Gold GOLD PRO WEEKLY, January 31 - 04, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,303
Fundamentals

This week has become as bad for the Gold market as for EUR and other dollar rivals, mostly because of solid US Dollar appreciation, expectations of the more aggressive Fed policy. But the positive moment here also exists - the geopolitical tensions impact differently on the gold market and provide a supportive effect. As we expect that geopolitical struggle stands for the long-term, we do not despair yet to see positive performance on the gold market in the 2nd half of 2022.

Market overview

Gold advanced on Monday as a selloff in Wall Street driven by geopolitical tensions over Russian claims to NATO bolstered its safe-haven appeal, while investors prepared for the Federal Reserve's rate hike decision. Gold hit a more than two-month high on the next day as well as geopolitical concerns over the Russia-NATO conflict pushed investors toward safe havens including bullion, ahead of the U.S. Federal Reserve's meet that could offer cues on its monetary policy tightening plan.

"The Ukraine story is positive for gold and the Fed policy will eventually evolve into a little bit more conservative tapering since the Fed still believes a lot of this is going to be transitory," said Ed Moya, senior market analyst at brokerage OANDA.

But CMC Markets UK chief market analyst Michael Hewson said the Fed was unlikely to have a big impact on gold at present "because the markets are more concerned about what's going on in eastern Europe," especially considering a March interest rate hike has been priced in.

"Assuming that the current wave of risk aversion ebbs away eventually as the Fed addresses these fears, and barring a deterioration of the economic outlook, we thus believe that the gold and silver markets are again experiencing a temporary but no lasting rebound," Julius Baer analyst Carsten Menke said.

Russia said it was watching with great concern after the United States put 8,500 troops on alert to be ready to deploy in case of an escalation, while Britain urged its European allies to have sanctions ready to go. Russia said on Thursday it was clear the United States was not willing to address its main security concerns in their standoff over NATO expanding in Eastern Europe, but both sides kept the door open to further dialogue.

Gold is acting like a "flight to safety trade" in a wait-and-watch scenario until after the Fed announcement tomorrow, said Bob Haberkorn, senior market strategist at RJO Futures. Investors await cues on how aggressive the Fed would be for the rest of the year and if it would signal more hikes to tackle inflation, Haberkorn added.

"Despite the Fed likely set to announce the start of a U.S. rate hike cycle this week, gold keeps holding up well. Support for the yellow metal comes from high inflation and elevated market volatility," UBS analyst Giovanni Staunovo said. Unless the Fed surprises with an even more hawkish statement, gold (could) stay supported," said Staunovo, adding that historically, gold outperforms equities when market volatility increases

The aggressive shift in Fed rhetoric coming into 2022 signaled to many that all eight of this year's Fed meetings, including this week's gathering, would be 'live' ones in the removal of emergency supports. And if at least four interest rate hikes and an unwind of the Fed's bloated balance sheet are all now on the table, then it leads precious little room for markets to relax all year.

But the geopolitical twist in Europe, and the energy price risk it exaggerates, adds a whole new dimension - not least with the pandemic still playing out in the background. Even before military tensions intensified this month, investment banks such as Goldman Sachs saw supply and demand dynamics pointing to a return to $100-per-barrel oil for the first time in 7 years.

The Russian standoff and risk of full-blown NATO conflict ups the ante on both crude and also on soaring natural gas prices in Europe.

Inflationary? For sure. Recession too?

In a "What if?" note from Friday, JPMorgan economists Joe Lupton and Bruce Kasman sketched out what $150-a-barrel oil as soon as this quarter could mean.
They concluded that such as negative shock would more than double their estimates of annualized world inflation to 7.2% for the first half of 2022 - and virtually wipe out equivalent global growth to 0.9% annualized from 4.1% previously.
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"Oil shocks have a long history of driving cyclical downturns, with US recessions often associated with oil price spikes," Lupton and Kasman wrote. "Tensions between Russia and Ukraine raise the risk of a material spike this quarter."

