Sive Morten
Special Consultant to the FPA
- Messages
- 18,737
Fundamentals
In short-term perspective gold has some similar driving factors as for EUR and FX market in general, and we've discussed this in our weekly research, dedicated to EUR. In particular they are US government shutdown and ECB meeting next week. Shortly speaking, we think that US government shutdown should not make any strong impact on markets. Last time, when shutdown has happened in 2013, it was bare impact on markets. Indispensable spheres will continue to function, majority of employees in different government entities will get retroactive payment. So, overall noise around this event looks as overreaction.
There are more important events that could make impact on gold. Thus, Reuters reports that N. Korea has cancelled its visit to South kith. This topic is rather popular on the market not just because of possible warming of relations between two Koreas, but also because there is a crazy rumor that US has plans to attack N. Korea during Olympic games. This sounds like absurd but it supports interest around this subject.
Speaking on economical factors US Treasuries yield has shown strong performance last week. Just take a look at three days action:
Source: Investing.com
Rising yields always press on gold price, because gold is non-yielding asset. Thus, other yield carrying assets become more attractive compares to gold. According to CME Fed watch tool, markets expect three rate increasing in 2018. As it is anticipated, first rate change should happen in March, while two others mostly should come in summer and December correspondingly. Currently chances on rate increase in March is treated around 70%.
Source: cmegroup.com
Fed representatives confirms this expectations - "The Fed should raise interest rates three to four times in
both 2018 and 2019, Cleveland Fed President Loretta Mester said on Thursday, a pace slightly faster than many of her fellow policymakers prefer."
As we know, inflation is driving factor for gold and gold feels most comfortable when inflation are rising while rates are still low - in the beginning of upside cycle. This is where we stand right now. World Gold Council released 2018 forecast where they suggest positive dynamic for gold market In general, they suppose some headwinds for gold either, but positive factors should overcome negative barriers. In particular, They tell about 4 major driving factors for gold in 2018. They are:
1. Synchronized global economic growth. It should support demand for gold among population, as gold has positive correlation with population's wealth:
Source: Gold.org
Major demand for gold comes not from population and even not from central banks but from industrial production, dentist sphere and jewelry. As wealth of population is growing due economical boom, demand for tablets PC, phones, laptops also grows. The same is for cars and jewelry. World gold council mostly confirms our idea about first stage of business cycle:
"In our view, the potential headwinds to gold may not be as strong as some think. Gold can help investors manage financial market risks. Our analysis of gold’s performance during different US real-rate environments reveals that when real rates are between 0% and 4% gold’s returns are positive, and its volatility and correlation with other mainstream financial assets are below long-run averages. These attributes can have a positive effect on portfolio performance"
Others factors are - shrinking of balance sheets by Central banks and rising rates, Frothy asset prices and market transparency efficiency and access.
Central Bank policies definitely will be headwind for gold, but Gold Council suggests relatively low rates still in 2018 that should not press on gold too much. Recent rally is an example of this. As Fed is rising rates - gold was able to show rally in the end of 2017.
Besides, this negative impact should be compensated by other factors. As most stock markets look overbought, this should support investors' search for alternative investments and tools that could let them to protect wealth. So some flows could be sent to gold as well.
Finally appearing of new tools and trading methods on gold market, development of exchanges and new trading products should make trading process more flexible. At the end of research Gold Council gives four reasons to hold gold in 2018:
We believe that the confluence of the key trends we’ve highlighted for 2018 could be supportive of gold demand. And over the long run, there are also four attributes that make gold attractive as a strategic investment:
• It has been a source of return for investors’ portfolios
• Its correlation to major asset classes has been low in both expansionary and recessionary periods
• It is a mainstream asset that is as liquid as other financial securities
• It has historically improved portfolio risk-adjusted returns.
COT Report
Recent CFTC data shows that tendency is still the same. Chart of speculative positions doesn't bring any hints on weakness. Net long position is rising but still has room to grow more. Open interest supports this growth:
Now we also see support from real money flows - physical gold purchases are coming to ETF's. Here is recent dynamic of SPDR Fund:
Thus, sentiment looks still positive for gold. Fundamental picture shows some headwinds but they do not have decisive meaning yet and their impact will be spread over long period.
Technicals
Monthly
Last week technical picture barely has changed as price was coiling around 1330 top. On long-term chart our major setup is still valid. Gold price action looks rather well. COT report also points on bullish sentiment and existence of upside potential as well.
December has become a turning point for gold market. There are two important technical issues are accumulated in just one month. They are bullish grabber and reversal candle.
Grabber suggests now action above 1355 top of 2017 year. If you will take even brief look on the chart, you could imagine a lot of different extensions that could be formed with targets above 1355. They are large butterfly, AB-CD's of different scales.
December reversal feature also is very important and bring more confidence with upside continuation. As you can see December low stands under lows of four previous months but it has closed above the top of November.
