Gold GOLD PRO WEEKLY, July 04 - 08, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,932
Fundamentals

The Banking Portugal conference has become the most important event for the gold market as well, although, I would say that NATO summit has special meaning for the gold market as well. Statistics shows that economy conditions are deteriorating but haven't reached yet the breakeven point. This lets Fed to follow existed strategy, rising rates more, which, in turn potentially headwind for the gold market.

Market overview

U.S. Treasury yields eased for a second consecutive day and the dollar rose on Wednesday after Federal Reserve Chairman Jerome Powell said there is a risk the U.S. central bank's interest rate hikes will slow the economy too much, but the bigger risk is persistent inflation.

"The clock is kind of running on how long will you remain in a low-inflation regime. ... The risk is that because of the multiplicity of shocks you start to transition into a higher inflation regime and our job is to literally prevent that from happening and we will prevent that from happening," Powell said at a European Central Bank conference.

Investors have worried that an aggressive push by the Fed to dampen inflation will tip the economy into recession. A Commerce Department report on Wednesday showed that the U.S. economy contracted slightly more than previously estimated in the first quarter as the trade deficit widened to a record high and a resurgence in COVID-19 infections hurt spending on services like recreation.

Gold prices were hemmed in a tight range as prospects of higher interest rates challenged bullion's safe-haven appeal while recession risks boosted it.

"It's a snooze-fest in gold markets. The yellow metal is being pulled in two directions as a hawkish Fed regime clashes with recession fears," said TD Securities in a note.

Speaking at the European Central Bank's annual conference in Portugal, President Christine Lagarde said the bank will move gradually but with the option to act decisively on any deterioration in medium-term inflation. Gold largely held its ground despite an uptick in the dollar , which usually dims bullion's appeal for overseas buyers. U.S. 10-year Treasury yields also rose.

"Gold remains a traders' market – vulnerable to false breaks and quick turnarounds on little news," City Index senior market analyst Matt Simpson said.

Meanwhile, holdings in the world's largest gold-backed ETF, the SPDR Gold Trust , recorded outflows for the past five straight sessions.
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Investors cut holdings in exchange-traded funds for silver, platinum and palladium in the second quarter on fears that a potential recession will reduce industrial demand, but gold assets held up because of its role as a haven, and that may persist. Gold-backed ETFs shrank by just over 1% in the three months through June, or 43 tons, after an 8% surge in the first quarter helped by Russian military operation, according to data compiled by Bloomberg. By contrast, silver holdings contracted almost 5%, and the outflow in tonnage terms was the biggest since 2011. The amount in gold ETFs is the lowest since March, while assets in the other three precious metals are around the smallest since 2020.
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Gold has held up well relative to silver and platinum. One ounce of gold now buys 90 ounces of silver, the most in almost two years. The resilience of gold offers yet more evidence to support its role as a component in portfolio asset allocation, in contrast to silver, platinum and palladium, which have more industrial uses and are therefore more exposed to economic downturns, according to Chad Hitzeman, senior business development manager at ETF Securities.

“Where broader markets remain negative, pressured by inflation and central bank hawkishness in taming prices, we see investors holding fast to gold ETFs as a risk-off haven,” said Hitzeman, whose company offers several precious metals products to investors.

Giovanni Staunovo, a strategist at UBS Group AG’s wealth management unit, shared this sentiment. “If market recession fears are increasing, you prefer to hold exposure to gold and not to the white metals, which have a high industrial usage,” he said.

Central banks are hiking borrowing costs in a bid to curb the highest inflation in years, weighing on non-interest bearing precious metals. The monetary tightening has spurred rising angst over a possible recession, particularly in the US, with Federal Reserve Chair Jerome Powell calling his commitment to cooling prices “unconditional.”

But as an economic slowdown becomes more likely, so does the outlook darken for precious metals with more industrial uses. Silver is used in solar panels and electronics, while platinum and palladium can be found in catalytic converters for vehicles. Demand for the platinum-group metals, or PGMs, has already suffered as a semiconductor shortage crimps auto production, while car sales in China have slumped due to Covid-19 lockdowns and as economic worries weigh on consumer sentiment.

“The market focus has shifted from potential supply losses to a potential demand slowdown,” said Suki Cooper, an analyst at Standard Chartered Plc. “We do expect auto production to start to recover toward the end of the year as chip shortages ease, but before then ETF flows are likely to continue to be a drag on the market across silver and the PGMs.”

