Gold GOLD PRO WEEKLY, July 20 - 24, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,631
Fundamentals

This week Gold market also was waiting for ECB decision and announcing of new rescue measures for economy. As nothing new has been said on Thu, markets were disappointed a bit, but not too much. As a result, just minor retracement has happened and now all eyes are on EU summit that is prolonged for Sunday as well. Overall background stands supportive for gold. We've talked about many times in previous months and overall picture stands the same. Currently we do not see any signs of changes and keep our moderate bullish view on gold. Under impact of coming driving factors market could change the shape of price action a bit, but major tendency should hold as it is based on fundamental reasons.

Gold inched higher on Wednesday, holding firm above the key $1,800 level, as worries over surging coronavirus cases and simmering China-U.S. tensions lifted
demand for the safe-haven metal. Coronavirus cases continue to rise in the United States. With more than 3.3 million cases, it has one of the highest rates of cases per capita in the world. Many U.S. states have temporarily halted the reopening of their economies in order to curtail the outbreak, which has infected more than 13 million people worldwide so far.

The World Health Organization reported a record increase in global coronavirus cases for the second day in a row, with the total rising by 259,848 in 24 hours.
The biggest increases reported on Saturday were from the United States, Brazil, India and South Africa, according to a daily report. The previous WHO record for new cases was 237,743 on Friday. Deaths rose by 7,360, the biggest one-day increase since May 10. Deaths have been averaging 4,800 a day in July, up slightly from an average of 4,600 a day in June.

India on Friday became the third country in the world to record more than 1 million cases of the new coronavirus, behind only the United States and Brazil. Epidemiologists say India is still likely months from hitting its peak. Cases in Brazil crossed the 2 million mark on Thursday, doubling in less than a month and adding nearly 40,000 new cases a day. A patchwork of state and city responses has held up poorly in Brazil in the absence of a tightly coordinated policy from the federal government. The United States, which leads with world with over 3.7 million cases, has also tried to curb the outbreak at the state and local levels with only limited success.

Federal Reserve officials warned on Tuesday the U.S. economy faces a longer recovery from the pandemic, and economic pain could still worsen as cases mount.
U.S. President Donald Trump signed legislation and an executive order to hold China "accountable" for the national security law it imposed on Hong Kong. Trump also shut the door on "Phase 2" trade negotiations with China, saying he does not want to talk to Beijing about trade because of the coronavirus pandemic.


Gold fell below the key $1,800 level on Thursday as the dollar strengthened and the European Central Bank kept its monetary policy on hold, prompting some investors to lock in profits.

“The key narrative is that central banks are on hold for some time and more stimulus is coming but it’s going to be much later. That’s taking a little bit of the bullish trend that gold has firmly been in recently,” said Edward Moya, senior market analyst at broker OANDA.

ECB President Christine Lagarde said the central bank will use its stimulus firepower fully even as the euro zone economy shows some signs of rebounding from its pandemic-induced recession.

“Some investors are locking profits but medium to long investors are firmly maintaining their position and they’re looking to buy on any significant dip,” Moya added.

The rise in U.S.-China tensions and an uptick in coronavirus infections in some major economies is keeping gold fundamentally supported, said Kitco Metals senior analyst Jim Wyckoff.

“As long we don’t have a vaccine, we will continue to have these problems... We could see a push towards $2,000 before the end of this year,” said Afshin Nabavi, senior vice president at precious metals trader MKS SA.


Tensions between the United States and China are also prompting people to invest more in gold rather than stocks, Nabavi said.

Adding to the recent rise in U.S.-Sino friction, the Trump administration was considering banning travel to the United States by all members of the Chinese Communist Party, a person familiar with the matter said on Thursday, an idea that China dismissed as absurd. President Donald Trump on Tuesday ordered an end to Hong Kong’s special status under U.S. law, which gives preferential economic treatment to the city, prompting Beijing to warn of retaliatory sanctions.

New York Federal Reserve President John Williams said it could take a few years for the U.S. economy to recover, and it was not yet the time to think about raising interest rates. Investors also eyed a meeting of EU leaders in Brussels about a proposed stimulus to kick-start their COVID-hit economies. European Central Bank Vice-President Luis de Guindos said he expected them to reach an agreement before the end of July.

“The bulls’ case for gold remains intact with real rates low and suppressed which would be able to sustain the high price of gold,” Phillip Futures said in a note.

