Gold GOLD PRO WEEKLY, July 13 - 17, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,635
Fundamentals

As we've noted last week, the headlines usually relates gold appreciation to virus issue, but as we've considered the background is significantly wider. Virus is just a part of the puzzle and not the most important. Low rates, a lot of money printing, difficult political situation especially in US, support gold in long term. The data that we have this week provides no reasons to change our moderate bullish view on gold market.

Gold held above $1,800 on Thursday, close to the near nine-year peak hit in the previous session, on growing fears that surging coronavirus cases could stall a global economic recovery, with the focus shifting to U.S. jobs data later in the day.

The combination of global central bank easing, geopolitical risks, the persisting pandemic impact and global recession could continue to push gold prices higher in the medium term,” said Bank of China International analyst Xiao Fu. But the analyst also said: “There’s volatility ahead ... There could be some better economic data or (signs economies are) returning to normal, it could slow down the rally to a certain extent.”

Global coronavirus cases exceeded 12 million on Wednesday, with more than half a million dead. In the United States, cases have been on the rise in 42 of the 50 states over the past two weeks, according to a Reuters analysis. Keeping alive worries over the economic fallout, U.S. Federal Reserve officials on Wednesday suggested the recovery in the world’s largest economy may be stalling. Meanwhile, Britain’s finance minister promised an additional $38 billion to try to head off an unemployment crisis. Stimulus tends to boost gold, which is considered a hedge against inflation and currency debasement.

As we've said yesterday, D. Trump administration now considers providing another $1Trln. in August to support US economy.

Gold rose on Friday and held above the key $1,800 level, en route to a fifth straight weekly gain as a jump in U.S. COVID-19 infections underpinned demand for safe-haven assets.

“The higher COVID numbers in the U.S. and the implications this might have on the economic recovery has been influencing price action,” said Cameron Alexander, an analyst at Refinitiv-owned metals consultancy GFMS.


Gold exchange-traded fund (ETF) inflows continue to rise, indicating investors are hedging against further pullbacks in equities, he said.

The United States on Wednesday reported the largest one-day increase in coronavirus cases by any country since the start of the pandemic, while cases have jumped in major cities such as Melbourne, Tokyo and Hong Kong. The spike in cases soured risk sentiment, sending world stocks and oil prices down with concerns over fresh lockdowns in the United States alarming investors. Adding to the support, 10-year U.S. Treasuries dropped to their lowest since late April.

“Ten-year yields are still declining more than the inflation expectations are declining, and that’s been the driver behind gold, and why we’re seeing these kind of whip-saws on the day,” said Daniel Ghali, commodity strategist at TD Securities.

Gold could even set a new record high this year if another bolt of risk aversion courses through the markets, especially if the green shoots of the global economic recovery are snuffed out by another round of lockdowns across major economies,” said FXTM market analyst Han Tan in a note.

Data showed U.S. shoppers were staying out of stores in areas where cases are rising the most, dampening hopes of a quick recovery in the world’s biggest economy.

However, gold’s longer-term technical patterns suggest a slowing in the momentum, with positioning pointing to a market very long on gold and implying a short-term pullback is possible, IG Markets analyst Kyle Rodda said.

Goldman Sachs view

Goldman Sachs expects gold to benefit if China, the world’s top retail buyer, recovers much strongly from a second wave of COVID-19 cases than the United States, and reinforced its $2,000 an ounce target for bullion prices. The Wall Street bank recommended maintaining long positions in copper, silver, steel and gold, which are “both less exposed to areas with new outbreaks — Asia and Europe versus the Americas — and less exposed in the event of an outbreak.”

Total cases of the novel coronavirus in the United States cross 3 million, a Reuters tally showed, with the country reporting more than 60,500 new infections — a one-day record.Increased safe-haven buying has pushed spot gold prices 18% higher so far this year, and it breached the key $1,800 an ounce level this week — the highest since Sept. 2011.

Going forward, the bank expects prices to average $1,740 in 2020 and $1,988 an ounce next year, adding that rising inflation and a weaker dollar are among key factors that will boost prices.

Silver too has a “near perfect environment” to finally perform,” the bank said in a note dated July 9, based on drivers including a Chinese-led recovery in industrial activity, safe-haven buying and lower supply due to COVID-19-related mining disruptions in the Americas.

It also recommended going long on Brent crude futures, and maintaining short positions in U.S. crude, reasoning that “core U.S. fundamentals are providing headwinds to WTI.”

On a 3-, 6- and 12-month horizon, Goldman sees returns of -9.3%, 1.7% and 13.9% on commodities over the S&P GSCI index. The year-to-date return on commodities is seen at -31.6%, compared with 17.4% in 2019. The bank forecast 3-month returns of -4.0% for industrial metals, -0.9% for precious metals and -11.7% for energy complex.

