Sive Morten
Special Consultant to the FPA
- Messages
- 18,767
Fundamentals
Last time we've discussed current fundamental background for gold and estimated that it mostly is not very good for the market. Overall situation barely has changed within previous week.
As Reuters reports gold prices rose on Friday from one-year lows hit the previous day and spot platinum
increased more than 3 percent after U.S. President Donald Trump criticized the strength of the dollar and interest rate increases by the Federal Reserve, pushing the greenback sharply lower. This is mostly the same reason that pushed FX market higher as well.
But, as we've discussed similar situations previously - this is not the question of the strength of the driving factor but its durability. Any event could shake markets but how long its effect will last - that's the major question. As more durable factor is as more signs of sentiment changing we have.
The stronger dollar makes gold more expensive for buyers with other currencies. Higher interest rates tend to boost the dollar and raise the opportunity cost of holding non-yielding bullion.
Bank of America Merrill Lynch said on Friday fears of a trade war had seen global investors plough $5 billion into bonds this week while pulling $1.2 billion from gold.
"There’s a good chance that if you start to see any change in the stance on the dollar, rhetoric or comments from the Fed, I think you would see gold bounce back (up) pretty hard," said Michael Ellingston trader at U.S. Global Investors in San Antonio.
Indeed, if you will take a statistics shot of flows to very short-term bond funds, you'll see impressive inflows.
For the fund-flows weeks ended July 11 and July 18, 2018, the Thomson Reuters Lipper Ultra-Short Obligation Funds (USO) peer group had its two largest net-positive weekly flows (+$1.1 billion and +$1.2 billion, respectively) since Lipper began tracking the data in 1992. These last two weeks represented the continuation of a long-term trend, with the group experiencing 19 straight weeks of net inflows—for a total intake of $11.7 billion. Year to date the USO peer group has had net-positive flows of $23.1 billion, which is just behind the group’s all-time high of annual net inflows (+$24.7 billion) that it set last year.
Meanwhile, funds and money managers have cut their net long position in Comex gold to a 2-1/2-year low, helping drive down prices. And gold-backed exchange traded funds tracked by Reuters have cut their holdings by more than 5 percent since their 2018 peak in mid-May.
On the technical front, support was at gold's July 2017 low of $1,204.90 and Fibonacci resistance was at $1,234.70, analysts at ScotiaMocatta said, adding that technical and momentum indicators suggested prices would fall further.
As we can see even growing political turbulence in the world has no impact yet on gold prices. It seems that US get an appetite for tariffs as China economy performance starts to slow down.
Fathom’s measure of China’s economic activity, its CMI 2.0, continued its descent in May, slowing to a 15-month low of 6.2%.
This drop has fundamental background as China was on a road of short-term growth support for too long, while monetary stimulus tools could have negative impact for longer term perspective. Mostly this was done by cutting reserve rates for banks, depreciation of national currency, which could happen again by Fathom analysis while denying the fact that economy is just slowing.
Any attempt to rebalance economy in the past led to its slow down.
"Indeed, as we have highlighted to clients previously, past episodes of rebalancing by emerging market economies are associated with stalling economic growth for an average of two years. And, after that initial impact, average annual GDP growth tends to be 1.6 percentage points weaker than its pre-rebalancing trend rate."
This gives advantage to US and let to be more aggressive in trade war. And China has very limited tools to answer. In short-term perspective it could seem that China indeed control situation and could force US to change the vector. But this China strength is very short-term, until it could burn its reserves, while in the longer-term US has better position.
All this stuff could increase demand for high grade bonds, especially when yields are raising.
COT Report
Recent data doesn't show big shifts in sentiment. Gold stands depressed as net long positions almost has reached zero level:
Technical
Monthly
Slowly but stubbornly gold market moves lower and result of this move could be seen even on monthly chart. The crucial, decisive bearish moment happens not now, it has happened at the end of 2017.
Although July candle is not finished yet, but market shows downside breakout of major monthly trend line. As we've said last time - "If this line will be broken - gold could start dropping with acceleration."
Fundamental irrational behavior which we've disclosed earlier now starts to show continuation. Recall our conclusion that we've made since the beginning of the year. That was decisive moment that we've mentioned:
"most important moment for long-term gold right now is ability to move higher. 1327 level is long-term COP target of AB-CD started at 1046$, in July 2015. First it was reached in July 2017. After logical minor bounce price returns back to it. But right now it should be an action higher, to next 1450 target, which is OP of the same AB-CD.
If gold will not be able to do it - strong drop is possible, because price will fail to proceed next extension leg, showing inability and lack of strength to do it. This could break whole AB-CD construction. Besides, this standing below "B" point also keep door open for downside butterfly. As longer gold will stand under resistance as weaker it position will be."
