Gold GOLD PRO WEEKLY, January 17-21, 2022

Sive Morten

Special Consultant to the FPA
Messages
15,946
Fundamentals

The gold market shows a bit different reaction on the recent bulk of statistics that we've got in two weeks. In general, reaction stands positive but not as strong as, say, on the FX market. This is because of the tight relation to interest rates. Despite relatively poor Retail Sales report, interest rates remain under pressure of two drivers - direct changing of the interest rates, which could start as soon as on March, and indirect rate increase that should be the by-product of the coming quantitative tightening program. These two moments do not let the interest market to "relax".

Market overview

Gold was flat on Monday, hovering near a three-week low, as traders awaited December U.S. inflation data that could reinforce the case for earlier-than-expected interest rate hikes by the U.S. Federal Reserve after weaker jobs data. Fed funds futures have priced an almost 90% chance of a rate hike in March and a more than 90% chance of another one by June.

An uptick in retail appetite for physical gold prompted dealers in India to charge premiums last week, while upcoming Lunar New Year festivities brightened the outlook for sales in Singapore. U.S.-Russia talks over rising tension in Ukraine also have traders on the edge, as the two sides seem far apart and failure risks an armed confrontation on Europe's doorstep.

People are happy to bid a little bit for gold on the dip. The market is still sort of on the back-foot because of the high yields at the end of last week's close," said Nicholas Frappell, a global general manager at ABC Bullion. (If) inflation data is a little bit hotter than expected, this will only confirm people's expectations (of aggressive tightening from the Fed). You might see a little bit of decline in real yields, and that would be gold positive," Frappell said.

Gold is holding around the $1,800 area despite the rise in yields, showing that the market is looking at other factors such as the inflationary environment and geopolitical tensions, said Saxo Bank analyst Ole Hansen. "The weakness in stocks has potentially also added some support to the precious metal market. While there is a chance that yields could move even higher than current levels, the bulk of the initial move has potentially taken place, Hansen said. Ongoing tensions between the United States and Russia over Ukraine and unrest in Kazakhstan are also stoking geopolitical concerns, he added.

"We've got inflation working in gold's favor, but yields are pushing prices lower leading to a tug-of-war between these two factors," said Bob Haberkorn, senior market strategist at RJO Futures. The sentiment on gold is buy-and-hold, with prices settling into a range of around $1,800, Haberkorn added.

Goldman Sachs expects the Fed to raise interest rates four times this year and begin the process of reducing the size of its balance sheet as soon as July. The investment bank, which earlier predicted the Fed would raise rates in March, June and September, now expects another hike in December.

Gold prices rose on Tuesday, supported by a weaker U.S. dollar and Treasury yields, as traders awaited December inflation data and weighed bets for quicker interest rate hikes by the Federal Reserve.

"Pullback in both the U.S. dollar and 10-year treasury yields are supporting gold prices, but the fact that markets are still seeing three to four interest rate hikes this year is limiting the upside potential," said Margaret Yang, a strategist at DailyFX.

The dollar slipped after U.S. Federal Reserve Chair Jerome Powell's testimony before Congress did not spring any surprises in terms of monetary tightening, while a retreat in bond yields also lent support. Powell noted that policymakers were still debating approaches to reducing the Fed's balance sheet and said inflation is running very far above target and "it is a long road" to anything close to restrictive policy.

"The fact that Powell wasn't more hawkish than expected has maybe assuaged the gold market bulls a little bit," said Jim Wyckoff, a senior analyst at Kitco Metals.

"Gold prices rose as the bond yield rally paused as Fed Chair Powell signalled the Fed is likely to begin normalizing policy this year," Ed Moya, senior market analyst at brokerage OANDA, wrote in a note. The longer gold stays above $1,800, the more annoyed the shorts will become."

Peter Mooses, a senior market strategist at RJO Futures said economic uncertainty tied to the pandemic and volatility in wider markets also seemed to be helping safe-haven gold.

Gold firmed on Wednesday as data showing U.S. inflation was within expectations dented the dollar and prompted buying from investors who seemed to have priced in the Federal Reserve's likely interest rate hike trajectory.


Standard Chartered analyst Suki Cooper said gold prices have held up "remarkably well" even as the market continues to look for the first Fed rate hike in March.

"Historically, gold has tended to price in rate hikes early. Price action suggests that the market has priced in rate-hike headwinds and the scope for near-term USD strength."