Thus, up 19% this year, gold has had a stellar run, recently cracking the $1,800 per-ounce level to scale nine-year peaks. Several factors have driven the precious metal’s ascent, especially the safe-haven bid as the coronavirus wreaked havoc. As economies re-opened from May, retail buying helped accelerate the rally. Now focus is on gold as an inflation hedge.

With central banks and governments in full stimulus mode, inflation will be roused from its decade-long slumber, economists expect, though that’s a long-term rather than immediate possibility. Between coronavirus risks and inflation expectations, speculators are taking no chances; positioning data indicates a market very long on gold. Prices will hit $2,000 within a year, Goldman Sachs predicts.

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As Goldman sets gold performance in relation to China recovery, recently we've mentioned that statistics looks impressive. Stock market looks better than in developed countries -

As Fathom reports, Chinese equities jumped by more than 5% on Monday as investors priced in a sharp bounceback in the world’s second largest economy. The Shanghai A-share index closed almost 8% above its January 2020 level, when measured in US dollars, and has outperformed other major bourses on that metric. It marks a sharp turnaround from the beginning of February, when Chinese equities were heavily sold off as Wuhan went into lockdown and COVID-19 was largely expected to be a China-centric shock. However, the virus has since spread all over the world, with stringent lockdowns imposed in almost all countries. Despite being the apparent country of origin, China seems to have been able to contain the virus much more effectively than large economies in Europe and the US. This has allowed an easing of restrictions that is translating to stronger economic activity. Industrial profit was up 6% year-on-year in May. Meanwhile, the Caixin services PMI for June rose to 58.4, its highest level in more than ten years.

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COT Report

CFTC data shows another week of increasing of net long position on gold. This week it is not as impressive as week before, but still, it is positive. And what is more important - it is accompanied by growing open interest. It means that position chances not due short covering but due exceeding of new longs over new shorts.

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, rose 0.27 percent on Wednesday from
Tuesday as well, supporting existed trend on the market.

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As a result net position has increased. Still, on the chart we see that gold slowly enters in an area of "saturation" of long position that commonly stand around 250-260K contracts that gold reaches already. During recent rally, supported by panemic, this record high was shifted slightly higher for another 100K contracts to 350K level. But, anyway, as higher gold will climb as stronger it will feel the pressure of "saturation" and odds of retracement will start to rise.
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Source: cftc.gov
Charting by Investing.com



That's being said, guys, we have good background for the gold market. Investors tell the same as we do - not only the virus is cornerstone of the rally, but wider combination of factors - outstanding money printing amount, political risks, zero interest rates and hazard of virus relapse. Chinese economy shows good pace of recovery, leading even US and EU stock markets and showing good statistics. According to Goldman, it should become additional driver for physical demand of gold in medium-term perspective. As we do, Goldman also points on $2000 area, as nearest target.

Among the risks we see mostly technical ones. In the situation when gold reaches "saturation" area of total net long positions it could rise until strong resistance level but hardly it breaks it without preparation and pullback. Thus, currently we do not expect explosive rally and suggest that gold show significant pullback somewhere from 1800-2000$ area. But this pullback becomes good chance to consider long-term entry again.


Technicals
Monthly


Take a look what we have on monthly chart. All major resistance levels are in the past, overall context, trend are bullish, no doubts. Overbought level stands around 1845 and lets market easily fluctuate around 1800 top. YPR1 is broken that indicates new long-term trend.

Technical targets point now that next target is 1920 - 1955 level. Still, take a look, that 1800 area is natural resistance zone where market has spent a lot of time in the past, when it has dropped from the top in 2011-2012. This fact makes us to suggest two different scenarios.

First is scenario is most simple - direct breakout and run above 1920, reaching overbought on monthly chart and high level of saturation of net long position by CFTC data, which should trigger reasonable pullback before continuation.

Second scenario - possible cup & handle shape and immediate retracement somewhere to 1550 level, then gradual acceleration and breakout of 1920 area running to 2000 level.

What scenario finally will happen depends on current position on gold, how natural to gold is 250K net long contracts and what power it has to repeat the top of 350K. If 350K was mostly the pandemic effect and a kind of outlier, then second scenario should start. Anyway we have to keep an eye on possible bearish signs on the market, because they could appear at any moment when overall position on Gold stands above 250K contracts. Also do not forget that it is summer now that is seasonally bearish time for the market and vacations time.