One offsetting factor, they add, is that the Fed and other major central banks have over more recent decades increasingly viewed energy shocks more as a demand suppressant than an inflation spur. But even this may have to be re-thought in the light of today's peculiar circumstances. Putting the NATO with Russia tensions and related oil and gas squeezes in the context of post-pandemic supply disruptions - as well as longer-term mega trends of demographics and climate change - the BlackRock Investment Institute reckons policymakers will now be forced into long-absent trade offs.

"A world shaped by supply constraints will bring more macroeconomic volatility. There is no way around this," it said. "Unlike when inflation is driven by demand – policy cannot stabilize both inflation and growth at the same time - it has to choose between them."

BII economist Elga Bartsch estimates that if central banks were to tighten fast just to get supply-driven inflation rates back to 2% targets, it could come at a cost of almost 10% unemployment rates. And it's hard to imagine such macro volatility not being matched by higher financial market volatility too.

"The Fed will be judged not by its ability to move rates up but by its capacity to avoid having to cut nominal rates all the way back to zero again and restart QE when the first external shock hits," wrote Pictet Wealth Management's Thomas Costerg. "This is far from being assured."

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Gold prices slid over 1% to more than a two-week low on Thursday, as the dollar rallied after robust U.S. economic data strengthened the case for an interest rate hike by the Federal Reserve in March. The drop in gold prices is a continuation of Wednesday's selloff as markets further digest Fed Chair Jerome Powell's comments on raising rates, said Philip Streible, chief market strategist at Blue Line Futures in Chicago.

"The committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so," Powell said in a news conference, pinning down a policy statement from the central bank's Federal Open Market Committee that only said rates would rise "soon."

Subsequent interest rate increases and an eventual reduction in the Fed's asset holdings would follow as needed, Powell said, while officials monitor how quickly inflation falls from current multi-decade highs back to the central bank's 2% target.

Much was left undecided, he told reporters after the end of the Fed's latest two-day policy meeting, including the pace of subsequent rate hikes or how quickly officials will let its massive balance sheet decline. But Powell was explicit on one key point: that with inflation high and for now apparently getting worse, the Fed this year plans to steadily clamp down on credit and end the extraordinary support it has provided to the U.S. economy during the coronavirus pandemic.

Since the Fed's last policy meeting in December, Powell said, inflation "has not gotten better. It has probably gotten a bit worse ... To the extent that the situation deteriorates further, our policy will have to reflect that."

"This is going to be a year in which we move steadily away from the very highly accommodative monetary policy we put in place to deal with the economic effects of the pandemic," he added. Powell said policymakers at this point feel they have "quite a bit of room to raise interest rates" without threatening progress on jobs or slowing an economic recovery they want to keep underway.

In a refrain that has become common, he noted "the economy is quite different" than when the Fed last began raising interest rates in 2015, with higher inflation, lower unemployment, and what Powell regards as enough momentum to make its way without the Fed's help.

In that shift to tighter policy the Fed moved at an initially glacial pace, with one quarter-percentage-point rate increase in 2015 and only an additional one in 2016.
Investors are expecting much more this time, with pricing in federal funds future contracts anticipating four rate increases this year. The Fed's benchmark overnight interest rate is currently set at the near-zero level.

U.S. economic growth accelerated in the fourth quarter to post its best performance in nearly four decades in 2021. The economy grew 5.7% in 2021, the strongest since 1984, as the government provided nearly $6 trillion in pandemic relief. It contracted 3.4% in 2020, the biggest drop in 74 years. Gross domestic product increased at a 6.9% annualized rate in the fourth quarter, the government said in its advance GDP estimate. That followed a 2.3% growth pace in the third quarter.

Growth is 3.1% above its pre-pandemic level. Inventory investment increased at a $173.5 billion rate, contributing 4.90 percentage points to GDP growth. Spending shifted during the pandemic to goods from services, a demand boom that pressured supply chains. Excluding inventories, GDP grew at a moderate 1.9% rate.

Despite the economy's struggles at the start of the year, most economists believe the run of good fortunes will prevail. Growth estimates for this year top 4%.

