Sive Morten
Special Consultant to the FPA
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Fundamentals
It is amazing guys, how political background intrudes markets performance, especially gold. Things that just a week ago was unclear - how gold could start turning up from $1660 area, for example, now is getting the evidence. Last week, we're not occasionally spent some time on discussing of the US political background and D. Trump initiatives and we come to conclusion that Republicans are not intend to wait for 2024 elections. They want to win November elections and start a legal claim on 2020 elections results in some "arguable" States. The result of this investigation means J. Biden impeachment. The campaign is already started there, as we show you below.
Second important moment - west is softening confrontation degree with Russia. The group of politicians that were standing in a head of heavy anti Russian politics are loosing their sits - B. Johnson, M. Draghi and some others. E. Macron and O. Sholtz are loosing popularity and political support while many international financial institutions, such as IMF, World Bank call to cancel anti-Russian sanctions. The US is already cancelled some. It means that west policy is changing and West/East confrontation is changing the shape. This might be the turning point for the gold market as well.
Market overview
Gold dropped back toward an 11-month low as investors again turned to the dollar as a haven asset amid expectations for more aggressive US monetary tightening.
The metal slipped as much as 2.2% after ending Wednesday 0.6% higher in the wake of a searing inflation report from the US. Investors bet that the Fed is more likely than not to raise interest rates by 100 basis points when it meets later this month, a move that would boost the chances of the economy entering a recession.
Gold is heading for its fifth weekly loss, the longest streak of such declines in almost four years, with haven credentials sidelined by investors becoming super-bullish on the US dollar. Bullion has come under relentless pressure in the past month as investors turn to the greenback in the face of an increasingly hawkish Federal Reserve. That trade got another boost this week from soaring US inflation.
Spot gold slumped below $1,700 an ounce on Thursday for the first time in almost a year as Bloomberg’s dollar gauge climbed to a record.
While high inflation and growth threats typically aid gold, the precious metal is wilting as investors weigh the prospect of bigger or more frequent interest-rate hikes from a Fed trying to curb price pressures. Gold doesn’t pay interest, and, like other dollar-denominated commodities, it suffers when the dollar rises.
Still, investors’ expectations of an economic recession in the US should benefit gold as a safe haven, according to Commerzbank AG analysts.
Yesterday we explain why with the high degree of certainty, the Fed will fizzle to keep rate hiking, closer to the elections and end of the year. While big banks, due to recession fears suggest the same, for example, Bank of America:
And even full step rate cut in IQ of 2023:
Although we agree on coming Fed capitulation and inflation victory over the Fed, we disagree on the consequences and suggest that inflation wouldn't go lower, keep standing on high levels and rising. Bank of America thinks different on a chart above, making forecast on inflation decreasing somewhere to 3%. As you understand - the end of the upside Fed cycle and high inflation is a absolute perfect combination for the gold market. Since we expect that all these stuff will happen on a background of total collapse on the bond market, the real interest rate could be even more negative than now.
Other investors also start suspect something.
According to the Taylor rule, the federal funds rate shouldn’t be just between 1.50% and 1.75%, but at least above 5% (see the chart below taken from the Atlanta Fed)! At such a level, the Fed will be “neutral,” but to beat inflation it should be restrictive, not merely neutral.
It means that the U.S. central bank remains behind the inflation curve and would have to raise interest rates much further to combat high inflation. However, it raises a very important question: Could the Fed raise rates so decisively without triggering the next economic crisis? This is, of course, a rhetorical question. Monetary policy tightening should be negative for gold prices, as higher real interest rates usually lead to lower gold prices. However, gold has been generally very resilient during the current tightening cycle. It’s true that it didn’t rally despite the outburst of inflation, but its gave a stellar performance (even when we take July plunge in the account) in the face of rising rates and in comparison to plunging equities or cryptocurrencies, as the charts below show. By the way, it seems that the debate about whether gold or Bitcoin is a better store of value has been settled.
Powell still believes in a soft landing, but he may be the only one. You see, after a gigantic binge, there is always a hangover. When the host of the great party is taking away the punch bowl, drunken guests loudly express their dissatisfaction, which can even translate into brawling. Similarly, after a massive increase in the money supply, there is high inflation that you cannot just wait out, lying in bed and eating broth. You have to hike interest rates, but then borrowing costs are increasing, which hits many excessively indebted companies and investors, and the economic boom translates into a bust.
Busts are awful, but not for gold. The yellow metal rallied during both the Great Recession and the coronavirus crisis (and also during the repo crisis), and this time won’t be different. We just have to wait until deteriorating economic conditions force the Fed to deviate from its planned course. Initially, when the next crisis hits, there might be a panic sell-off in the precious metals market in order to raise liquidity, but after this short period, gold should rally, shining brightly as a truly safe haven.