US economy turns to nosedive

Statistics become worse and worse. With the negative IQ GDP data we've got two times drop of consumption and retail sales. GDP Deflator shows 8.3% while supposedly this numbers are artificially undervalued and by our calculation it should be around 10%. But, these numbers show past. Let's take a look what we have in the future - all leading indicators shows that the US economy runs to the worst collapse in a history on a full throttle.

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All leading indicators in the US clearly indicate that the system is began to crumble in conditions when they did not even begin to tighten monetary policy.
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The Michigan Consumer Sentiment Index has collapsed to a historic low since statistics began in the mid-70s. The level of 75 on the consumer confidence index is considered to be the border between growth and recession – now it is already 50, this has not been seen even in the crisis of 2009, when it was about 55

The Conference Board Consumer Confidence Index is compiled using a different methodology with a different calculation base, but the reversal formation has appeared in the fall of 2021 and has been steadily trending since then.

The NFIB Small Business Optimism Index has collapsed to CV-19 lows. At that time, small and medium-sized businesses in the United States were extremely sensitive to lockdowns, and now the optimism on the economy perspectives is completely annihilated. All components, except inventories and vacancies, show a landslide decline.

The ISM Manufacturing Index shows the strongest collapse since the covid crisis of 2020, but it is still above 50, but there is no doubt that according to the July polls, the index will turn to production activity contraction due to the fact that new orders for goods have shown outstanding plunge (immediately "-6" points) turning to the active dropping. Besides, ISM has the lag of 2-3 months, so, supposedly at the late summer US production should fall into collapse.

This is confirmed by surveys of regional Federal Reserve Banks (from five FRBs), where the average index of production activity has already moved into the production compression area.
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The leading indicator - ECRI Leading Index is also actively declining. The difference between 2020 and 2009 - 2009 was a quick shock with a V-shaped recovery. Now it will be a little long and tedious, but then it will explode…

Spending by American households per capita in real terms by May 2022 is only 1.5% higher than in February 2020 (!!!). Income is 0.6% higher, and excluding transactions with the state is 0.6% lower. Inflation has destroyed everything… Disposal will take place until every fake dollar from the depths of the Fed is disposed of in an inflationary hell. This is a minimum program.

By opinion of BofA the bond market stands in a worst situation since 1865. Previously we've explained - why. Nobody wants to but an assets that you immediately have to pay the interest. But this precisely happens, if you buy the bond with "-8%" yield.
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On February 2, 2022, the US national debt exceeded the historical mark of $30 trillion. The Senate in December 2021 has voted for another increase in the ceiling of the possible national debt of the country by $ 2.5 trillion to $31.4 trillion.

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It took 215 years for the US debt to reach $7 trillion. Then it took just 27 months, from March 2020 to June 2022, to add another $7 trillion. Moreover, President Trump managed to print more than $5 trillion before the end of his term in January 2021, giving an impetus to the promotion of a powerful inflationary wave around the world

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Bretton Woods III

On a background of these events, the most forward looking economists start talking on a new global financial system. We already have mentioned V. Putin speech on S-Petersburg economy forum and on BRICS meeting later on. But even before that the Credit Suisse political economy guru, Zoltan Pozsar have explained what big shifts are coming and already stand under way.

We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East (that is was V. Putin talked about as well) that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West. A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves…

We have two convictions today. First, June FRA-OIS spreads can widen more, to at least 50 bps, both due to funding premiums driven by commodity prices and the market taking out Fed hikes, and second, it’s a good time to get long… shipping freight rates. Yes, freight rates, which, at the current juncture are linked to “geo-monetary” dynamics. Freight rates are the price of balance sheet for “commodity RV traders” (the commodity trading houses) and for sovereigns that can take the risk of moving and storing subprime, sanctioned commodities

Who drives the bid for cash, i.e. whose bid is driving term funding premia in this environment where lenders are less willing to lend cash for longer tenors? The commodities world, for three reasons. First, non-Russian commodities are more expensive due to the sanctions-driven supply shock that basically took Russian commodities “offline”. If you are a (leveraged) commodities trader, you need to borrow more from banks to buy commodities to move and sell them.

Commodities no longer trade at par. There are Russian commodities that are collapsing in price and there are non-Russian commodities that are rallying – this rally is due to the 2022 Russia supply shock that we referred to above, which, once again, is driven by present and future sanctions-related stigma. It’s a buyers’ strike. Not a seller’s strike, to make things all the more absurd… Russian commodities today are like subprime CDOs were in 2008. Conversely, non-Russian commodities are like U.S. Treasury securities were back in 2008. One collapsing in price, and the other one surging in price, with margin calls on both regardless of which side you are on. The “commodities basis” is soaring! Commodity correlations are also at 1, which, to stress, is never a good thing.