“A surge in confirmed cases, particularly across the U.S., lockdown measures being reinstated, as well as rising geopolitical tensions between the U.S. and China, have supported a flight to safety in gold,” said Standard Chartered analyst Suki Cooper.

Gold prices could touch $2,000 per ounce by year-end, helped by lower real interest rates, massive fiscal stimulus and a weak economy, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.


European Union leaders failed to agree on a massive stimulus fund to revive their coronavirus-hammered economies on Saturday after two days of fraught negotiations, but extended their summit for another day to try and overcome their differences. As the 27 leaders scurried back to their hotels after a late, inconclusive dinner, German Chancellor Angela Merkel and French President Emmanuel Macron stayed behind in the EU’s headquarters in Brussels to haggle with the Dutch-led camp of thrifty countries demanding cuts to the 1.8-trillion-euro package.

“The negotiations were heated,” said Prime Minister Giuseppe Conte of Italy, one of the EU countries most affected by the coronavirus crisis that are seeking generous aid from the bloc. “Europe is under the blackmail of the ‘frugals’.” “We have to do all what is possible to reach a deal tomorrow. Further delays are not useful to anybody.”

With the pandemic dealing Europe its worst economic shock since World War Two, leaders first locked horns on Friday over a proposed 750 billion euro ($856 billion) recovery fund and a 2021-27 EU budget of more than 1 trillion euros. But a group of wealthy and fiscally “frugal” northern states — the Netherlands, Austria, Denmark and Sweden — blocked progress in the first face-to-face EU summit since spring lockdowns across the continent.

They favour repayable loans rather than free grants for the hard-hit indebted economies mostly on the Mediterranean rim, and they want stricter control over how the funds are spent. Hopes for an agreement grew earlier on Saturday when Michel proposed revisions to the overall package designed to assuage the Dutch concerns.

Under his new plan, the portion of grants in the recovery fund would be reduced to 450 billion euros from 500 billion and an ‘emergency brake’ on disbursement would be added.

But hopes that this would be enough faded quickly as Sweden asked for grants to be cut to 155 billion euros, according to diplomatic sources. Some pointed out the recovery scheme would risk being irrelevant at that much-reduced scale. Conte also said a de-facto veto on national applications for aid sought by The Hague was “politically and legally improper and also largely unfeasible”.

The budget commissioner of the bloc’s executive reminded the leaders - who wore masks and kept their distance from each other - that COVID-19 was still among them and they needed to act.



“Just a solemn reminder: the Corona crisis is not over: infections on the rise in many countries,” Johannes Hahn tweeted. “High time to reach an agreement which allows us to provide the urgently needed support for our citizens+economies!”

Diplomats said the “frugals” also pressed through the day for bigger rebates for net payers into the core EU budget, among other demands.

Other countries had their own demands in negotiations criss-crossing different regional and economic priorities, putting in doubt an unprecedented act of solidarity for the EU under which the executive European Commission would borrow billions of euros on capital markets on behalf of them all.

The exact size of the EU’s long-term budget and how far to use payouts as leverage for reforms, or whether to withhold money from countries that fail to live up to democratic standards, were unresolved as the leaders left on Saturday.

Hungary, backed by its eurosceptic, nationalist ally Poland, has threatened to veto the whole package over a new envisaged mechanism to freeze out countries flouting democracy.

The EU is already grappling with the protracted saga of Britain’s exit from the bloc and has been bruised by past crises, from the financial meltdown of 2008 to feuds over migration.

Another economic shock could expose it to more eurosceptic, nationalist and protectionist forces, and weaken its standing against China, the United States or Russia.

CFTC Data

This week overall position has not changed significantly, meaning that long-term investors mostly keep existed position and stand in "accumulation" mode, trying to buy deeps. SPDR Fund storage reaches the highest level since April 2013. Still there are few things to worry about. At first glance it is everything good with balance here - position is still bullish, open interest has increased and position has not changed too much:
1595153214381.png

Source: cftc.gov
Charting by Investing.com


Now take a look in the table. Open interest grows mostly due hedger' activity as they have increased both longs and shorts. At the same time, speculators have closed 8K long positions. Recall what we've talked about saturation of net long position and possible retracement on gold market. This is it. Thus, we have to keep a close eye on what is going on here. And it is really could happen that ultimate level of 350K net long position is Covid outlier and gold could gravitate to pre-covid 250-260K ultimate level that was naturally formed.

1595153123514.png



World Gold Council resource has issued new fundamental report this week. In oppose to Fathom Consulting, they suggest that odds are shifting in favor of "U" or "W" shape of recovery, while Fathom tells mostly about "V" shape.