"This year may well be an even better year for the economy," said Scott Hoyt, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Growth will slow and monthly job gains will lag last year's lofty rates. Nonetheless, the economy should be near full employment and inflation near the Fed's target by year's end."

Gold prices will drift lower in 2022 and 2023 as central banks raise interest rates, lifting bond yields and making non-yielding bullion less attractive, a Reuters poll showed.

"Any rebound not backed by safe-haven seekers should thus run into resistance sooner or later as long as the economy is in recovery mode," Julius Baer analyst Carsten Menke wrote in a note. Menke added that he did not see a broad-based move into gold from safe-haven seekers but rather some selective buying which should remain the case as long as the economic backdrop does not sharply deteriorate.

The outlook for aggressive rate hikes has led to a major reset globally, said Ed Moya, senior market analyst at OANDA. "You just don't know how far the Fed is going to go because we don’t know exactly when inflation will really peak," he said. While there is optimism that inflation will subside by midyear, it could get worse and lead to more aggressive Fed action, he said, adding, "you got a little bit more left in this dollar move."

Investors expect the speed at which the Fed tightens policy to be the major determinant of risk sentiment in the coming months, although the bank has said how quickly it hikes will depend on economic data and especially inflation.

Prices for a wide range of commodities have climbed to their highest level for seven years or more as drillers, miners and farmers struggle to keep up with booming demand as the economy recovers from the pandemic. Commodity prices have always been cyclical and recent increases will almost certainly create conditions for the next downturn, as they have in the past.

In theory, price escalation could be reversed by faster growth in production, slower growth in consumption, or some combination of the two. In practice, the most likely trigger is a slowdown in the global manufacturing cycle which causes commodity consumption growth to slow.

There are already signs the manufacturing cycle has passed an inflection point, with rapid growth in the wake of the pandemic and lockdowns giving way to moderate growth rates by the fourth quarter of 2021. Business surveys, industrial production estimates and freight movements all indicate the rate of expansion slowed in the second half of last year in North America, Europe and Asia. Global manufacturing is likely to experience a significant mid-cycle slowdown if not an end-of-cycle recession by the middle of 2023.

Gold extended declines on Friday and was set for its worst week since late November as growing expectations for U.S. interest rate hikes pushed the dollar to a multi-month high, making bullion less attractive for overseas buyers. Gold prices slipped below its 100-day and 200-day moving averages in the last session, after the U.S. Federal Reserve reaffirmed plans to end its pandemic-era bond purchases and signalled an interest rate hike in March.

"The current market environment has been very detrimental for gold. Investors are completely reassessing Fed expectations," said Edward Moya, senior market analyst at brokerage OANDA. "There's still some momentum selling in gold, but we're getting closer to a potential bottom now that it has broken past $1,800."

The rate hike expectations set the dollar on track for its biggest weekly rise in seven months, making gold more expensive for holders of other currencies. However, gold's credentials as an inflation hedge are likely to attract renewed attention with rising stock market volatility amid a market adjusting to a rising interest rate environment, Saxo Bank analyst Ole Hansen wrote in a note.

COT Report

CFTC data, although it was released before the collapse of the recent week, still shows a positive mood on the market. The net long position has increased as investors were closing shorts and adding longs. Open interest has increased as well:

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SPDR reserves also have increased this week, despite the massive sell-off on the market. It gives some hopes that investors treat the current drop as temporal, or, at least, suppose some demand in gold due to gepolitical factors.

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The US geopolitical strategy to hold China using pandemic effect shows no solid results by far. Yes, we see high pricing of cargo delivery from China to the US and Europe, we see some financial difficulties inside China, but they do not have the vital degree yet.

China smashed its previous records on external trade in 2021. Amid the strong global economic recovery, both goods exports and imports surged by 30%, to $3.4 trillion and $2.7 trillion respectively. The overall trade surplus on goods rose from $524bn in 2020 to $676bn in 2021, surpassing the previous high of $594bn in 2015. Despite ongoing tariffs, exports to the United States increased by 28% to $576bn and the trade surplus reached a new high at almost $400bn.

