Gold GOLD PRO WEEKLY, July 24 - 28, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

Today we consider some common things in economy and politics that mostly will make impact in long term perspective. Tactical situation we've discussed yesterday in weekly FX report and considered recent jobs data, consumption, etc. We've considered situation with liquidity what the Fed is doing, what the Treasury is doing, situation is more or less clear. But, at the edge of economy and politics we have very interesting events that directly relate to future gold performance.

Market overview

Gold rose as US bond yields fell following dovish commentary from a key European Central Bank official. ECB Governing Council member and known hawk Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed. Global bond yields, including US Treasuries fell following the comments, boosting non-interest bearing gold.

Bullion is consolidating around $1,950 an ounce as investors wait for a clearer outlook on the Federal Reserve’s monetary policy path. While swaps traders see a hike at its next meeting as virtually guaranteed, consensus becomes more divided from there. Data Tuesday showed US retail sales rising less than expected, a potentially welcome sign for the Fed as it seeks to cool inflation. Still, figures excluding automobile and gas purchases were in line with forecasts, pointing to relatively robust
consumption.

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Inflows into bullion-backed exchange-traded funds on Monday showed holdings ticking higher for a second day following a 19-day run of declines, according to initial data compiled by Bloomberg. Meanwhile, money managers are finding more appeal in gold, having increased net-long positions to a five-week high

Russ Koesterich, portfolio manager, BlackRock Global Allocation Fund, tells that Gold May Shine.

The idea: Year-to-date, most asset classes are benefiting from expectations that the Fed’s tightening cycle is close to an end. If that assumption proves correct, gold may be one of the prime beneficiaries.

The strategy: In contrast to last year, which featured an unrelenting rise in both the dollar and interest rates, 2023 has been characterized by a more range-bound bond market and muted moves in the US dollar — two developments that support gold. While many investors treat gold as an inflation hedge, the relationship between gold and inflation is more nuanced. Historically, gold has been a decent inflation hedge, but only over the very long-term. For shorter horizons, gold tends to trade with real, or inflation-adjusted, interest rates and the dollar. If rates, particularly real rates, and the dollar are falling, gold is generally rising.

The big picture:
The odds are that the Fed is reaching the end of its tightening cycle. If this proves true, flat to lower real rates should help gold, even more so if sticky inflation in Europe forces the European Central Bank to continue to raise rates, further pressuring the dollar. Outside of monetary policy, gold would likely benefit, as it did in early 2022, if geopolitical tension rises. Assuming growth and inflation continue to soften, gold can continue its ascent.

Ian Harnett , chief investment strategist, Absolute Strategy Research tells
The idea:
we expect US and global economies to fall into recession later this year, as the impact of higher rates limits credit availability. Slowing growth will likely see headline inflation fall, boosting the outlook for US Treasury bonds and defensive equities such as food and beverage stocks, pharmaceuticals and utilities. Lower inflation also means weaker pricing power, falling earnings and rising unemployment, which tend to undermine cyclical stocks, including the high-valuation US technology plays.

The big picture: Tighter bank lending standards such as we’ve seen in the wake of the collapse of Silicon Valley Bank would typically lead to slower credit growth up to a year later (we talked about yesterday in FX report), suggesting the real credit crunch has not yet started. In previous cycles, looking for signs of bank lending weakness would have been enough. However, more than 50% of global financial assets are controlled by non-bank financials such as private credit, private equity and fintech. Many of these new growth areas of finance have business and funding models untested for a world of higher rates and reduced liquidity availability, and we expect market volatility to rise by year-end.

Eric Crittenden, founder and chief investment officer, Standpoint Asset Management
The idea:
Diversify away from stocks and bonds into something that can do well in times of stagflation, when both of those asset classes should be struggling. For this purpose, we like managed futures funds focused on macroeconomic trends, which can tap opportunities
The strategy: Managers in this space tend to use rules-based, systematic approaches to find developing trends in various global asset classes including currencies, precious metals, industrial metals, energy markets, grains, soft commodities, bonds and equities.
The big picture: We’ve already seen the first signs of stagflation-like consequences, with both equities and bonds declining in 2022. Valuations and breadth in stocks are currently at very fragile levels, and most government bonds are back under pressure in early July 2023.