But the building inflationary pressures are likely to keep gold supported in the coming weeks, pushing it above technical resistance around $1,830, said David Meger, director of metals trading at High Ridge Futures.

"Gold seems like it is in a good place as Treasury yields won't be rallying much higher until financial markets have balance sheet runoff certainty and that won't happen until at least a couple more Fed meetings," Edward Moya, senior market analyst at brokerage OANDA, said in a note. the overall gold market reaction to the data was rather muted since it did not change the narrative of what the Fed is likely to do in March. Equity traders are nervous about the Fed tightening its monetary policy. The PPI data being mostly below expectations and a bump in jobless claims supported the idea that it could possibly make the Fed pump the brakes on its "hawkish rhetoric," Moya added.

Gold gained briefly after the release of data showing retail sales tumbled by 1.9% in December as Americans struggled with shortages of goods due to supply chain bottlenecks and an explosion of COVID-19 infections.

Gold is acting as a placeholder in people's portfolios "until the dust settles" in terms of where the economy is going, said Philip Streible, chief market strategist at Blue Line Futures in Chicago. The weak data this week could eventually either cause a sell-off in wider markets or prompt the Federal Reserve to curb rate hike expectations, and gold gets a tailwind either way, Streible added. However, overall declines in the dollar this week put bullion on track for a weekly gain of about 1.1%.

"Considering that markets will ultimately remain intensely focused on the Fed's exit, fewer sources of upside flow in the coming weeks could leave gold prices vulnerable to a consolidation", TD Securities said in a note.

When the supply bottlenecks will be over?

“The economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation,” Fed Chairman Jerome Powell said this week. We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation,” the Fed chief told senators at his confirmation on Tuesday. We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
  • In December, there were still only 149 million non-farm jobs in the economy, compared with 157 million that would have been expected if employment had continued growing along with its pre-pandemic trend.
  • The civilian labor force participation rate for those aged 25+ years was still only 62.8% in December compared with 64.5% in the same month in 2019.
  • Real gross domestic product is just 2.5% below its pre-pandemic five-year trend. Real personal consumption expenditures are only 0.8% below trend.
  • Total energy consumption was still 1.1% below track in the three months to September
  • manufacturing production was already 2.9% above its anemic pre-pandemic trajectory by November.

In practice, the pandemic and recession are likely to have disrupted some productivity growth and destroyed some capacity semi-permanently, so spare capacity maybe even less than these figures suggest.

With the economy operating close to full capacity, but demand still increasing rapidly, inflationary pressures have accelerated significantly. If the economy is like a complex system or a machine, the rate-limiting factor or source of friction, in this case, is not the availability of labor but tightness in production capacity, energy, and other raw materials.

In the first nine months of 2021, the White House and Federal Reserve’s exclusive focus on the labor market blinded them to the increase in frictional pressures in other parts of the system. Policymakers attempted to use macroeconomic policy (low-interest rates, bond-buying, and government spending) to solve a microeconomic problem (persistent under-employment in sections of the labor force).

In April, White House advisers gave a lengthy press briefing in which they argued the economy could be run “hot” without “overheating”, but this has proved impossible. There is not enough manufacturing capacity, freight transportation capacity, oil, gas, and other raw materials to sustain the rapid rate of demand growth being fuelled by expansionary monetary and fiscal policies.

The resulting excess demand is showing up as rapid price increases across a broadening range of final products (furniture), semi-finished products (semiconductors), and raw materials (cotton). Now policymakers have a macroeconomic problem (too much demand) they are attempting to solve with microeconomic interventions (antitrust enforcement and targeted measures to support supply chains).

Prices will continue to escalate until aggregate demand is brought back into line with aggregate supply, either through slower demand growth, faster supply growth, or some combination of the two. In practice, there may be some scope to increase supply growth, but it is likely to be limited in the short term, which means most of the adjustment will have to come from slower growth in demand.

Ending central bank bond buying, higher interest rates, slower growth in government spending and tax rises will all likely be needed to moderate demand growth over the next two years and reduce inflationary pressure. The challenge for policymakers is to achieve a slowdown in demand growth, and inflation, without tipping the economy into a recession.

