Sive Morten
Special Consultant to the FPA
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- 18,648
Fundamentals
Gold has shown easier reaction on events of these weeks, particularly speaking on geopolitical tensions and the collapse of the stock market. In general, the sentiment shift that we see on the markets is gold supportive as the market is trying to re-assess the coming Fed policy and excessive dollar value.
Market overview
Almost the whole week gold price stands in a tight range. U.S. 10-year Treasury yields hit two-year highs last week on expectations for higher interest rates. The focus is now on the U.S. Federal Reserve's Jan. 25-26 meeting after policymakers signaled that they would start raising interest rates in March to tame inflation.
Gold rose more than 1% on Wednesday as a retreat in the dollar and geopolitical tensions surrounding Ukraine burnished safe-haven bullion's appeal, sparking a rally in precious metals.
U.S. Secretary of State Antony Blinken said earlier in the day Russia could launch a new attack on Ukraine at very short notice but Washington would pursue diplomacy as long as it could.
Russian officials have repeatedly denied planning to invade, but the Kremlin has massed some 100,000 troops near Ukraine's borders, a buildup the West says is preparation for a war to prevent Ukraine from ever joining the NATO Western security alliance.
Shortly after the nearly two-hour news conference ended, the White House stressed any Russian military move into Ukraine would elicit a tough response.
Gold and silver touched two-month highs on Thursday, lifted by worries surrounding inflation and Russia-Ukraine tensions, while autocatalysts platinum and palladium extended the previous session's rally. The primary factor driving gold is inflation, which is boosting its appeal as a hedge against rising prices, said Daniel Pavilonis, senior market strategist at RJO Futures.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose last week. Reflecting investor appetite, holdings of the largest gold-backed exchange-traded fund, SPDR Gold Trust, jumped to their highest since mid-December.
Inflation risk
Headline consumer price inflation has continued to soar in the major economies, reaching 7% in the US, 5% in the euro area and 5.1% in the UK on the latest numbers. The US reading was the highest since June 1982, while the euro area’s was the highest since the beginning of the single currency in 1999.
The source of the initial shock to inflation was a substantial increase in the demand for goods, which resulted in a dramatic increase in the share of goods in total consumption, since the consumption of services fell. The increasing share of goods consumption reversed a trend that had been in place for decades (chart below). Producers were not able to respond quickly enough to the rising demand for goods, putting pressure on global supply chains. There are signs that the goods share is returning to more normal levels in some countries, notably France, but in the US it remains elevated.
A return to a more normal mix of household spending should lessen some of the upward pressure on inflation. There are already signs that shipping costs, for example, have peaked and have started to fall. Business surveys suggest prices have come off their highs in manufacturing, but pressures remain elevated.
Ultimately, whether the impact of the initial shock to inflation proves to be transitory or sustained will depend on the expectations of firms and workers. However, given current rates of inflation there is a risk that we are not in that world anymore. Evidence from the University of Michigan survey suggests that US households are willing to tolerate inflation in the range 0%-3% without it affecting their beliefs about future inflation. Beyond that range, which is where we are now, inflation expectations rise broadly in line with actual inflation.
Most economists — including those at Fathom — expect inflation to come down this year and next. After all, factors that helped to keep a lid on inflation in the pre-COVID years — technology, globalisation, demographics, inequality, etc — have not gone away. Moreover, we think that the gradual withdrawal of COVID-related fiscal policy will prompt inactive workers to re-enter the labour market, boosting labour supply and dampening wage pressures. But while we expect inflation to come down, it will remain above the Fed’s 2% target this year — and possibly beyond, even though the Fed is likely to increase the federal funds rate at its next meeting in March and stop buying new bonds under its QE programme. With that in mind, it would not be a surprise if the gap between the US Treasury yield and 5-year forward inflation expectation rate began to close, as it did last week. The speed at which inflation comes down will, of course, be key for the monetary policy outlook and markets.
The long-term US geopolitical strategy is showing mixed results by far. Initially, it has seemed that China starts to have some real problems with good export but recent statistics shows that it is vice versa - very good results.
At the same time, China's central bank Monday unexpectedly cut the borrowing costs of its medium-term loans for the first time since April 2020, while some market analysts expect more policy easing this year to cushion an economic slowdown. The world's second-largest economy has shown signs of slowing after a rapid rebound from the COVID-19 slump, with concerns about the financial health of property developers and the rapid spread of the Omicron coronavirus variant clouding the outlook.