Our major trend line (green) still stands valid. That's why long-term bull trend stands intact. December candle should provide us a lot of patterns for trading on lower time frames, in addition to large patterns that we could get here later.
Just grabber shows on upside perspective above 1355 and this is sufficient potential for trading on daily chart.
Finally, December and January (by far) show tail close that is also bullish supportive issue. Beyond 1355 next target mostly will be 1380-1391 that includes 2016 top, major Fib level and YPR1.
Weekly
As this was first stop on upside rally, weekly chart also mostly stands the same. Trend is bullish, price is not at overbought. Recent week was mostly inside one, while price is coiling around MPR1.
At least right now weekly picture doesn't show any barriers to reach at least 1355 tops.
Overbought should appear around 1390 area.
Also gold has passed rather easily through our 1330 level - COP target was disrespected, December MPR1 broken. May be some minor relief could happen, but mostly it will stand in relation to daily and lower time frames. Here, on weekly, it could pass insensibly.
Following grabber's idea, here we could focus on nearest target above 1355 tops. It is 1384 AB-CD objective point. And, in general 1380-1390 area will be very important. Market could stand there for a long time. This is major Fib level on monthly chart (1380), new YPR1 @ 1391, multiple targets and extensions around 1380-1390 area.
Thus, it is logical to expect some brief taking around 1380-1390 area and use this area as indicator. Because if market will break it up then - this will be very important signal.
Daily
Daily trend has turned bearish. As market has completed harmonic retracement - on Friday it has made an attempt to re-establish upside action. Meantime we've suggested deeper retracement, some kind of AB-CD and now it seems that it is really could happen.
At the same time, as upside momentum is rather strong and major targets have not been met yet - we mostly suggest that whatever downward action will be - it should be treated as retracement, at least until price will hold above 1277 area - major 5/8 Fib support.
So, as some temporal signs of weakness exist indeed - next week we will be watching for downside continuation. Our preferable area that could be met is daily K-support around 1300. It also will be accompanied by oversold.
Intraday
While on 4-hour chart we still keep in mind possible H&S pattern, on hourly chart we more definite patterns:
hourly picture will be most important on coming week. Our "222" Sell that we've discussed on Friday has started nice. Now the most important level will be 1325. If gold will drop below it - it automatically will appear in former rectangle consolidation. In this case next target is a bottom - right around our 1302-1304 daily K-support. AB-CD XOP target also stands in the same area:
Conclusion
Long term situation still looks promising as gold has confirmed targets above 1355 area.
On coming week, we will monitor 1325 level. Downside breakout will open road right to our major 1300 level.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
In short-term perspective gold has some similar driving factors as for EUR and FX market in general, and we've discussed this in our weekly research, dedicated to EUR. In particular they are US government shutdown and ECB meeting next week. Shortly speaking, we think that US government shutdown should not make any strong impact on markets. Last time, when shutdown has happened in 2013, it was bare impact on markets. Indispensable spheres will continue to function, majority of employees in different government entities will get retroactive payment. So, overall noise around this event looks as overreaction.
There are more important events that could make impact on gold. Thus, Reuters reports that N. Korea has cancelled its visit to South kith. This topic is rather popular on the market not just because of possible warming of relations between two Koreas, but also because there is a crazy rumor that US has plans to attack N. Korea during Olympic games. This sounds like absurd but it supports interest around this subject.
Speaking on economical factors US Treasuries yield has shown strong performance last week. Just take a look at three days action:
Source: Investing.com
Rising yields always press on gold price, because gold is non-yielding asset. Thus, other yield carrying assets become more attractive compares to gold. According to CME Fed watch tool, markets expect three rate increasing in 2018. As it is anticipated, first rate change should happen in March, while two others mostly should come in summer and December correspondingly. Currently chances on rate increase in March is treated around 70%.
Source: cmegroup.com
Fed representatives confirms this expectations - "The Fed should raise interest rates three to four times in
both 2018 and 2019, Cleveland Fed President Loretta Mester said on Thursday, a pace slightly faster than many of her fellow policymakers prefer."
As we know, inflation is driving factor for gold and gold feels most comfortable when inflation are rising while rates are still low - in the beginning of upside cycle. This is where we stand right now. World Gold Council released 2018 forecast where they suggest positive dynamic for gold market In general, they suppose some headwinds for gold either, but positive factors should overcome negative barriers. In particular, They tell about 4 major driving factors for gold in 2018. They are:
1. Synchronized global economic growth. It should support demand for gold among population, as gold has positive correlation with population's wealth:
Source: Gold.org
Major demand for gold comes not from population and even not from central banks but from industrial production, dentist sphere and jewelry. As wealth of population is growing due economical boom, demand for tablets PC, phones, laptops also grows. The same is for cars and jewelry. World gold council mostly confirms our idea about first stage of business cycle:
"In our view, the potential headwinds to gold may not be as strong as some think. Gold can help investors manage financial market risks. Our analysis of gold’s performance during different US real-rate environments reveals that when real rates are between 0% and 4% gold’s returns are positive, and its volatility and correlation with other mainstream financial assets are below long-run averages. These attributes can have a positive effect on portfolio performance"
Others factors are - shrinking of balance sheets by Central banks and rising rates, Frothy asset prices and market transparency efficiency and access.