Gold still looks too expensive after recent declines, according to a Pimco managing director who says sticky inflation will make it difficult for the Federal Reserve to meaningfully cut rates. The precious metal fell in May, with prices retreating from just shy of a record early in the month. More losses could be in store, even if it’s well-supported over the longer term, according to Greg Sharenow, who manages a portfolio focused on energy and commodities at Pacific Investment Management Co.

Bullion is “modestly over-valued” compared with inflation-linked government bonds, or TIPs, and those are probably better value in multi-asset portfolios for now, he said in an interview. Real bond yields are likely to stay higher for longer, he said, pressuring non-interest bearing gold. There are still mixed views on when central banks will be able to ease policy, and on whether developed economies can avoid recessions. The passing of a US debt-limit deal in the House removes one risk.

“The biggest challenge one has right now is to figure out the lagged effects of any credit tightening that is coming from some of the central banks,” said Sharenow. “The uncertainty band still remains fairly wide.”

Mild recessions in developed markets are “more than likely”, but while the Fed may be nearing the end of its tightening cycle, that doesn’t preclude another hike, the Pimco executive said. Central banks could struggle to bring down rates in the face of deglobalization and so-called “greenflation” as the world shifts from fossil fuels to renewable energy.

Still, the long-term outlook for gold — which Sharenow calls a 25-year duration asset — looks brighter as central banks look to diversify holdings away from dollar assets. There’s already been a “tremendous amount of interest” from central banks that have helped support bullion at recent levels, he said.

“The safety and security of gold right now has a high currency to them,” he said, “There’s a lot of countries that are questioning their dollar reserves.”

FEW PARALLEL TOPICS

With the launching of Fed Now, we had better get ready for the world of central bank digital currencies (CBDCs) because they are coming. And they are coming fast.
According to a recent survey by the Bank for International Settlements (BIS), as many as 24 CBDCs could be in circulation by 2030. A cashless society is sold on the promise of providing a safe, convenient, and more secure alternative to physical cash. We’re also told it will help stop dangerous criminals who like the intractability of cash.

But there is a darker side – the promise of control. The elimination of cash creates the potential for the government to track and control consumer spending. Digital economies would also make it even easier for central banks to engage in manipulative monetary policies such as negative interest rates. The government could even “turn off” an individual’s ability to make purchases. Bloomberg described just how much control a digital currency could give Chinese officials.

Economist Thorsten Polleit outlined the potential for Big Brother-like government control with the advent of a digital euro in an article published by the Mises Wire. As he put it, “the path to becoming a surveillance state regime will accelerate considerably” if and when a digital currency is issued. We probably can’t stop governments from issuing CBDCs, but we can avoid using them. Initially, they will coexist with cash. Simply rejecting CBDCs and sticking to cash will slow down implementation.

Individuals can also begin to establish barter relationships. If the government begins to restrict the use of cash, you can still do business using barter metals or non-government cryptocurrencies. For instance, a bill introduced in Texas this year would have created a state-issued gold-backed digital currency. The bill didn’t advance, but it started the discussion and opened the door for future action. As Allain L. de la Motte argues, “While the dollar won’t be displaced overnight, fostering a competitive environment where it needs to compete with sound money backed by gold is the best option for all 50 states.”

The one thing is clear from this topic and lot of big persons who would like to hide their operations from the governments' eyes could start using physical gold to store the capital and make some, say, "private" payments. And introducing of CBDC in long-term should support demand for the gold. Hardly gold turnover will be stopped totally. Besides, the over-the-counter and secondary market will always exist because gold has no depreciation and devaluation.

So, what are governments doing about this? They are clearly aware of the risks and this is why they invent all kinds of events that will enable them to control the people. This includes Covid lockdowns, forced vaccinations, climate control, CBDCs (Central Bank Digital Currencies), wars and unlimited rules, regulations and laws. The US for example now has over 300,000 laws controlling all aspects of daily life and making everyone a likely daily felon.

The seismic shift should take place from West to East and South based on commodities and manufacturing rather than debt and services. That will be a long process which is just starting. Whilst a lot of gold investors are excited about the prospect of a BRICS currency backed by gold, it seems It still stands far away. The Tweet by an official at the Russian embassy in Kenya is not quite enough to confirm this.

Gold will be the asset of choice for central banks to hold as reserves rather than dollars. Such a move would have a major impact on gold. So with risks facing the Western world of a magnitude never seen before in history, including geopolitical, financial, economic, with the biggest asset and debt bubble in history coming to an end. It is clearly impossible to predict how this will play out. It is not even worth speculating. What we do know is that risk is now at a level which makes investment markets extremely dangerous. In the next few years major fortunes will be lost permanently.