Cheung expects that the PBOC could deliver more easing measures this year than previously expected by market analysts. Such expectations were also reflected in the bond market, with China's 10-year treasury futures rising to their highest level since June 2020 and the yield on China's benchmark 10-year government bonds falling more than 2 basis points in early trade.
Market analysts said the size of the rate cut and the timing were a big surprise, and they believe further monetary stimulus could follow.
The US ports stand overloaded with the goods:
Big companies keep moving production back in the US and EU:
Intel still intends to develop European chip manufacturing capacity despite the delayed plans being overshadowed by its announcement on Friday of a more than $20 billion investment in two new U.S. semiconductor plants. The company said in September it could invest as much as $95 billion in Europe over the next decade and announce the locations of two major new European chip fabrication plants by the end of 2021.
Currently, is more uncertainty appearing around whether the US keep going with its strategy using pandemic limitations or some other tools will be founded. By far we see that artificial supply bottlenecks exist but they barely affect the Chinese economy, at least by the data that we have right now. Still, high shipping rates and containers deficit still exist. We need to keep monitoring this situation.
COT Report
This week we do not see big changes in CFTC numbers. Net position barely has changed. But, SPDR fund reserves show a big breakout, which is definitely could be treated as a positive sign. It is a rather sharp change for just a single week.
It is also worth mentioning here that speculators' net long positioning on the U.S. dollar dropped in the latest week to its lowest level since mid-September 2021, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
The value of the net long dollar position fell to $12.59 billion for the week ended Jan. 18, from $19.34 billion the previous week. Scotiabank, in its report after the release of the CFTC data, said this was one of the largest weekly declines in long dollar positioning since mid-2020.
So, we could say that gold stands under the impact of the same factors, which is Fed policy + Inflation, and the geopolitical situation. Despite the factors being the same but they have different impact on the gold. Big drop of long dollar positions and pullback of nominal interest rates are supportive to the gold in short term, as they reduce real interest rates, because inflation still stands high. As we've seen yesterday, in our FX report, when we've discussed the situation around Fed policy and how investors treat it, the major sentiment trend is to reduce dollar overpricing that has come on first hawkish Fed shock and Omicron fears.
Speaking on this factor we could say that indeed, it might be supportive to the gold in the short-term, as four rate hikes are priced-in already for ~80-85%. But, at the same time, what would you say if Fed raise rates by 0.5% instead of 0.25% or if the rate will be raised right on the January meeting? Thus, it is not as easy as it could be seen. And we agree with the worries mentioned above that in this case, gold could drop to a lower standing range below 1800$.
The second is geopolitics. And it is more important for the gold market right now. Biden said - " Putin has to do something" and we totally agree. Russia can't announce some charges to NATO and then push the backpedal. This is a total loss of reputation. But at the same time, we're 99% sure that V. Putin will do something different and no Ukraine invasion happens. Anyway, the major conclusion for us directly is not the results of this geopolitical game. But the fact that these tensions are for long-term. And that should gradually provide support to the gold market.
Finally, as inflation is spreading as fast as omicron - demand for gold could rise in emerging countries that also should provide some support. As a result, although in the long term aggressive Fed policy definitely will become the headwind for the gold, in the nearest time we do not expect a sharp reversal by far.
Technicals
Monthly
The big technical achievement of this week is breaking above Yearly Pivot. Now January gold also stands above December's top. The market has shown good resistance to relatively bearish news this week. And as the 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.
Weekly
This time frame brings nothing new by far. Indeed, upward action seems a bit difficult to the gold, but anyway it was able to move above local top and completed the latest bullish grabber. Still, as we have more - they suppose action above 1870$ top. With no strong fib levels above and no overbought, technically gold should try to do it. 1750$ low keeps importance as the validity edge. As we do not have any other big events except Fed meeting, supposedly the geopolitics should move the market in the nearest time.
Daily
The pullback that we see on the daily chart mostly was expected, as we've mentioned multiple extension targets around 1840 area. Trend stands bullish here. The fact that gold was able to stay above 1830$ area should be treated as a positive sign:
Intraday
To keep perfect bullish behavior market should stay above the 1830$ support area. Otherwise, it becomes the return under the neckline of our reverse H&S pattern, that becomes the sign of weakness. In the case of a downside breakout, downside action might be extended and it would be better to not haste with long entry. Meantime, everything looks well by far. On the 4H chart, we keep watching for the 1860$ target. But, as the journey with the H&S is not over yet, 1852$ is the nearest destination point, which is the OP target of the AB-CD pattern, based on the H&S.