Now take a look at price action that we have. Market has failed to break 1360 top, which means that it has failed to proceed to OP target. Which, in turn, means breaking of CD leg. This process has not finished yet, but signs that we see right now makes us worry.
Besides, we have W&R of 1360 COP top, which also has bearish sentiment.
Our hopes to get bulilsh grabber on May were vanished as price has closed below MACDP line. Trend now stands bearish here.
That's being said, on long-term chart gold looks heavy and weak and overall picture is not attractive for taking long-term bullish position. Next target here stands at 1180 of YPS1.
Weekly
Last week our target of 1210 that we've specified three weeks ago has been reached. Market has touched strong Agreement support area on weekly chart, which is combination of AB=CD COP target and major 5/8 Fib support.
Normal action that should follow is a bounce up, at least minor one. On weekly chart we have hammer pattern. Price action from "C" point right to COP takes the shape of good thrust, that potentially could become a background for DiNapoli patterns, such as "B&B "Sell.
Gold stands not at oversold here but very close to it.
OP target stands around 1113$ and will be next step, following our nearest 1180 YPS1 destination point.
Daily
On daily we do not have yet any clear patterns. Market stands at oversold. Taking in consideration that we are at major weekly support, we could count on stronger upside retracement. First destination point is 1248-1250, while next one is 1270 K-resistance. This is also 3/8 retracement of whole weekly downside action and potentially an area where weekly B&B "Sell" could be formed:
Intraday
Potentially, if market will climb to 1270, we could get reverse H&S pattern (the first half already stands in place), but it will depend on action down from 1270. B&B "Sell", if it will be formed could push market down to form right arm and in this case upside action could reach 1300. Or, it could push price to new lows.
I current environment second scenario looks more probable. 4H chart shows that 1245-1248 also is K-area and now price stands at nearest 3/8 Fib resistance level.
On Monday we will watch scenario that is typical for bullish market. Now we have "222" Sell in place on 1H chart and deep retracement is normal action after gold was long time in downside action.
Retracement probably will be around 5/8 and should reach approx. 1220. If gold really has intention to show stronger upside retracement - it should turn up somewhere around this level.
Next leg up will follow to our next strong level of 1245.
Conclusion
If no geopolitical surprises or natural disaster will happen - gold will remain under pressure in foreseeable future. Currently is very difficult to see some fundamental factor that could support gold.
Still, in short-term gold could get a technical relief as it has hit major weekly support area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Last time we've discussed current fundamental background for gold and estimated that it mostly is not very good for the market. Overall situation barely has changed within previous week.
As Reuters reports gold prices rose on Friday from one-year lows hit the previous day and spot platinum
increased more than 3 percent after U.S. President Donald Trump criticized the strength of the dollar and interest rate increases by the Federal Reserve, pushing the greenback sharply lower. This is mostly the same reason that pushed FX market higher as well.
But, as we've discussed similar situations previously - this is not the question of the strength of the driving factor but its durability. Any event could shake markets but how long its effect will last - that's the major question. As more durable factor is as more signs of sentiment changing we have.
The stronger dollar makes gold more expensive for buyers with other currencies. Higher interest rates tend to boost the dollar and raise the opportunity cost of holding non-yielding bullion.
Bank of America Merrill Lynch said on Friday fears of a trade war had seen global investors plough $5 billion into bonds this week while pulling $1.2 billion from gold.
"There’s a good chance that if you start to see any change in the stance on the dollar, rhetoric or comments from the Fed, I think you would see gold bounce back (up) pretty hard," said Michael Ellingston trader at U.S. Global Investors in San Antonio.
Indeed, if you will take a statistics shot of flows to very short-term bond funds, you'll see impressive inflows.
For the fund-flows weeks ended July 11 and July 18, 2018, the Thomson Reuters Lipper Ultra-Short Obligation Funds (USO) peer group had its two largest net-positive weekly flows (+$1.1 billion and +$1.2 billion, respectively) since Lipper began tracking the data in 1992. These last two weeks represented the continuation of a long-term trend, with the group experiencing 19 straight weeks of net inflows—for a total intake of $11.7 billion. Year to date the USO peer group has had net-positive flows of $23.1 billion, which is just behind the group’s all-time high of annual net inflows (+$24.7 billion) that it set last year.
Meanwhile, funds and money managers have cut their net long position in Comex gold to a 2-1/2-year low, helping drive down prices. And gold-backed exchange traded funds tracked by Reuters have cut their holdings by more than 5 percent since their 2018 peak in mid-May.
On the technical front, support was at gold's July 2017 low of $1,204.90 and Fibonacci resistance was at $1,234.70, analysts at ScotiaMocatta said, adding that technical and momentum indicators suggested prices would fall further.