Central Bank policies definitely will be headwind for gold, but Gold Council suggests relatively low rates still in 2018 that should not press on gold too much. Recent rally is an example of this. As Fed is rising rates - gold was able to show rally in the end of 2017.
Besides, this negative impact should be compensated by other factors. As most stock markets look overbought, this should support investors' search for alternative investments and tools that could let them to protect wealth. So some flows could be sent to gold as well.
Finally appearing of new tools and trading methods on gold market, development of exchanges and new trading products should make trading process more flexible. At the end of research Gold Council gives four reasons to hold gold in 2018:
We believe that the confluence of the key trends we’ve highlighted for 2018 could be supportive of gold demand. And over the long run, there are also four attributes that make gold attractive as a strategic investment:
• It has been a source of return for investors’ portfolios
• Its correlation to major asset classes has been low in both expansionary and recessionary periods
• It is a mainstream asset that is as liquid as other financial securities
• It has historically improved portfolio risk-adjusted returns.
COT Report
Recent CFTC data shows that tendency is still the same. Chart of speculative positions doesn't bring any hints on weakness. Net long position is rising but still has room to grow more. Open interest supports this growth:
Now we also see support from real money flows - physical gold purchases are coming to ETF's. Here is recent dynamic of SPDR Fund:
Thus, sentiment looks still positive for gold. Fundamental picture shows some headwinds but they do not have decisive meaning yet and their impact will be spread over long period.
Technicals
Monthly
Last week technical picture barely has changed as price was coiling around 1330 top. On long-term chart our major setup is still valid. Gold price action looks rather well. COT report also points on bullish sentiment and existence of upside potential as well.
December has become a turning point for gold market. There are two important technical issues are accumulated in just one month. They are bullish grabber and reversal candle.
Grabber suggests now action above 1355 top of 2017 year. If you will take even brief look on the chart, you could imagine a lot of different extensions that could be formed with targets above 1355. They are large butterfly, AB-CD's of different scales.
December reversal feature also is very important and bring more confidence with upside continuation. As you can see December low stands under lows of four previous months but it has closed above the top of November.
Our major trend line (green) still stands valid. That's why long-term bull trend stands intact. December candle should provide us a lot of patterns for trading on lower time frames, in addition to large patterns that we could get here later.
Just grabber shows on upside perspective above 1355 and this is sufficient potential for trading on daily chart.
Finally, December and January (by far) show tail close that is also bullish supportive issue. Beyond 1355 next target mostly will be 1380-1391 that includes 2016 top, major Fib level and YPR1.
Weekly
As this was first stop on upside rally, weekly chart also mostly stands the same. Trend is bullish, price is not at overbought. Recent week was mostly inside one, while price is coiling around MPR1.
At least right now weekly picture doesn't show any barriers to reach at least 1355 tops.
Overbought should appear around 1390 area.
Also gold has passed rather easily through our 1330 level - COP target was disrespected, December MPR1 broken. May be some minor relief could happen, but mostly it will stand in relation to daily and lower time frames. Here, on weekly, it could pass insensibly.
Following grabber's idea, here we could focus on nearest target above 1355 tops. It is 1384 AB-CD objective point. And, in general 1380-1390 area will be very important. Market could stand there for a long time. This is major Fib level on monthly chart (1380), new YPR1 @ 1391, multiple targets and extensions around 1380-1390 area.
Thus, it is logical to expect some brief taking around 1380-1390 area and use this area as indicator. Because if market will break it up then - this will be very important signal.
Daily
Daily trend has turned bearish. As market has completed harmonic retracement - on Friday it has made an attempt to re-establish upside action. Meantime we've suggested deeper retracement, some kind of AB-CD and now it seems that it is really could happen.
At the same time, as upside momentum is rather strong and major targets have not been met yet - we mostly suggest that whatever downward action will be - it should be treated as retracement, at least until price will hold above 1277 area - major 5/8 Fib support.
So, as some temporal signs of weakness exist indeed - next week we will be watching for downside continuation. Our preferable area that could be met is daily K-support around 1300. It also will be accompanied by oversold.
Intraday
While on 4-hour chart we still keep in mind possible H&S pattern, on hourly chart we more definite patterns:
hourly picture will be most important on coming week. Our "222" Sell that we've discussed on Friday has started nice. Now the most important level will be 1325. If gold will drop below it - it automatically will appear in former rectangle consolidation. In this case next target is a bottom - right around our 1302-1304 daily K-support. AB-CD XOP target also stands in the same area:
Conclusion
Long term situation still looks promising as gold has confirmed targets above 1355 area.
On coming week, we will monitor 1325 level. Downside breakout will open road right to our major 1300 level.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.