Gold has shown easier reaction on events of these weeks, particularly speaking on geopolitical tensions and the collapse of the stock market. In general, the sentiment shift that we see on the markets is gold supportive as the market is trying to re-assess the coming Fed policy and excessive dollar value.
Market overview
Almost the whole week gold price stands in a tight range. U.S. 10-year Treasury yields hit two-year highs last week on expectations for higher interest rates. The focus is now on the U.S. Federal Reserve's Jan. 25-26 meeting after policymakers signaled that they would start raising interest rates in March to tame inflation.
Gold rose more than 1% on Wednesday as a retreat in the dollar and geopolitical tensions surrounding Ukraine burnished safe-haven bullion's appeal, sparking a rally in precious metals.
U.S. Secretary of State Antony Blinken said earlier in the day Russia could launch a new attack on Ukraine at very short notice but Washington would pursue diplomacy as long as it could.
Russian officials have repeatedly denied planning to invade, but the Kremlin has massed some 100,000 troops near Ukraine's borders, a buildup the West says is preparation for a war to prevent Ukraine from ever joining the NATO Western security alliance.
Shortly after the nearly two-hour news conference ended, the White House stressed any Russian military move into Ukraine would elicit a tough response.
Gold and silver touched two-month highs on Thursday, lifted by worries surrounding inflation and Russia-Ukraine tensions, while autocatalysts platinum and palladium extended the previous session's rally. The primary factor driving gold is inflation, which is boosting its appeal as a hedge against rising prices, said Daniel Pavilonis, senior market strategist at RJO Futures.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose last week. Reflecting investor appetite, holdings of the largest gold-backed exchange-traded fund, SPDR Gold Trust, jumped to their highest since mid-December.
Inflation risk
Headline consumer price inflation has continued to soar in the major economies, reaching 7% in the US, 5% in the euro area and 5.1% in the UK on the latest numbers. The US reading was the highest since June 1982, while the euro area’s was the highest since the beginning of the single currency in 1999.
The source of the initial shock to inflation was a substantial increase in the demand for goods, which resulted in a dramatic increase in the share of goods in total consumption, since the consumption of services fell. The increasing share of goods consumption reversed a trend that had been in place for decades (chart below). Producers were not able to respond quickly enough to the rising demand for goods, putting pressure on global supply chains. There are signs that the goods share is returning to more normal levels in some countries, notably France, but in the US it remains elevated.
A return to a more normal mix of household spending should lessen some of the upward pressure on inflation. There are already signs that shipping costs, for example, have peaked and have started to fall. Business surveys suggest prices have come off their highs in manufacturing, but pressures remain elevated.
Ultimately, whether the impact of the initial shock to inflation proves to be transitory or sustained will depend on the expectations of firms and workers. However, given current rates of inflation there is a risk that we are not in that world anymore. Evidence from the University of Michigan survey suggests that US households are willing to tolerate inflation in the range 0%-3% without it affecting their beliefs about future inflation. Beyond that range, which is where we are now, inflation expectations rise broadly in line with actual inflation.
Most economists — including those at Fathom — expect inflation to come down this year and next. After all, factors that helped to keep a lid on inflation in the pre-COVID years — technology, globalisation, demographics, inequality, etc — have not gone away. Moreover, we think that the gradual withdrawal of COVID-related fiscal policy will prompt inactive workers to re-enter the labour market, boosting labour supply and dampening wage pressures. But while we expect inflation to come down, it will remain above the Fed’s 2% target this year — and possibly beyond, even though the Fed is likely to increase the federal funds rate at its next meeting in March and stop buying new bonds under its QE programme. With that in mind, it would not be a surprise if the gap between the US Treasury yield and 5-year forward inflation expectation rate began to close, as it did last week. The speed at which inflation comes down will, of course, be key for the monetary policy outlook and markets.
The long-term US geopolitical strategy is showing mixed results by far. Initially, it has seemed that China starts to have some real problems with good export but recent statistics shows that it is vice versa - very good results.
At the same time, China's central bank Monday unexpectedly cut the borrowing costs of its medium-term loans for the first time since April 2020, while some market analysts expect more policy easing this year to cushion an economic slowdown. The world's second-largest economy has shown signs of slowing after a rapid rebound from the COVID-19 slump, with concerns about the financial health of property developers and the rapid spread of the Omicron coronavirus variant clouding the outlook.