PIMCO writes in its recent report, concerning inflation and bottlenecks:

While the overall pace of core U.S. inflation in December 2021 remained strong, underlying details in the Consumer Price Index (CPI) data suggested some stabilization from the recent reacceleration. This reinforces PIMCO’s outlook for U.S. inflation to begin to moderate, likely peaking in February and then trending back toward the central bank’s target throughout 2022.
With inflation at multi-decade highs, upside risks to inflation expectations remain elevated. Taken together with the recent drop in U.S. unemployment, it is consistent with PIMCO’s expectations for the U.S. Federal Reserve to start to hike rates in March 2022 and move to further tighten policy by allowing the balance sheet to shrink later this year.
We continue to see upside risks supporting Fed officials’ decision to tighten policy more quickly than they previously projected. First, we continue to see upside risks to inflation expectations, as the longer inflation stays elevated, the greater the risk that consumers start to adjust their behavior. Second, we see risks from the recent global surge in COVID-19 cases related to the omicron variant. While we expect U.S. real GDP growth to slow in 1Q 2022 due to the virus outbreak as well as the breakdown in negotiations over the Build Back Better fiscal plan, we see risks that supply disruptions cause the inflation outlook for 2022 to rise further.
Another disruption to production in China and other key U.S. suppliers would come at a time when U.S. retail goods inventories remain very low, raising the risk of an outsized impact from any further shutdowns.

As we do, PIMCO also sees direct relation between inflation and supply constraints. Thus, they write in their research, providing one of the possible scenarios:

Risk scenario #1: Inflation remains persistently elevated. Maybe 1) supply constraints don’t ease (or become worse due to additional COVID outbreaks), 2) the recently strong productivity growth trends (at least in the U.S.) sputter out, or 3) the incremental labor supply gains resulting from a recovery in prime-age participation and/or immigration don’t materialize. Or alternatively, it’s possible that inflation expectations rise as a result of the already elevated inflation prints, prompting stronger wage bargaining, which itself feeds into more persistent inflation.

Meantime, the bottlenecks keep bringing fruits. Last time we've mentioned rising prices by IKEA and Dollar Tree. This week Netflix raises prices for subscriptions by ~10% :

Netflix Inc has raised its monthly subscription price by $1 to $2 per month in the United States depending on the plan, the company said on Friday, to help pay for new programming to compete in the crowded streaming TV market. The standard plan, which allows for two simultaneous streams, now costs $15.49 per month, up from $13.99, in the United States. Prices also rose in Canada, where the standard plan climbed to C$16.49 from C$14.99.

To smooth the effect of delivery sabotage using Atlantic shipping, China adopts an alternative way of transition by ground as Russian Railways reports 35% growth of transition revenues:

Russian Railways saw a 34.4% jump to record high container volumes last year as it helped Asian manufacturers deliver goods to Europe amid a global logistics crisis, the state company said on Tuesday. Russia's transiting container traffic rose to 1.076 billion twenty-foot equivalent units (TEUs), the rail monopoly said in a statement.

Explosive growth in sea shipping costs is prompting Chinese manufacturers to send more goods to Europe by rail across Russia, but the growth in demand is creating bottlenecks and straining network capacity. With countries frantically replenishing stocks and exporting finished goods as they recover from the pandemic, global sea ports are snarling up, making rail an attractive alternative.

"At the beginning of the year, the cost of shipping goods in containers by rail between Asia and Europe was twice as low as by sea. Now it is 3.5 times (lower)," the rail company said.

But transport operators and analysts say the rapid growth has exposed infrastructure problems that could limit transit flows significantly.

Meantime, China's economy likely grew at the slowest pace in 1-1/2 years in the fourth quarter, dragged by weaker demand due to a property downturn, curbs on debt and strict COVID-19 measures, raising heat on policymakers to roll out more easing steps.

Data on Monday is expected to show gross domestic product (GDP) grew 3.6% in October-December from a year earlier - the weakest pace since the second quarter of 2020 and slowing from 4.9% in the third quarter, a Reuters poll showed.

The world's second-largest economy, which cooled over the course of last year, faces multiple headwinds in 2022, including persistent property weakness and a fresh challenge from the recent local spread of the highly-contagious Omicron variant. China's economic growth is likely to slow to 5.2% in 2022, before steadying in 2023, a Reuters poll showed, as the central bank steadily ramps up policy easing to ward off a sharper downturn.

China's exports outperformed expectations for much of 2021, but shipments have been slowing as an overseas surge in demand for goods eases and high costs pressure exporters. It was unclear how the Omicron coronavirus variant would affect that trend.