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Weekly

Weekly chart shows that current level is MPR1 also. If even retracement starts, it should not turn to miserable collapse as overall sentiment and context stands bullish. Thus, we are not interested in levels below weekly OS level around 1677 by far. This level is Fib support as well. Such combination lets us to suggest, say, H&S pattern like on the chart. But to say it definitely we should not miss the hints on reversal around 1820 area on lower time frames. Upside breakout of this level tells that market follows to 1st scenario mentioned above, and we're going to challenge 1900 in medium-term perspective.
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Daily

From the perspective of weekly chart, daily butterfly has special meaning. Butterflies very often become a part of H&S pattern. Daily oversold stands at the same 1680 level as weekly one. With this new environment, it is unsafe to take new longs right now. We have to wait either clear upside breakout and erasing of butterfly, or... yes, deep retracement and completion of medium-term pullback that could last for few months.

Bears instead could start planning the trades. Thus, here, right at top of the butterfly is the first point where it is possible. Later, if H&S pattern indeed will be formed the top of right arm is our perpetual point where we consider short entry.

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Intraday

On intraday charts I still hope that before any reversal market will finish with our XOP target of H&S pattern. Theoretically it is possible to sell right now, but in this case your stop order will be extended as anyway it has to be above XOP. Touching of XOP is just the dos and don’ts of polite manners for any market :)

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On 1H chart market keeps our K-support valid and even has formed minor W&R on Friday. Let's see what will happen. Currently it is unclear still, what particular pattern could be formed to finalize our 1825$ destination point. Our butterfly that we've initially suggested here was not realized.

gold_1h_13_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,635
Greetings everybody,

We keep up with our trading plan. As you remember our first step is to get completion of 1825 target. Take a look that today we could get the grabber here and it brings more confidence to our suggestion, so let's keep an eye on it:
gold_d_14_07_20.png


On 4H chart market is forming flag consolidation under the target and this is good sign. If it will be the flag, then here we could get butterfly that completes the target:

gold_4h_14_07_20.png


Alternatively we could get "222' Buy around our major 1790 K-area and upside continuation after that. But despite what pattern will be formed - it makes no impact on major levels as both patterns stand inside the flag and above the K-area. Still, as we have hidden MACD divergence here, I would suggest that butterfly has more chances to happen. Anyway, if you plan long trade here - it would be better to place initial stop below K-area:
gold_1h_14_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,635
Greetings everybody,

Everything goes well, we've got our daily grabber and now we have more confidence with reaching 1825, hopefully this week.
gold_d_15_07_20.png


While gold has not formed 4H butterfly and chosen 2nd scenario with "222" Buy pattern - as we've said, anyway all this stuff has happened inside the flag consolidation and absolutely makes no impact on major points of the trading plan. Now gold is challenging its upper border:
gold_4h_15_07_20.png


Here, on 1H chart, 2nd scenario works perfect upside bounce started right from 1790 K-area. So, let's keep watching now it is direct action to 1825:
gold_1h_15_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,635
Greetings everybody,

Everything goes well by far. We hope that ECB will announce either more supportive measures, or at least prolongation of existed ones. Both ways are supportive to gold and should be enough to trigger spike at least to our 1825 target.

Yesterday on daily chart we've got another minor grabber. That's why today we focus only on the context that could work within few hours:
gold_d_16_07_20.png


On 4H chart gold has challenged flag border, but has not broken it yet totally. Still, here we also have the same Grabber. It means that now we're interested only with this grabber's swing to plan our trades:
gold_4h_16_07_20.png


Here is what we have. If we're right on ECB opinion - price should start rising right from here. It means that we have chance to Buy with stops below 1802 and target around 1823-1825 level. Otherwise, deeper retracement will happen and we will have to postpone discussion of upward continuation on next week:
gold_1h_16_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,635
Greetings everybody,

ECB passivity makes barely negative impact on gold, as market has lost short-term driving factor, that could help price to hit the target. But this has not happened. Still, price stands close to the top and keeps chances on reaching 1825 target. Our major grabber has not been cancelled yesterday as well:
gold_d_17_07_20.png


On 4H chart, as price turns up again in the middle of the flag and gives hint on hidden MACD bullish divergence - this lets us to suggest butterfly pattern. But, to be honest, this is the only pattern that currently is more or less visible and recognizable here. The fact that price was able to hold inside the flag is positive for short-term context:
gold_4h_17_07_20.png


Daily and 4H charts suggest major trading setup - long entries with stops below daily grabber. Maybe market hits XOP here, on 1H chart. This could be the chance to buy... Conversely, we have something like reverse H&S and it might happen that upside action is already started... But anyway, the core stands the same - the target and the invalidation point. Situation makes impact only on placement where position could be taken...
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