Before we look at how to survive the biggest global asset bubble that has ever existed, let’s first look at the spectacle we have witnessed in the last 54 years.
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his period conveniently coincides with Nixon closing the gold window in 1971. That was the end of sound money and the beginning of a free-for-all bonanza in money printing.

So during my working life since 1969 US total debt has gone up 63X from $1.5 trillion to $95T.

Bubbles always burst, without exception. But we know of course that bubbles can always grow bigger before they burst.

What few people realise is that when a debt bubble explodes or more likely implodes, it could go almost as quickly as the recent implosion of the Titan Submersible.

The pressure on this vessel was remarkable:

A catastrophic implosion is “incredibly quick,” taking place within just a fraction of a millisecond, said Aileen Maria Marty, a former Naval officer and professor at Florida International University. The entire thing would have collapsed before the individuals inside would even realise that there was a problem,” she told CNN. “Ultimately, among the many ways in which we can pass, that’s painless.”

An implosion of the $3 quadrillion of debt and derivatives could happen very, very quickly. It would unroll at such a speed that no central bank would have time to react. And when the debt implodes, so will all the assets which were inflated by the debt.

So even if it doesn’t happen in milliseconds, it will be too quick to save. We saw this in the middle of March when 4 banks, led by Silicon Valley Bank, collapsed in a matter of a couple of days. And shortly thereafter Credit Suisse imploded too. As we know, it is impossible to time such an event. But the good thing is that we don’t need to time it.

So forget about short term timing. And forget about greed. Just avoid the potential implosion of asset markets and safely position yourself for incredible opportunities, whenever they may happen. Things will take too long to unravel but we don’t care about the timing as long as I am sitting right. General stocks, bonds of any kind, corporate or sovereign, currencies, bank deposits, investments in commercial or residential property. Even for the best companies, profits can halve and P/Es go from 20 to 5. That for example would lead to a decline in the share price of 88%!

Conversely, commodities started an uptrend in 2020 and have a long way to go. With gold being the only money which has survived and maintained its purchasing power in the last 5000 years, it is clearly the wealth preservation asset par excellence.

We have mainly stayed away from silver in the last 20 years due to its volatility. It has not been a good metal if you want to sleep well at night. But now with the gold/silver ratio at 80 (meaning silver is relatively cheap vs gold), and with strong industrial demand for solar panels, electricals etc, we are likely to see a decline of the ratio to 30 initially and eventually to 15 or lower. That means silver will go up 3-5x as fast as gold.

But physical gold is the king of metals for wealth preservation purposes and a smaller investment in physical silver should be seen as an investment/speculation with a massive potential.

In addition to yellow gold, black gold – oil – moves very similar to the yellow metal. Thus major price increases in oil are likely. So owning stocks in good gold and silver companies as well as oil companies is likely to be an excellent investment for a number of years. Protection against the probably biggest asset implosion in history necessitates holding the majority of investment assets in physical gold and some silver, stored outside the financial system in a very safe jurisdiction and vault.
Preferably the majority of your metals should be stored outside your country of residence. In case of emergency, you should be able to flee to your reserve asset. Or, at least in some physical non-banking storage.

Speaking about stock market... recently we've heard a lot about AI, FAANG, rally etc., but somehow people forget about leverage. And this is quite interesting topic.
The June stock market growth in the US was accompanied by the sharpest one in two years, from margin positions of + $37 billion to $681 billion (!!!). Although the volume of debt is, of course, significantly lower than it was at its peak in 2021, there is much less free cash on margin accounts - only $145 billion.

As a result, the amount of margin debt in the US market exceeded the amount of free money on these accounts by 4.7 times, setting a new record. Americans rushed in June to buy shares on credit, to increase leverage in the market.If until spring the American market was more likely to rely on the influx of money from non-residents and buybacks, then in recent months non-residents slowly began to unload, and the Americans began to aggressively buy increasing their leverage.
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So, it seems "leverage fans" stepped-in into the battle, which means squeezes and Armageddon will begin soon. I'm aiming for the end of August - the beginning of September. If the BRICS currency violates everything, then right in the 20th of August, if not, then closer to the beginning of September. Buy them all at full leverage is a simple matter only at first glance. It takes a decent amount of time to create a bubble if you look at the system as a whole. Another sign that everything goes to an end if massive review of forecasts by top analysts. Most Wall Street firms have revised up their SPX price targets for 2023...“It’s literally almost a strategist short squeeze."