Western central banks cannot close the gaping “commodities basis” because their respective sovereigns are the ones driving the sanctions. They will have to deal with the inflationary impacts of the “commodities basis” and try to cool them with rate hikes, but they will not be able to provide the outside spreads and won’t be able to provide balance sheet to close “Russia-non-Russia” spreads. Commodity traders won’t be able to either.

But the PBoC can…as it banks for a sovereign who can dance to its own tune. To make things more complicated, China is probably thinking deep and hard about the value of the inside money claims in its FX reserves, now that the G7 seized Russia’s. The PBoC has two “geo-strategic” = “geo-financial” options…

…sell Treasuries to fund the leasing and filling of vessels to clean up subprime Russian commodities. That would hurt long-term Treasury yields and stabilize the commodities basis and would give the PBoC control over inflation in China, while the West would suffer commodity shortages, a recession, and higher yields. That can’t be good for long-term Treasury yields.

The PBoC’s second option is to do its own version of QE – printing renminbi to buy Russian commodities. If so, that’s the birth of the Euro-renminbi market and China’s first real step to break the hegemony of the Eurodollar market. That is also inflationary for the West and means less demand for long-term Treasuries. That can’t be good for long-term Treasury yields either.

The idea behind going long shipping freight rates is simple: the price the PBoC will be paying to lease ships to fill them up with Russian commodities can in theory rise as much as the collapse in the price of Russian commodities: a lot. Renting boats is like renting balance sheet at a dealer to fund inventory, and if China does not have enough storage capacity on the mainland, it will store Russian commodities on vessels floating on the seas, encumbering not balance sheet (the PBoC is funding all this by printing money) but shipping capacity, which, for the rest of the world, will also be inflationary. Once again: if you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns.

The Fed and other central banks will be able to provide liquidity backstops, but those will be Band-Aid solutions. The true problem here is not liquidity per se. Liquidity is just a manifestation of a larger problem, which is the Russian-non-Russian commodities basis, which only China will be able to close.

This crisis is not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 – the end of the era of commodity-based money. When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money
(gold bullion and other commodities). After this war is over, “money” will never be the same again.

Conclusion:

While Fed and other central Banks wrap the minds of common investors, reviewing their forecasts for economy growth and inflation pace, suggesting, like C. Lagarde positive GDP numbers for EU economy this year (!!!) and suggesting that inflation will be around 2.5-3% within a year or two, we do not see yet the massive understanding of the tragedy among investors. They are tending to believe the Fed, which we think is a big mistake. It is enough to remember what they have promised just 3-4 months ago to understand absolute useless of their forecasts.

But with this slow mind of investors and their absolute faith in the US Treasuries as riskless asset (which is not the one, of course), postpones the moment when they should start looking things as they are. This, in turn, means that although currently we stand near the moment when everybody should start running into the gold, the real run will happen not now but later, when the catastrophe becomes evident. This in turn, means, that gold market should remain under pressure for some time more. At the same time - gold shows great resistance to the headwinds, showing only 3/8 monthly retracement despite big storm on the markets, that we see now.

NATO summit has become another important milestone in modern history. The trend on long-term confrontation has been proclaimed, and the Economist cover riddle tells the same - this is not just Russian military operation in Ukraine, this is war on total exhausting and it will last for the long time.
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Another source of big risk of escalation is coming US elections in November. We treat this risk as among most dangerous. Democratic party and liberal elites are obviously loosing control over the country. They can't resolve economical problems and the only way how they could unite people around them is to show external national enemy and turn situation to emergency that could let cancel/postpone elections etc. And obviously Russia is preparing for this role actively, as it is accused in all sins, particularly the US inflation.

War of different scale is most suitable for this in current circumstances. It might be escalation against China around Taiwan or higher degree of confrontation with Russia in Europe, or both. Actually we do not see any other ways how Democrats could hold the power in their hands. But that could turn to disaster.

It seems that Russia was waiting when the "West hit" will be done and now slowly, like Python, starts to strike back. Revenge - is a dish best served cold. First hit is Japan exclusion from Sakhalin project, which hurts Japan a lot and makes it to start searching other suppliers. But it is impossible to do now as all capacity is distributed already.

Second step might be taking at full or partially, when Russia contracts crude oil supply on the global markets. The point is that Russia has long-term pipe contracts with China and doesn't depend from spot demand. Thus, it could cut supply for as much as 5 mln. brls/day, which push price to 350-400$ per barrel.