The political component of Gold reversal
Last week we've discussed possible D. Trump return and how Republicans intend to do this. We've concluded that this plan highly likely means J. Biden impeachment. And take a look - we're not alone with our suggestion:
Republicans are spinning up their political media machine, pressing on Democrats, trying discredit their foreign policy and show public their mistakes. I give you just few links. You could read them, but even with the headlines it becomes everything clear:
Yes, we're coming to 0.75-1.0% rate change within two weeks and then we get the break until September that should keep gold under pressure, which makes us to stay focused on our 1660$ target. But the speed of events suggests that we might be closer to reversal than we thought initially.
Technicals
Monthly
Here we have no adjustments by far. As we've said last week - breaking down May lows 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. It is interesting guys, that UBS mentioned the same 1700$ area as potential level for the end of the year.
Indeed, technically this level is very strong, and it might be the one that we're looking for. Take a look - K-support and AB-CD Agreement, accompanied by monthly Pivot Support 1 and oversold. What stronger combination we could get? Thus, now we're aiming on 1660-1684 area as the target of downside action and potential reversal area.
Weekly
Here market finally hits the XOP target, accompanied with oversold level. Technically this combination suggests the pullback, which is really could happen as all eyes will be on ECB statement, that barely effects the gold market. Ahead of the Fed meeting on 26-27 of July, the pullback might be good chance to consider another short entry:
Daily
Friday doesn't bring more clarity as session was inside one. As gold is oversold on weekly chart, it is not good point for taking new short position. Thus, it makes sense to wait and see whether pullback happens. In general, $1800 area looks like the ceil for coming week because of combination of strong technical tools - K-resistance, daily overbought and former lows. It means that hardly we get more extended pullback, at least during the next week.
Additionally we could watch for tactical B&B "Sell" setup, as recent downside action is acceptable thrust for it.
Intraday
On intraday charts we have nothing yet, except divergence. It is unclear still, what particular pattern might be formed here, to trigger upside bounce, maybe H&S. We will see. This is important for those who intends to trade gold long. But we need this pattern mostly for upside targets calculation to identify potential areas where downside action could start again, daily B&B "Sell", for example.
It is amazing guys, how political background intrudes markets performance, especially gold. Things that just a week ago was unclear - how gold could start turning up from $1660 area, for example, now is getting the evidence. Last week, we're not occasionally spent some time on discussing of the US political background and D. Trump initiatives and we come to conclusion that Republicans are not intend to wait for 2024 elections. They want to win November elections and start a legal claim on 2020 elections results in some "arguable" States. The result of this investigation means J. Biden impeachment. The campaign is already started there, as we show you below.
Second important moment - west is softening confrontation degree with Russia. The group of politicians that were standing in a head of heavy anti Russian politics are loosing their sits - B. Johnson, M. Draghi and some others. E. Macron and O. Sholtz are loosing popularity and political support while many international financial institutions, such as IMF, World Bank call to cancel anti-Russian sanctions. The US is already cancelled some. It means that west policy is changing and West/East confrontation is changing the shape. This might be the turning point for the gold market as well.
Market overview
Gold dropped back toward an 11-month low as investors again turned to the dollar as a haven asset amid expectations for more aggressive US monetary tightening.
The metal slipped as much as 2.2% after ending Wednesday 0.6% higher in the wake of a searing inflation report from the US. Investors bet that the Fed is more likely than not to raise interest rates by 100 basis points when it meets later this month, a move that would boost the chances of the economy entering a recession.
Gold is heading for its fifth weekly loss, the longest streak of such declines in almost four years, with haven credentials sidelined by investors becoming super-bullish on the US dollar. Bullion has come under relentless pressure in the past month as investors turn to the greenback in the face of an increasingly hawkish Federal Reserve. That trade got another boost this week from soaring US inflation.
Spot gold slumped below $1,700 an ounce on Thursday for the first time in almost a year as Bloomberg’s dollar gauge climbed to a record.
While high inflation and growth threats typically aid gold, the precious metal is wilting as investors weigh the prospect of bigger or more frequent interest-rate hikes from a Fed trying to curb price pressures. Gold doesn’t pay interest, and, like other dollar-denominated commodities, it suffers when the dollar rises.
Still, investors’ expectations of an economic recession in the US should benefit gold as a safe haven, according to Commerzbank AG analysts.
Yesterday we explain why with the high degree of certainty, the Fed will fizzle to keep rate hiking, closer to the elections and end of the year. While big banks, due to recession fears suggest the same, for example, Bank of America:
And even full step rate cut in IQ of 2023:
Although we agree on coming Fed capitulation and inflation victory over the Fed, we disagree on the consequences and suggest that inflation wouldn't go lower, keep standing on high levels and rising. Bank of America thinks different on a chart above, making forecast on inflation decreasing somewhere to 3%. As you understand - the end of the upside Fed cycle and high inflation is a absolute perfect combination for the gold market. Since we expect that all these stuff will happen on a background of total collapse on the bond market, the real interest rate could be even more negative than now.
Other investors also start suspect something.
