above vital 2030$ support area. So, our bullish scenario now is cancelled. With the grabber on table and untouched YPP around 2003$, it seems the first area that we should consider is 2K:
gold_d_17_01_24.png


But potentially we also consider action to ~1986$ area, just because of AB=CD and potential "222" Buy pattern. If you take a look in the circle, it might seem that we could get double bottom here... anything could happen, of course, but gold recent performance and cross market analysis of DXY and bonds suggest that it is low chances for immediate upside reversal.
gold_4h_17_01_24.png


scalp traders could consider some intraday bullish setups, aiming on upside bounce, but this is not our major scenario now. Take a look on 1H chart how market is moving between support/resistance zones. Now it has dropped back inside the channel, which is difficult to call bullish. Maybe we could get minor tactical bounce, but major tendency should continue later.
gold_1h_17_01_24.png
 
Greetings everybody,

In general everything stands nice, gold goes with the plan that we've discussed yesterday. As we've explained - chances on downside continuation are better and now price has dropped not only below the High wave lows, but also breaks trendline support:
gold_d_18_01_24.png


This lets us to follow our plan with downside AB-CD and potential "222' pattern with 1985 target. On 4H chart we have other bearish signs - CD leg acceleration, flag consolidation shape.

gold_4h_18_01_24.png


On 1H chart for some case we mark 2020 resistance area. If it still happens that gold will bounce - this might be nice area to consider another short entry.

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Greetings everybody,

So, it seems that we should be ready for a new reality, when gold is changing direction everyday due to big amount of political and economical events. Now market still keeps bearish nominal context, but is coming close to vital area:
gold_d_19_01_24.png


Based on the swings' structure, 2030-2040 K-area seems critical for bearish context. Because it was set right after downside breakout. Thus, bears have to hold it, otherwise, with upside breakout situation will turn into bullish.

Yesterday we've discussed B&B "Sell" pattern that might be formed here. Well, maybe it is not perfect one as we have more than 3 closes above 3x3 DMA, but all other features remain. Besides, level is rather strong.
gold_4h_19_01_24.png


On 1H chart we have upside XOP around 2032$ that makes Agreement with K-resistance area. Thus, it seems potentially attractive for short entry with low potential risk:
gold_1h_19_01_24.png
 
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