"There is a growing consensus that a swift V-shaped recovery is morphing into a slower U-shape recovery or, more likely, the possibility that a recovery in H2 is short lived as recurring waves of infections set the global economy back, resulting in W-shaped recovery. For investors, this is not only keeping uncertainty levels high, but may also have a long-lasting impact on their portfolio performance. Against this backdrop, we believe that gold can be a valuable asset: it can help investors diversify risks and may positively contribute to improving risk-adjusted returns. "

1595154883835.png


In response to the pandemic, central banks around the world have aggressively cut rates and/or expanded asset purchasing programmes to stabilise and stimulate their economies. However, these actions are leading to several unintended consequences on asset performance:

  • soaring equity market valuations are not always backed by fundamentals, increasing the chance of pullbacks
  • corporate bond prices are also increasing, pushing investors further down the credit-quality curve
  • short-term and high-quality bonds have limited – if any – upside, reducing their effectiveness as hedges.
In addition, widespread fiscal stimuli and ballooning government debt levels are raising concerns about a long-term run up of inflation, or significant erosion of the value of fiat currencies. Deflation, however, is seen as the more likely risk in the near term.

As these dynamics heighten risk and lead to the possibility of ever lower returns than expected, we believe that gold can play an increasingly relevant role in investor portfolios.

Equities have recovered sharply since – especially tech stocks. But stock prices do not appear fully supported by company fundamentals or the overall state of the economy. This has often been referred to as the Wall Street vs. Main Street divide. In the US, for example, price-to-earnings ratios have jumped to levels not seen since the dot-com bubble in the span of a few months. And while many investors are looking to take advantage of the positive price trend, there is growing concern that such frothy valuations may result in a significant pullback, especially if the economy experiences a setback from a second wave of infections.

1595155006582.png




The low rate environment has also pushed investors to increase the level of risk in their portfolios via buying longer-term bonds, lower-quality bonds, or simply replacing bonds with even riskier assets, such as stocks or alternative investments. Going forward, we do not believe investors will achieve the same bond returns they have seen over the past few decades. Our analysis suggests that investors may see an average compounded annual return of less than 2% (±1%) in US bonds over the next decade. This could prove particularly challenging for pension funds, as many are still required to deliver annual returns between 7% and 9%. Lower rates increase pressure on the ability to match their liabilities and limit the effectiveness of bonds in reducing risk.

Finally,
While it is fairly evident that lower interest rates and asset purchasing programs are impacting asset price valuations, it is less clear what effect expansionary monetary and fiscal policies will have on inflation. Some believe that quantitative easing and increasing debt levels are inherently inflationary and that, sooner or later, consumer prices will spiral out of control even if economic growth remains subdued (ie, stagflation). Others, however, point out that previous – albeit not as aggressive – quantitative easing measures have not resulted in rampant inflation (at least not yet).

An additional camp points to the Japanese experience and predicts that deflation may happen first. In fact, there are some indications that this is starting to happen already. For example, while the price of necessities spiked during the lockdown in China, consumer price inflation has fallen from 5.2% in February to 2.5% in June. And some economists predict outright deflation by the end of the year.

Gold has historically protected investors against extreme inflation. In years when inflation was higher than 3% gold’s price increased 15% on average. Notably too, research by Oxford Economics shows that gold should do well in periods of deflation. Such periods are characterised by low interest rates and high financial stress, all of which tend to foster demand for gold.

Gold’s behaviour can be explained by four broad sets of drivers:
  • Economic expansion: periods of growth are very supportive of jewellery, technology and long-term savings
  • Risk and uncertainty: market downturns often boost investment demand for gold as a safe haven
  • Opportunity cost: interest rates and relative currency strength influence investor attitudes towards gold
  • Momentum: capital flows, positioning and price trends can ignite or dampen gold's performance.
1595155291335.png


In the current global economic environment, three of the four drivers are supportive of investment demand for gold, namely:
  • high risk and uncertainty
  • low opportunity cost
  • positive price momentum.
As a bottom line:

That's being said, currently we do not see any clouds on horizon of gold long-term perspective. Indeed, major driving factors that we have right now are promised to be long-term and should act within long period. It means that we should be careful to chances that market could give us for gold buying. For example, we should try to use current "saturation" of net long position on gold. Once retracement will be triggered, we should try to use it for good entry point on gold market.
Speaking about very short-term perspective - keep an eye on today's EU summit results. Approving of rescue fund will be supportive for gold market on coming week. Actually investors were waiting for that from ECB, but now we're waiting what EU summit will tell.