As we can see even growing political turbulence in the world has no impact yet on gold prices. It seems that US get an appetite for tariffs as China economy performance starts to slow down.
Fathom’s measure of China’s economic activity, its CMI 2.0, continued its descent in May, slowing to a 15-month low of 6.2%.
This drop has fundamental background as China was on a road of short-term growth support for too long, while monetary stimulus tools could have negative impact for longer term perspective. Mostly this was done by cutting reserve rates for banks, depreciation of national currency, which could happen again by Fathom analysis while denying the fact that economy is just slowing.
Any attempt to rebalance economy in the past led to its slow down.
"Indeed, as we have highlighted to clients previously, past episodes of rebalancing by emerging market economies are associated with stalling economic growth for an average of two years. And, after that initial impact, average annual GDP growth tends to be 1.6 percentage points weaker than its pre-rebalancing trend rate."
This gives advantage to US and let to be more aggressive in trade war. And China has very limited tools to answer. In short-term perspective it could seem that China indeed control situation and could force US to change the vector. But this China strength is very short-term, until it could burn its reserves, while in the longer-term US has better position.
All this stuff could increase demand for high grade bonds, especially when yields are raising.
COT Report
Recent data doesn't show big shifts in sentiment. Gold stands depressed as net long positions almost has reached zero level:
Technical
Monthly
Slowly but stubbornly gold market moves lower and result of this move could be seen even on monthly chart. The crucial, decisive bearish moment happens not now, it has happened at the end of 2017.
Although July candle is not finished yet, but market shows downside breakout of major monthly trend line. As we've said last time - "If this line will be broken - gold could start dropping with acceleration."
Fundamental irrational behavior which we've disclosed earlier now starts to show continuation. Recall our conclusion that we've made since the beginning of the year. That was decisive moment that we've mentioned:
"most important moment for long-term gold right now is ability to move higher. 1327 level is long-term COP target of AB-CD started at 1046$, in July 2015. First it was reached in July 2017. After logical minor bounce price returns back to it. But right now it should be an action higher, to next 1450 target, which is OP of the same AB-CD.
If gold will not be able to do it - strong drop is possible, because price will fail to proceed next extension leg, showing inability and lack of strength to do it. This could break whole AB-CD construction. Besides, this standing below "B" point also keep door open for downside butterfly. As longer gold will stand under resistance as weaker it position will be."
Now take a look at price action that we have. Market has failed to break 1360 top, which means that it has failed to proceed to OP target. Which, in turn, means breaking of CD leg. This process has not finished yet, but signs that we see right now makes us worry.
Besides, we have W&R of 1360 COP top, which also has bearish sentiment.
Our hopes to get bulilsh grabber on May were vanished as price has closed below MACDP line. Trend now stands bearish here.
That's being said, on long-term chart gold looks heavy and weak and overall picture is not attractive for taking long-term bullish position. Next target here stands at 1180 of YPS1.
Weekly
Last week our target of 1210 that we've specified three weeks ago has been reached. Market has touched strong Agreement support area on weekly chart, which is combination of AB=CD COP target and major 5/8 Fib support.
Normal action that should follow is a bounce up, at least minor one. On weekly chart we have hammer pattern. Price action from "C" point right to COP takes the shape of good thrust, that potentially could become a background for DiNapoli patterns, such as "B&B "Sell.
Gold stands not at oversold here but very close to it.
OP target stands around 1113$ and will be next step, following our nearest 1180 YPS1 destination point.
Daily
On daily we do not have yet any clear patterns. Market stands at oversold. Taking in consideration that we are at major weekly support, we could count on stronger upside retracement. First destination point is 1248-1250, while next one is 1270 K-resistance. This is also 3/8 retracement of whole weekly downside action and potentially an area where weekly B&B "Sell" could be formed:
Intraday
Potentially, if market will climb to 1270, we could get reverse H&S pattern (the first half already stands in place), but it will depend on action down from 1270. B&B "Sell", if it will be formed could push market down to form right arm and in this case upside action could reach 1300. Or, it could push price to new lows.
I current environment second scenario looks more probable. 4H chart shows that 1245-1248 also is K-area and now price stands at nearest 3/8 Fib resistance level.
On Monday we will watch scenario that is typical for bullish market. Now we have "222" Sell in place on 1H chart and deep retracement is normal action after gold was long time in downside action.
Retracement probably will be around 5/8 and should reach approx. 1220. If gold really has intention to show stronger upside retracement - it should turn up somewhere around this level.
Next leg up will follow to our next strong level of 1245.
Conclusion
If no geopolitical surprises or natural disaster will happen - gold will remain under pressure in foreseeable future. Currently is very difficult to see some fundamental factor that could support gold.
Still, in short-term gold could get a technical relief as it has hit major weekly support area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