Cheung expects that the PBOC could deliver more easing measures this year than previously expected by market analysts. Such expectations were also reflected in the bond market, with China's 10-year treasury futures rising to their highest level since June 2020 and the yield on China's benchmark 10-year government bonds falling more than 2 basis points in early trade.
Market analysts said the size of the rate cut and the timing were a big surprise, and they believe further monetary stimulus could follow.
The US ports stand overloaded with the goods:
Big companies keep moving production back in the US and EU:
Intel still intends to develop European chip manufacturing capacity despite the delayed plans being overshadowed by its announcement on Friday of a more than $20 billion investment in two new U.S. semiconductor plants. The company said in September it could invest as much as $95 billion in Europe over the next decade and announce the locations of two major new European chip fabrication plants by the end of 2021.
Currently, is more uncertainty appearing around whether the US keep going with its strategy using pandemic limitations or some other tools will be founded. By far we see that artificial supply bottlenecks exist but they barely affect the Chinese economy, at least by the data that we have right now. Still, high shipping rates and containers deficit still exist. We need to keep monitoring this situation.
COT Report
This week we do not see big changes in CFTC numbers. Net position barely has changed. But, SPDR fund reserves show a big breakout, which is definitely could be treated as a positive sign. It is a rather sharp change for just a single week.
It is also worth mentioning here that speculators' net long positioning on the U.S. dollar dropped in the latest week to its lowest level since mid-September 2021, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
The value of the net long dollar position fell to $12.59 billion for the week ended Jan. 18, from $19.34 billion the previous week. Scotiabank, in its report after the release of the CFTC data, said this was one of the largest weekly declines in long dollar positioning since mid-2020.
So, we could say that gold stands under the impact of the same factors, which is Fed policy + Inflation, and the geopolitical situation. Despite the factors being the same but they have different impact on the gold. Big drop of long dollar positions and pullback of nominal interest rates are supportive to the gold in short term, as they reduce real interest rates, because inflation still stands high. As we've seen yesterday, in our FX report, when we've discussed the situation around Fed policy and how investors treat it, the major sentiment trend is to reduce dollar overpricing that has come on first hawkish Fed shock and Omicron fears.
Speaking on this factor we could say that indeed, it might be supportive to the gold in the short-term, as four rate hikes are priced-in already for ~80-85%. But, at the same time, what would you say if Fed raise rates by 0.5% instead of 0.25% or if the rate will be raised right on the January meeting? Thus, it is not as easy as it could be seen. And we agree with the worries mentioned above that in this case, gold could drop to a lower standing range below 1800$.
The second is geopolitics. And it is more important for the gold market right now. Biden said - " Putin has to do something" and we totally agree. Russia can't announce some charges to NATO and then push the backpedal. This is a total loss of reputation. But at the same time, we're 99% sure that V. Putin will do something different and no Ukraine invasion happens. Anyway, the major conclusion for us directly is not the results of this geopolitical game. But the fact that these tensions are for long-term. And that should gradually provide support to the gold market.
Finally, as inflation is spreading as fast as omicron - demand for gold could rise in emerging countries that also should provide some support. As a result, although in the long term aggressive Fed policy definitely will become the headwind for the gold, in the nearest time we do not expect a sharp reversal by far.
Technicals
Monthly
The big technical achievement of this week is breaking above Yearly Pivot. Now January gold also stands above December's top. The market has shown good resistance to relatively bearish news this week. And as the 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.
Weekly
This time frame brings nothing new by far. Indeed, upward action seems a bit difficult to the gold, but anyway it was able to move above local top and completed the latest bullish grabber. Still, as we have more - they suppose action above 1870$ top. With no strong fib levels above and no overbought, technically gold should try to do it. 1750$ low keeps importance as the validity edge. As we do not have any other big events except Fed meeting, supposedly the geopolitics should move the market in the nearest time.
Daily
The pullback that we see on the daily chart mostly was expected, as we've mentioned multiple extension targets around 1840 area. Trend stands bullish here. The fact that gold was able to stay above 1830$ area should be treated as a positive sign:
Intraday
To keep perfect bullish behavior market should stay above the 1830$ support area. Otherwise, it becomes the return under the neckline of our reverse H&S pattern, that becomes the sign of weakness. In the case of a downside breakout, downside action might be extended and it would be better to not haste with long entry. Meantime, everything looks well by far. On the 4H chart, we keep watching for the 1860$ target. But, as the journey with the H&S is not over yet, 1852$ is the nearest destination point, which is the OP target of the AB-CD pattern, based on the H&S.