"Exports remained strong last month but may soften in the coming months amid growing disruptions at ports," said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note.

Analysts polled by Reuters expect the central bank to deliver more modest easing steps, including cutting banks' reserve requirement ratios the one-year loan prime rate (LPR) - the benchmark lending rate. Analysts at ANZ said in a note that they saw a possibility that the central bank will cut the rate on its medium-term lending facility (MLF) on Monday.

Policymakers have also pledged to step up fiscal support for the economy, speeding up local government special bond issuance to spur infrastructure investment and planning more tax cuts.

"We might see a larger effect of the monetary and fiscal easing only in the second half of 2022 due to the transmission lags of these policies," analysts at Natixis said in a note. The recent monetary easing and the stabilization of PMI (factory activity) have indicated such a direction, but more efforts are needed to boost fixed asset investment."

The producer price index (PPI) climbed 10.3% from a year earlier, the data showed. Economists in a Reuters poll had expected the PPI index to gain 11.1% after a 12.9% rise in November. Factory inflation has moderated in recent months from a 26-year high in October as Beijing intervened to stabilize high raw material prices and ease an energy power crunch.

CFTC Report

This week we have a bit specific change in sentiment data as a lot of positions have been turned to "spreading" with a huge boost of interest rates. From the CFTC table we could see that although net long position increases for 11K contracts, mostly by closing shorts - the rest 39.6K stands for spreading positions. It could mean that market prepares to something, and traders try to avoid volatility in nearest time, to unlock positions later. It is difficult to say what particular reasons stand on the back, maybe geopolitical issues, but this bulk of locked positions shuold be put on one or another side relatively soon.

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SPDR Fund also gives no hint on possible direction as reserves mostly stand flat despite rising price volatility:

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Thus, based on information that we've got in recent two weeks, including statistics, Fed comments, and minutes we could suggest that more or less Fed aggressive policy is mostly priced-in already. This explains mild gold reaction on high inflation data, as well as no solid upside reaction after worse Retail Sales. Supposedly, the turning point was the publication of Fed minutes. Now, even four rate changes in 2022 are priced in already. If statistics remain stable within a couple of months, gold should get the room to breathe as the only major factor that could change the balance is the quantitative tightening program start and its pace. This question Fed intends to consider within a few meetings, and it is highly likely that no decision will be made until summer. Thus, within this period gold should keep chances to show upside retracement.
Once the Fed adjusts its policy closer to the end of 2022 and QT will be started, gold could get additional headwinds and the downside trend could be re-established again. Thus, in the 2nd half of 2022, we suggest domination of bearish sentiment on the market. While in a very long-term perspective, we keep our positive view on the gold market. In our opinion, the current situation in global finance is quite different from any other that we saw before. And it is a big chance that at some stage the contradiction between high inflation and fragile economic recovery appears. So that inflation remains high still, while Fed could have no chance to keep raising the rates as the economy starts to show signs of weakens. Even now, the US economic data is not very impressive. And here a lot depends on the US geopolitical strategy. We expect that tensions with Russia increases more, and if the US keeps the trade war against China - inflation can't be controlled by just Fed tools. Now the trade struggle brings mixed results. Indeed, the Chinese statistics become worse, but we do not see a strong impact by far. From a long-term perspective, we have more questions rather than answers but it is definitely could be said that either bottleneck disappears and the US should normalize trading with China, or the US inflation hardly could be defeated.
 

Sive Morten

Special Consultant to the FPA
Messages
15,946
Technicals
Monthly

This week the gold market once again challenges the YPP resistance area. The fact that price is trying to move higher suggests that at least light domination of bullish sentiment exists.

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.

gold_m_17_01_22.png


Weekly

This week here mostly everything remains the same. Price action has formed another bullish grabber this week, in addition to many previous ones that lets us to keep staying on the same course. The context here remains bullish and for the gold market, the big achievement will be to break up 1870 top first. The big surprise either could come, in a case of below 1750$ drop, whatever reasons it could be triggered. That's being said, our vital area here is 1750$ lows while we're watching north.
gold_w_17_01_22.png



Daily

The daily trend remains bullish, as well as context, but Friday's defeat and inability to break through the 1830 resistance suggests that deeper retracement could happen here. If our suggestion is correct, it is highly welcome that gold tries to stay above the 1800 area.