External trade has been a key support for the Chinese economy recently, as problems in the property sector and the country’s draconian zero-Covid strategy have weighed on growth. Net trade added 1.7 percentage points to annual GDP growth in 2021, up from 0.6 percentage points in 2020. A major switch back to spending on services from goods in advanced economies is an important downside risk for the Chinese economy in 2022.

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So, it is a razor-thin way for the gold market now. Driving factors mostly remain the same - geopolitics and Fed strategy. But many people now understand them in the wrong way. The second tricky moment among these two factors - the US domestic economy depends on geopolitics as well, and even fewer people see this relation. We try briefly to explain that.

Speaking on Fed policy, it is not the concern on how many hikes we get this year and even not with what hikes we get - 0.25% or 0.5%, and when Fed starts QT programme. Yesterday we've taken an in-depth view of these factors. Treating the Fed policy only with these two subjects seems too narrow. This should be more or less clear within 2-4 months. Indeed, it could and probably will bring pressure to the Gold in a short-term perspective, but this becomes just the first push, which seems obvious. The more important is what will happen with the economy when interest rates start to rise. Markets now react proactively, anticipating the next Fed steps, which means that investors will be ahead of the running train and the gold market appears in condition as interest rates hike is already happened. But the question is - whether markets will have to rewind the anticipated interest rates hike effect? Fed can't struggle with inflation and simultaneously support economic growth and the job market. Something should be hurt, and it seems that it is not inflation. We do not exclude the situation when, within 2022, when Fed appears in a dead way with high interest rates that start holding economic growth and increase unemployment.

Now, what has that to do with geopolitics? If the US does not deny the holding economic policy against China and keeps artificial supply bottlenecks, this makes its own economic recovery fragile, significantly increasing the chances for the scenario that we've mentioned above. But this is only half of the story NATO-Russia tensions also have a long-lasting effect. The rule of thumb is if you lose the political game in the external arena - you can't avoid troubles in domestic politics as well. No doubt, the US geopolitical win against Russia could become a big boost for the US in the economic sphere as well, opening new doors to the press on China and controlling Europe in many spheres. But in the opposite scenario, it could become a disaster. With losing positions in the geopolitical arena domestic political struggle and unrest exacerbate. Low J. Biden rating (under 41%) keeps the door open of impeachment and separatist sentiment rising in known states. Europe could start going out of control and potential Russia - China agreements in the political sphere promise nothing good to the US either. This will make a negative effect on the US economy and put the Fed in a difficult situation. This is just a common illustration of how it works.

Speaking on NATO (US)- Russia tensions, as we've said yesterday, in the FX report, we should not be deceived by temporal relief. These tensions are for the long term. They are not about Ukraine (neither US nor Russia needs it). These tensions about two subjects - Russian claims on security guarantees in Europe and domination over Europe, in general. But they are tight together closely. Russia gets the obnoxious answer from the NATO and US and now the ball is on Russia's side. Everybody waits for the next V. Putin step. There are two things that we could say - he can't say "it's Ok then. Let's forget about it, we just lost the religion". NATO's answer was obvious and expected. It means that Putin has some plan and/or arguments to support the Russian position. I suspect that answer comes from where nobody expected it, and definitely, it is not the invasion in Ukraine, which I'm 99% sure does not happen.

It promises a long journey with big shakes that should be supportive of the gold. And these factors tell that the game on the gold market is not lost yet as most interesting events come closer to the summer. In the first half of 2022 gold probably keeps its struggle against bearish Fed factors and remains under pressure.

Technicals

Monthly

January is coming to an end. The nominal trend remains bearish and gold was not able to break the resistance of YPP that keeps the door open for a further price decrease. At the same time, gold shows good resistance to unprecedented hawkish Fed rhetoric, which indirectly supports our long-term view. Investors right now can't agree with total gold capitulation and still see the place for gold in their portfolios.

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...