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. This week market has reached it and flirting around.

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. As CFTC position starts to change, it seems that this scenario is not as impossible as it was seemed previously.

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.

gold_m_20_07_20.png


Weekly

This week we've got inside bar and it means that overall analysis stands the same.
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.

gold_w_20_07_20.png


Daily

So, it has become a bit longer road to 1825 target than we've expected. In fact, the whole recent week price has spent in tight range and stuck right under the target. Among positive signs we could point on validity of the grabber - despite price stops, minor retracement was minor indeed, and keeps pattern valid. Second - the flag shape that is also potentially bullish. Friday trading plan was not bad, as indeed, buying against grabber's lows worked fine as and price returns right back up to the flag's top border:
gold_d_20_07_20.png


Intraday

Currently it is too late to take any position, I suppose, aiming to 1825 target. Market stands close already to it and risk/reward ratio will be not attractive. Sometimes it happens, if you follow to conservative tactic, you could loose the chance. But this is not the tragedy as major setups stand ahead. Besides, on Monday we could get gap opening, depending on EU summit result. Hopefully, it will be positive.
Anyway, the only new thing that we've got on 4H chart - bullish divergence with MACD. Target is the same - XOP of our long playing H&S pattern:
gold_4h_20_07_20.png


Here, on 1H chart we have almost the same picture as on EUR yesterday. With bullish patterns on the back and upside action from K-support area, we're mostly interested in most recent upside swing. If rescue fund will not be approved by EU - stand on hold, do not take any new long positions on Monday. This setup is only if fund will be approved. In this case, if we get lucky a bit, market could show minor pullback that theoretically is possible to use for long entry against the recent lows, or lows of daily grabber. Calculate risk/reward, if it will be acceptable, than it is possible to do.
gold_1h_20_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,631
Greetings everybody,

Today is just a minor update. EU summit is finished and as we were hoping - historical decision is made and fund is approved. That has pushed gold right to our target. Now we're coming to 2nd stage of our trading plan and start watching whether major retracement will start or not.
At the same time we will be watching for short-term bearish trading setups, as on daily chart butterfly is completed and some retracement, at least, has good chances to happen:
gold_d_21_07_20.png


The same story in on 4H chart but a smaller scale - another butterfly and XOP of our H&S pattern. For short position taking, it seems we should wait for clear reversal pattern, say, minor H&S here. Aggressive way to trade suggests short entry right at top, based on two butterflies that we have. But in this case, "catching the knife" scenario is possible, if gold continues upside action...
gold_4h_21_07_20.png


That's been said - no new longs by far, and watching for short-term bearish setups.
 

Sive Morten

Special Consultant to the FPA
Messages
13,631
Greetings everybody,

So, Gold has exceeded a bit our expectation jumping above 1825 area. For a long-term perspective this is a good sign because daily butterfly has failed (in terms of reversal features). But now we have to take a look at weekly chart instead. See - market hits weekly overbought. IT means that this week upside continuation is doubtful:
gold_w_22_07_20.png


That's why we can't consider any new longs on daily chart by far. And it is too early to talk about shorts as no clear bearish background is formed. Actually gold even has destroyed our suggestion of possible H&S pattern. It seems that something different will be formed there.

Thus, currently we could focus only on some intraday setups - for example 4H B&B "Buy" trade, somewhere from 1840 Fib support. That's all that we could do now...
gold_4h_22_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,631
Greetings everybody,
Situation here has not changed significantly but we have few moments that might be important. Gold has passed a bit more to upside, moving deeper in weekly overbought. But now it comes to monthly overbought as well, that stands at 1888 level. Overextended net bullish position and weekly/monthly overbought is not a good combination for any new long trade on the market, at least based on probability.

Besides, as it is correctly mentioned above, we have XOP target on daily as well - 1875 where market stands right now. This is the extension of similar shape as we have on EUR.
gold_d_23_07_20.png


On 1H chart we have minor butterfly and MACD divergence. This is not enough for bearish context, but it might suggest exhausting of upside momentum and could trigger the reaction that we're waiting for.
gold_1h_23_07_20.png


In current circumstances we need to be patient a bit. Odds suggests that this is bad idea to jump in right here, before the weekend, at daily target and monthly/weekly overbought area.
Still, for bearish position we do not have sufficient context as well.
 
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