gold_d_17_01_22.png


Intraday

Here, on the 4H chart, we once again have to return to the idea of reverse H&S, as it seems that normal size shoulder is getting 2nd chance to be formed.
gold_4h_17_01_22.png



Hourly chart performance makes us suggest downside action at least to 1810-1812 K-support area, which agrees with XOP target here, but drop now to 1800 gets more chances to happen as price action reminds the shape of Double Top with the W&R on the peak. Besides, as nominal as real interest rates have made an uptick on Friday. Thus, we're not hurrying up with buying gold by far and waiting for better levels to enter.
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Sive Morten

Special Consultant to the FPA
Messages
15,946
Greetings everybody,

Price action is not fast right now, but still few moments we need to consider. First is, gold now has few headwinds. One comes from upside retracement on the Dollar Index and second - from the rally on the interest rates. With these circumstances, it seems that our expectation of a bit deeper retracement on the gold market looks reasonable.

On the daily chart, MACDP line stands around 1810 area and the one pattern that we intend to wait for here is a bullish grabber. That might become an important part of the context.
gold_d_18_01_22.png


On 4H chart we're monitoring the reverse H&S pattern mentioned previously:

gold_4h_18_01_22.png


On 1H chart market almost hits XOP target. At the same time we also have more extended "blue" AB-CD pattern with OP around 1807. It is interesting that CD leg now is taking the shape of the butterfly with 1.27 extension around 1810 and 1.618 around the same 1807. That's being said, once we get 1st extension and daily grabber supposedly, we could consider long entry but be aware of possible spike to 1807. So, initial stop should be better to hide a bit deeper, maybe even below 1800$ support area, if you trade on weekly time frame.
gold_1h_18_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,946
Good morning,

Gold shows much better performance and resistance to negative financial information compares to financial markets, such as stocks and Forex. We suppose that geopolitical tensions might be the reason for that. Whatever it is, we've got the bullish grabber on daily chart that we need for bullish context:

gold_d_19_01_22.png


On the 4H chart downside action of the right arm looks bullish, because it is chopping, gradual. Still, as we have the harmony of the shoulders around the 1800 area, and because DXY and 10-year yields have not reached yet the targets - we suggest for any position-taking, it would be better to hide stop below 1800.
But this is only for those who have no position.
Yesterday's action also looks bullish as the market has formed an engulfing pattern, that includes a bullish reversal bar
gold_4h_19_01_22.png


On 1H chart market hits the OP target and completes the 1.618 butterfly extension accurately. Thus, if you already have the position - you could keep it with b/e stop.
Another reason, why we talk about the 1800 area - is the double top pattern's target, which we've discussed a few days ago. Now chances are lower market keep going to it, but still, it would be better to overinsure for this scenario as well.
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Sive Morten

Special Consultant to the FPA
Messages
15,946
Good morning,

So, Gold has brought no surprises yesterday and upside action has started perfectly. The breakout of 1830$ area is a big short-term achievement for the gold, because now it has no other Fib resistance levels until 1880 top. We do have some extension targets, Overbought area, etc., but no levels. And if we get no headwinds from the interest rates, gold should keep upside potential.
gold_d_20_01_22.png


Now we need to set next targets. On 4H chart market hits 1.27 extension of the butterfly. But, as acceleration stands fast, it is the question of time when it should proceed higher to 1860, which is also OP of large AB=CD pattern here;
gold_4h_20_01_22.png


Meantime, the OP target of reverse H&S has not been met yet, and it stands around 1852$. This is the nearest upside destination point. The XOP stands around 1880, which also doesn't seem impossible, but it is more extended. That's being said, now we're watching for 1852$ and monitoring how it goes. Retracements now should be relatively small as the market stands in extension mode. Probably we could consider 1830$ as the level that the market should stay above of.
gold_1h_20_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,946
Welcome everybody,

Gold shows relatively quiet price action and is coiling around the same 1840 area. Upside spike has happened but gold was not able to reach 1852 target.
gold_d_21_01_22.png


Performance on intraday charts suggest that retracement still could be a bit deeper, and the gold market still could re-test 1830$ former big resistance area, that we've discussed yesterday.
gold_4h_21_01_22.png


On 1H chart we obviously could recognize minor H&S pattern with the grabber on the right arm's top. Thus, if you consider long entry it makes sense to wait until 1830 area is reached or, H&S fails.

gold_1h_21_01_22.png
 
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