Finally, EU buys from the US the same amount of LNG as pipe gas from Russia:
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As you know - Nord Stream I will be closed from 11 till 21 of July for preventive maintenance and repairs. The 1st branch is already closed because of Siemens false to settle compressor turbine. I wouldn't exclude totally that Nord Stream will not open any more after maintenance pause. In this case the EU preparation for the winter will be broken. Besides, Freeport LNG starts function not in September but only in October.

All these events make the rope on the neck of the US and EU economies tighter. The gold downside action hardly will last too long. Currently it seems it could reach 1680-1700 area within the summer. This should be great levels for long term investing. At the same time, as you understand - once reversal starts, it will be explosive. Just because of the reasons that we've mentioned. Thus, maybe it is not bad idea to think on slow start of investing right now, on small amounts, week by week and with no leverage. Better is to buy the physical gold (if you find a good dealer with acceptable bid/ask spreads), or invest in economically strong countries and currencies, such as Switzerland or UAE, as UK and the US exchanges could meet problems.

Finally, the gold market is very narrow, low-liquid for large flows. In 2021, the volume of gold production amounted to only 3,580 tons, with 10% belongs to Russia and another 1,143 tons is secondary use, i.e. processing of gold scrap - ~ 4500-5000 tone totally.

The volume of global demand for gold is about $ 272 billion per year. If we count the demand on average over the past 5 years:
▪️ jewelry accounts for 43.2%;
▪️ 6.9% for technological electronic production;
▪️ 10% on central banks or an average of 470 tons from all world central banks per year;
▪️ 40% on investment demand (27.5%) and over-the-counter trading (12.5%);
The investment demand for bullion, coins and medals is 21.4%, and 6.4% are gold ETFs.

Thus, almost half of the demand is the one from financial sector or investment demand, where 40% is private demand, and 10% is the public through the Central Bank. Accordingly, at current prices, the marginal flow into the gold market is only $ 135 billion, where the financial sector and the Central Bank together are only $77 billion a year!

We would like to emphasize once again that the demand for gold from all the world's central banks and the financial sector is only $ 77 billion a year!

Why gold is not growing when money supply have increased few times? The growth of gold prices is restrained by central banks from the G7, with the support of primary dealers in the framework of agreed procedures to maintain confidence in the monetary system. That is why, with 24 trillion issues by the world central banks over 13 years and an all-consuming pump of various-sized investment garbage, everything has grown except gold.

Of course we can't know this for sure but if Russia sends at least a third of its $240 billion current account surplus for 2022 into gold, it could trigger the armageddon in the gold market, pushing prices up to 7-10 thousand per ounce.

In turn, the destabilization of the gold market will provoke chaos in the money markets of Western countries through the effect of a cumulative trigger of undermining confidence, when there will be a consistent and massive involvement in this game.

The money and debt markets are interconnected, with the undermining of confidence in the money markets, the 130 trillion construction of the debt markets of Western countries is being destabilized.

The higher the gold prices, the stronger the mass psychosis imposed on the current unstable base of trust, when inflationary pressure, which has been record for 40 years, is already undermining confidence in the monetary institutions of Western countries.

To be continued...
 
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Sive Morten

Special Consultant to the FPA
Messages
16,932
Technicals
Monthly

Under impact of tighter Fed policy, gold is sagging through the Pivot point and comes to very decisive moment that could set the new trading range here. June has become an inside month but now price is testing the May lows. Breaking them down opens the road to the next support around 1680-1700 area. Technically it could happen by flat AB=CD pattern that has an OP target precisely in this area.
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Weekly

Weekly trend stands bearish, flag pattern and major 5/8 support have been broken down. It means that retracement after OP target is over and market slowly starts the extension swing down to XOP target around 1708. In fact this was the reaction on monthly COP either, as it stands around 1810$ area.
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Daily

As you could see - here we've done everything correct, based on Friday analysis. Indeed, once market hits intraday OP - it has formed minor W&R of the lows and shows the pullback. Here we still keep an eye on butterfly targets, and in the beginning of the week will be busy with searching area for short entry:
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Intraday

This is the picture. First is, supposedly, we could keep an eye on 1820-1823$ K-resistance area. Market could test it, forming AB-CD upside pattern. Depending on upside strength we will decide whether it makes sense to consider higher standing levels.
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Sive Morten

Special Consultant to the FPA
Messages
16,932
Greetings everybody,

Since gold market was closed yesterday, I suggest that we could update our long-term setups on commodity currencies - NZD, CAD, AUD. The most bright here is NZD that hits weekly XOP Agreement area:
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As you remember - on AUD and NZD we're watching for huge reverse H&S patterns, and NZD sets the bottom of the right arm. Supposedly it is bullish pattern, but bears also could get a lot from it. The point is that this pattern is not perfect, the sell-off on the right arm seems too strong for this pattern, and chances for failure are higher than usual. This is what bears could watch for.