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And all this stuff is going on the background of tighter banking reserves and capital solvency ratio. A feared liquidity drainage in the U.S. banking system as the Treasury refills its coffers has not materialised yet, on the contrary reserves increased recently, assuaging some concerns the bond spree could lead to further credit tightening.

China on dessert

China's economic growth problems will hit everyone as it is entering an era of much slower economic growth , posing the daunting prospect of slowing global growth.
The data released last week showed that breaking the 5% annual growth rate this year may turn out to be a pipe dream. Moreover, many Western analysts are already predicting the fate of Japan with “lost decades of stagnation” for the country. China's annual growth has averaged about 7% in the last decade and over 10% in the 2000s.

Because of this loss of momentum, economists no longer attribute weak household consumption and private sector investment to the effects of the pandemic, instead everyone is talking about the structural problems of the economy. Busted real estate bubble , which accounts for a quarter of output; one of the deepest imbalances between investment and consumption ; huge debts of municipalities under state guarantees; and the strict control of the CCP over private business - all these are problems in the organization of the economy, and not local distortions.

Xi Jinping's pursuit of "common prosperity" against inequality has contributed to wage cuts in the financial and other sectors. The deteriorating financial situation of the city led to cuts in the salaries of civil servants , leading to a deflationary spiral. China's problems are more complex than those of Japan a generation ago. But China still has time.

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The country is currently in a "balance sheet recession" with consumers and businesses paying off debt instead of borrowing and investing. This is how depressions start, and the only cure is "quick, substantial, and sustained" fiscal stimulus. It is believed that incentives and support from the state will be able to overcome these imbalances. Only the Chinese government needs to decide how to stimulate the economy , given the already existing debts of municipalities.

The ongoing processes will accelerate on the background of trading war with the US and rising boiling point in confrontation with AUKUS block in the region.

Conclusion:

So, it has happened so, that our today's report mostly is dedicated to macro economy. Big epic shifts are going to happen in global economical space. Now we see just the beginning, but all of them look positive to gold market. Yes, this is not the question of nearest 3-6 months probably, although on stock market we could get drastic change of sentiment and collapse, as well as on the bond market - problems with liquidity and higher rates. But all these events, although highly likely will trigger big swings on gold market, will be just first signs of tectonic shifts that are still yet to come. Meantime, as we've said last week, we should get 1-2, maybe 3 relatively quiet months, when investors will enjoy their anticipation of Fed pivot and, as they think, end of the rate hike cycle. We do not have any objections either, especially because it makes positive impact on gold as well. Let's just follow to our own trading plan, and everything should be OK.
 
Technicals
Monthly

We do not have any big shifts on monthly chart by far. Gold keeps long term bullish context. Despite the pullback out from the top, it shows very small retracement, although the interest rates are around 5.25%. This indicates some hidden power with the gold market and existing of stable demand for the metal. Taking in consideration events mentioned above, and some others - we're not sure yet but do not exclude that it might become the starting point of major trend continuation. Otherwords speaking - retracement might be over.

MACD trend remains bullish, while price still stands inside the "bullish sentiment area" between YPP and YPR1. Indirectly we could suggest that despite all talks concerning "strong economy", "inflation defeat" and Fed's pivot - investors keep caution and rely on gold.

Here we do not have any specific patterns by far, but price stands relatively close to MACDP. So it should be interesting, what will happen when the price starts flirting with MACDP line, any grabbers? Maybe at the eve of BRICS summit on Aug, 22-24... But for now we could say only that monthly context is bullish:

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Weekly

So, it is the 2nd week of our "strategy of pullback" from weekly K-area. MACD trend stands bearish here, suggesting that we should treat current bounce as retracement by far. Still, example of previous retracement tells that situation could change. Gold has completed downside harmonic swing. Since we're dealing with daily reverse H&S now, everything could change within a week, maybe two. Speaking technical side, to catch the moment, we should keep an eye on weekly Minesweeper "A" situation - we have K-support, we have the pullback, the last thing to get is the change of MACD direction.
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Daily

Daily chart barely has changed on Friday. We're still watching for ~1930 area where the right shoulder should be formed. This is the primary object for the bulls:
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Intraday

On 4H chart market also has not deviated from our "perfect picture". Everything goes as it should, by far:
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As well as on 1H chart - short entry setup for scalp traders has worked nice and market has reached predefined 1965 and 1969 levels. But, take a look - something like small reverse H&S is forming, so, here might be another chance for short entry from 1967 K-resistance, if H&S will work
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So, in general everything looks nice, no step down from our trading plan and we could follow it next week.
 