Although current price action suggests that gold could drop more, it is still far from monthly vital areas around 1680$ lows.

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Weekly

On the weekly chart, we have differences with CME futures. Thus, retail broker (FX Choice) shows bullish grabber, formed this week, while futures chart doesn't have it, showing the weekly trend has turned bearish. Although we have other grabbers that are still valid - everything is based on the same invalidation point of 1750-1760$ lows. Downside breakout gives us a bearish reversal swing, suggesting a further drop in the gold market. As gold has formed bearish reversal week - it is difficult to count on the upward continuation and probably we should look on wider downside context. Usually with this type of performance (very similar to the daily EUR), the market aims at previous lows...

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Daily

The trend has turned bearish here. Gold has reached the last 5/8 support area and daily oversold. It means that before downside continuation on the weekly time frame, the market could show some bounce:
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Intraday

Since we have excellent thrust down on the 4H chart and do not consider any bullish positions for now - it would be great if we get B&B "Sell" around 1810$ area. This is the pattern that we could keep an eye on at the beginning of the week and might be quite useful for those who would like to sell.
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Sive Morten

Special Consultant to the FPA
Messages
16,303
Greetings everybody,

So, gold market is enjoying temporal relief as in geopolitical tensions as around Fed next step, showing slow upside bounce. In general, everything goes with our plan, the momentum is not as strong as on the EUR, which means that chances to get downside pullback from 1810 area are not bad:
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Strictly speaking, this is not the B&B trade as market stands above 3x3 DMA for a long time already. But bearish momentum is not disappeared and should show itself around meaningful resistance. Thus, we still count to get the bounce from 1810 area.
 

Sive Morten

Special Consultant to the FPA
Messages
16,303
Greetings everybody,

It's just a brief update on gold market right now. In fact, a kind of B&B setup has started accurately from 1808-1810 area and gold is moving to its minimum 1791 target:
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On 1H chart we see some downside acceleration, and in general, upward action was very choppy and slow that doesn't carry features of bullish reversal and is more typical for retracement type of action. As we have bearish reversal week, current downside action could get more extended than just to 1791 level.
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Sive Morten

Special Consultant to the FPA
Messages
16,303
Greetings everybody,

So, here we also have a bit tricky action as on EUR. Once our initial entry starts to work, gold has shown another upward spike later on, when ADP report was released. Now, on 4H chart we do not have any drastic changes, and everything still stands valid. But it makes us one again decide where to take the short position:
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On 30 min chart we have few contradictive things. First is - we do not have any clear bearish patterns, except MACD divergence, maybe. Recent ADP jump was relatively fast, so it doesn't exclude minor upward continuation. Exspecially because we have two uncompleted extensions - one is from steep butterfly pattern, and another one is from inner AB-CD pattern:
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Overall downside action is choppy by far. Thus, only if you have your own technical tools that point on immediate downside action - it is possible to try to jump in. Otherwise, like in my case, it makes sense wait a bit more.
Potentially we could get two more chances for entry. First one, if price hits 1815 area, second - in a case of downside drop, we could get larger H&S pattern.
 

Sive Morten

Special Consultant to the FPA
Messages
16,303
Greetings everybody,

Our 4H momentum trade has been completed, but right after that gold has rebounded back. Still, we should understand that this is not gold's achievement but because of the drop of the dollar due to unexpected ECB hawkish statements. The daily chart picture doesn't look bullish with flag consolidation. And recall - we have bearish reversal week. So, the overall picture stands far from being bullish.

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But, the recent rebound has solid momentum and there are a lot of emotions in there. As today we have NFP release and is the last session of the week - it would be better to wait a bit with taking any short position right now. Besides, our 4H momentum trade is done already:

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Bulls, in turn, have the only background for trading - engulfing pattern on 4H and 1H chart. So, if you want to, just watch for support levels from engulfing pattern's swing. The market now stands at a short-term COP target, so some pullback could happen. But, as this context looks a bit fragile, try to take a position as closer to the 1788 lows of the pattern as possible...
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