On daily chart we see the wedge pattern. By classical view - it should be bullish. But modern technical analysis shows a lot of examples of downside breakout with acceleration as well:
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On 4H chart NZD is trying to set the background for reversal, forming bullish patterns - butterfly "Buy" and minor reverse H&S pattern:
nzd_4h_05_07_22.png


On AUD market is forming the same pattern as on NZD, but it hasn't reached yet the OP monthly target, that stands around 0.66-0.6650 area. So there we should wait a bit more. While on CAD we do not have so bright patterns as on NZD, but overall monthly performance suggests further strength of CAD that is forming flag consolidation after the sell-off. Taking in consideration tight relation of CAD with Oil export - it is not surprising:
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That's being said, on NZD bulls stand at the decision making point - either to buy or not. This area provides best risk/reward ratio and lowest risk for the trade, but it doesn't guarantee the success unfortunately. And risk is - H&S failure as downside action is too fast.
Bears, in turn, should catching the signs of failure for short entry, if market breaks down the week XOP Agreement area.
 

Sive Morten

Special Consultant to the FPA
Messages
16,932
Greetings everybody,

So, our long-term fundamental view brings the fruit and gold is keep going lower. Butterfly target is reached. Still, as market is not at oversold and action was fast - gold should proceed to the next target as well. This is 1.618 butterfly and XOP extension around 1720-1730$.
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On 4H chart we could count on tactical bounce as respect of butterfly target. Usually it takes 30% but 1807-1811 target seems a bit too extended and initially I would consider 1790-1800$ area, where some previous lows stand:
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Besides, on 1H chart we see that this is also K-area around it. Thus, based on current performance it seems that we should watch first for 1781 and 1792 K -area
gold_1h_06_07_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,932
Greetings everybody,

So, it seems that gold decides not to postpone downside action for too long and hits the 2nd butterfly target next day. Now daily gold stands at the target and oversold area. It is reasonable to count on some, at least minor, pullback.
At the same time, we have uncompleted weekly XOP around 1705 and important weekly 1700 lows. It makes us think that hardly we get too significant upside reaction here:
gold_d_07_07_22.png


It might be just 1763$ or 1780 K-area pullback at best case. Local XOP also is completed here.
gold_4h_07_07_22.png


That's being said, we do not consider any long positions here and watch for mentioned to levels for possible short entry
 

Sive Morten

Special Consultant to the FPA
Messages
16,932
Greetings everybody,

So, it is almost nothing going on on Gold market by far. Few moments tell that downside action should continue and hardly market stops just at XOP target 30$ lower. In fact price has completed 1.618 butterfly at daily oversold level. Normally we could count on 30% upside pullback at least, but now gold shows no reaction which looks bearish:
gold_d_08_07_22.png


On 4H chart gold is just forming bearish flag. It seems that oversold is totally ignored:
gold_4h_08_07_22.png


Such a combination starts smelling like butterfly failure. It happens relatively rare but if butterfly fails - it fails miserably. It suggests significant downside continuation, potentially 1680 lows could be tested
 

RahmanSL

Major
Messages
2,887
Greetings everybody,

So, it seems that gold decides not to postpone downside action for too long and hits the 2nd butterfly target next day. Now daily gold stands at the target and oversold area. It is reasonable to count on some, at least minor, pullback.
At the same time, we have uncompleted weekly XOP around 1705 and important weekly 1700 lows. It makes us think that hardly we get too significant upside reaction here:
View attachment 78188

It might be just 1763$ or 1780 K-area pullback at best case. Local XOP also is completed here.
View attachment 78189

That's being said, we do not consider any long positions here and watch for mentioned to levels for possible short entry
Hi Sive.... We all know that the main factor weighing on gold/precious price is the strong US dollar which, on a trade-weighted basis, has appreciated to its highest level in nearly 20 years. However, the USA (and the UK, EU, and many parts of the world) is facing a number of serious economic issues & challenges, especially persistent high inflation and the risk of a recession. I would think that would favour gold/precious metals.
 
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