According to the Taylor rule, the federal funds rate shouldn’t be just between 1.50% and 1.75%, but at least above 5% (see the chart below taken from the Atlanta Fed)! At such a level, the Fed will be “neutral,” but to beat inflation it should be restrictive, not merely neutral.
It means that the U.S. central bank remains behind the inflation curve and would have to raise interest rates much further to combat high inflation. However, it raises a very important question: Could the Fed raise rates so decisively without triggering the next economic crisis? This is, of course, a rhetorical question. Monetary policy tightening should be negative for gold prices, as higher real interest rates usually lead to lower gold prices. However, gold has been generally very resilient during the current tightening cycle. It’s true that it didn’t rally despite the outburst of inflation, but its gave a stellar performance (even when we take July plunge in the account) in the face of rising rates and in comparison to plunging equities or cryptocurrencies, as the charts below show. By the way, it seems that the debate about whether gold or Bitcoin is a better store of value has been settled.
Powell still believes in a soft landing, but he may be the only one. You see, after a gigantic binge, there is always a hangover. When the host of the great party is taking away the punch bowl, drunken guests loudly express their dissatisfaction, which can even translate into brawling. Similarly, after a massive increase in the money supply, there is high inflation that you cannot just wait out, lying in bed and eating broth. You have to hike interest rates, but then borrowing costs are increasing, which hits many excessively indebted companies and investors, and the economic boom translates into a bust.
Busts are awful, but not for gold. The yellow metal rallied during both the Great Recession and the coronavirus crisis (and also during the repo crisis), and this time won’t be different. We just have to wait until deteriorating economic conditions force the Fed to deviate from its planned course. Initially, when the next crisis hits, there might be a panic sell-off in the precious metals market in order to raise liquidity, but after this short period, gold should rally, shining brightly as a truly safe haven.
The political component of Gold reversal
Last week we've discussed possible D. Trump return and how Republicans intend to do this. We've concluded that this plan highly likely means J. Biden impeachment. And take a look - we're not alone with our suggestion:
Republicans are spinning up their political media machine, pressing on Democrats, trying discredit their foreign policy and show public their mistakes. I give you just few links. You could read them, but even with the headlines it becomes everything clear:
- Tucker Carlson: The most dishonest people are yelling loudest for a war with Russia
- The HIll: Have sanctions against Russia boomeranged?
- Popular Mechanics: NYC Officials on Surviving a Nuclear Attack: ‘You Got This!’
- Newsweek: Joe Biden Risks Impeachment if Democrats Lose Both House and Senate
- Bloomberg: Russia Aims to Control Oil Pricing by Creating Own Benchmark
- Voice of America: Yellen Pushes Plan to Cap Price of Russian Oil on Global Markets
- Bloomberg, Julian Lee: Capping Russian Oil Prices Is Pure Fantasy
- US Department of Treasury cancels some vital anti-Russian sanctions
- WTO, World Bank, IMF call to ease anti Russian sanctions
- Reuters: Russia preparing for next stage of offensive, Ukraine says
- Russian Defense Minister Shoigu calls for intensified action to stop Kiev's civilian strikes
- RT: US tells citizens to leave Ukraine
Yes, we're coming to 0.75-1.0% rate change within two weeks and then we get the break until September that should keep gold under pressure, which makes us to stay focused on our 1660$ target. But the speed of events suggests that we might be closer to reversal than we thought initially.
Technicals
Monthly
Here we have no adjustments by far. As we've said last week - breaking down May lows 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. It is interesting guys, that UBS mentioned the same 1700$ area as potential level for the end of the year.
Indeed, technically this level is very strong, and it might be the one that we're looking for. Take a look - K-support and AB-CD Agreement, accompanied by monthly Pivot Support 1 and oversold. What stronger combination we could get? Thus, now we're aiming on 1660-1684 area as the target of downside action and potential reversal area.
Weekly
Here market finally hits the XOP target, accompanied with oversold level. Technically this combination suggests the pullback, which is really could happen as all eyes will be on ECB statement, that barely effects the gold market. Ahead of the Fed meeting on 26-27 of July, the pullback might be good chance to consider another short entry:
Daily
Friday doesn't bring more clarity as session was inside one. As gold is oversold on weekly chart, it is not good point for taking new short position. Thus, it makes sense to wait and see whether pullback happens. In general, $1800 area looks like the ceil for coming week because of combination of strong technical tools - K-resistance, daily overbought and former lows. It means that hardly we get more extended pullback, at least during the next week.
Additionally we could watch for tactical B&B "Sell" setup, as recent downside action is acceptable thrust for it.
Intraday
On intraday charts we have nothing yet, except divergence. It is unclear still, what particular pattern might be formed here, to trigger upside bounce, maybe H&S. We will see. This is important for those who intends to trade gold long. But we need this pattern mostly for upside targets calculation to identify potential areas where downside action could start again, daily B&B "Sell", for example.