Greetings everybody,

So, if on EUR we can't get yet any bullish signs, on Gold market is an opposite story - we're getting it too early. It is not definite yet, but still. On daily chart, due to poor EU statistics gold starts flirting with MACDP line. So, appearing of bullish grabber in 1-2 sessions could change situation so, that H&S could start acting earlier:
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On 4H chart, our "perfect" picture stands valid, but market slows downside action due 1951 support level. Maybe it will be just "trading" of the level, we'll see.
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1H chart shows that reaction could take the shape of minor reverse H&S:
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For now we do not need anything to do. Mostly situation depends on daily grabber - if it will be formed, upward action on daily chart could start earlier. The only thing that is possible to consider, if you want - scalp upward trade on 1H chart.
 
Greetings everybody,

So, let's proceed our discussion of "early upward reversal" on Gold. In general it doesn't break the strategy, I would say that this is good sign for the bulls, but it brings some difficulties of a technical kind - how and where to take the position.

On daily chart we haven't got any grabbers, but today we have another reasons that point on early upside reversal:
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And the major reason is on the 4H chart - take a look how our H&S pattern is looking now. It's looking "wrong". The price action here points that H&S has failed, that increases chances on upward action above the Head, i.e. starting of extension, based on daily reverse H&S pattern:
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It means that on 1H chart we could try to take position on minor pullback. Now price is coming to 1975 resistance area. If bounce happens, then 1.1065 area seems OK to consider long entry. WE do not need to place too far stops, because our entry tactic is based just on current reversal price shape - everything is above 1950 lows. If it fails, we return back to idea of H&S pattern on 4H chart, although now it looks hardly possible.
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Fed remains major risk factor for now. Too hawkish tone could push Gold lower. Despite that market mostly expects the opposite, but nobody knows for sure...
 
I wonder who makes these swings happen, because a lot of money is needed for that and I dont think it are us, the small traders that have ANY effect on where price goes. In other words, it must be one or more Big Whales who are playing this game. I am having that movie THE WOLF OF WALLSTREET in mind.
 
I wonder who makes these swings happen, because a lot of money is needed for that and I dont think it are us, the small traders that have ANY effect on where price goes. In other words, it must be one or more Big Whales who are playing this game. I am having that movie THE WOLF OF WALLSTREET in mind.
Retail brokers just translate quotes from exchanges, there are a lot of scalping auto softwares, big whales, hedgers, market makers etc.... This is just a boiling pot. Not surprisingly that we see all this stuff, because, once big whale has done something - it triggers reaction of trading robots and speculators of any kind, all together they start muddy water around big whale move.
 
Greetings everybody,

So, as EUR as Gold has started well from predefined intraday support, forming similar, a kind of reverse H&S patterns. But EUR shows stronger performance. Gold is a bit choppy. The major riddle on the gold market is whether the right arm is formed already or not. If not - it could be another downswing back to 1935 area, as we've thought initially, before upward action starts again. Otherwise, price should try to challenge 1990 daily resistance:
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But, for now we still need to go back to 1990 first. On 4H chart divergence suggests re-test of previous top:
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On 1H chart everything also goes well, market has broken through resistance area, and no it has no other barriers to re-test 1888 top. Besides, it enters into new trading range. Finally - OP stands precisely around the top. So, we focus on this target first. Then, depending on market response, it should become clear will we get another 1935 move or gold keep going higher:

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Greetings everybody,

So, short-term bullish context has been destroyed by US data release. Our trade have been closed at breakeven but maybe you were able to catch some profit. Daily context has changed and it seems that briefly mentioned scenario yesterday with possible return back to 1925-1930 could become a reality. Gold, is not at oversold, so it could proceed lower.

But, despite the collapse the scenario with reverse H&S is not cancelled. It depends on future market performance around 1925 area:
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On 4H chart price stands at 3/8 Fib support area:
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While on 1H chart OP has been touched. Now market stands in upside bounce. XOP agrees with daily 5/8 Support and this is our next destination point - 1925 area. Now we should keep an eye on upside bounce to one of these resistance levels to consider short entry:
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