Sive Morten
Special Consultant to the FPA
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Fundamentals
Recent upside reaction on gold market was not totally unexpected, as we've suggested upside pullback in our daily updates. But, by looking at the strength of the reaction hardly it was triggered by purely technical factors. ECB decision is also weak driver for the gold. Most media tells about rising fears of recession that supposedly have become for gold reversal. Well, maybe, but why on this week when we had no important statistics? It is still unclear. My suggestion that market starts showing occasional unexpected spike by some cumulative effect of rising markets concern and week fundamentals, which from time to time trigger upside reactions. While gold market comes closer and closer to our major 1660-1680$ support area, these reactions should become more often.
Market overview
Gold held near an 11-month low as traders assess the outlook for further monetary policy tightening and the impact on global growth. Bullion hovered above the $1,700 an ounce level as it continued to be pressured by the strength of the US dollar, a sign of the prevailing caution in global markets. Still, a gauge of the greenback has retreated from a record hit last week.
Investors are awaiting the Federal Reserve’s meeting July 26-27 for a hint on how aggressive the central bank will be in raising interest rates to tackle soaring inflation. For now, the latest US data reinforce policy makers’ support for another 75-basis-point hike, according to Bloomberg Economics.
Investors continued to shed holdings of bullion-backed exchange traded funds ahead of central bank meetings over the next week that may result in more aggressive interest rate hikes. The precious metal has hovered in a narrow trading range since late last week as a gauge of the greenback retreated for three straight sessions through Tuesday in a sign of waning haven demand. Holdings in gold-backed ETFs have dropped for 15 days, the longest stretch since March 2021, according to initial data compiled by Bloomberg.
Net selling in gold and precious metal funds stood at $1.1 billion, a 63% bigger outflow than the previous week. At the same time global equity funds recorded their biggest weekly outflow in five weeks in the week to July 20, on investor caution ahead of crucial central bank meetings in which rate hikes are expected to be announced. According to Refinitiv Lipper, investors offloaded a net $13.79 billion worth of global equity funds, marking the biggest weekly outflow since June 15.
UBS Group AG’s wealth management unit has cut its gold forecasts to $1,600 at end-September and end-year from $1,800 and $1,700. Citigroup Inc. also flagged a potential drop to around $1,600 at some point in 2022.
Gold has lost more than $110 in July alone as traders increased bets on a full percentage-point increase in US rates after the consumer price index in June came in with a scorching 9.1% annual gain. That’s been dialed back as policy makers expressed reluctance about such a big move. The Fed is now expected to hike by 75 basis points for a second straight month when it meets later in July. The rest of the tightening cycle will depend on prevailing economic data and any evidence that prices are stabilizing.
Both Citigroup and UBS see prices reaching a trough this year before rallying in 2023. A drop to the $1,600 level is likely to be short-lived and attractive for investors, Citigroup analysts including Aakash Doshi said in a July 12 note.
Others remain confident in the metal’s role in a portfolio for diversification benefits. “Gold has done better than US cash holdings in real terms during this period of volatility, and even better in other currencies.” said Evy Hambro, global head of thematic and sector-based investing at BlackRock Inc.
Gold rose, erasing its previous decline to the lowest level in 15 months, after the European Central Bank raised rates by a larger-than-expected 50 basis points. European stocks and bonds slumped and the euro rose after the ECB joined global central banks in driving outsized rate increases to quell inflation. Bullion climbed back above $1,700 an ounce. Thursday’s increase, the first interest rate hike in 11 years by the ECB, comes as a brewing political crisis in Italy ramps up the pressure on the central bank to shield the most vulnerable euro-zone members from market speculation.
More than 5,000 “butterfly” call spreads centered around $1,825 an ounce traded Thursday, according to data compiled by Bloomberg. Here is how it looks like:
Gold held onto gains and headed for its first weekly advance since early June as investors weighed renewed concerns over economic growth. Bullion’s reversal comes with more economic data fueling fears of a recession. US business activity contracted in July for the first time in more than two years, according to data released Friday, adding to a slew of indicators earlier in the week that are painting a gloomy outlook. Meanwhile, a gauge of the greenback has retreated from its July 14 peak.
Similar results were seen in Europe. The group’s index of activity in the euro area unexpectedly shrank for the first time since early 2021. Output worsened among manufacturers, while growth in the service sector came close to stalling.
The US contraction was led by a steep decline in service-sector activity. The group’s services gauge slid to 47, the lowest print since May 2020. Excluding the pandemic, the July figure was the weakest in records back to 2009. Even so, firms continued to add jobs at a solid pace. Firms’ expectations for the future also deteriorated, falling to the lowest since 2020, as weaker demand and inflation weighed on sentiment. While the employment gauges signaled continued growth in July, the report said more firms mentioned plans to cut costs and reduce staffing numbers.
We've considered PMI and recent survey with more details in our FX Report yesterday.
Investors will closely watch the Federal Reserve’s meeting on July 26-27 for clues about its monetary policy path.
Personally, guys, I do not believe that ECB decision has triggered the gold rally and think that PMI data has more chances to do it, as it really looks discouraging. Hopefully, you've read our FX report yesterday where we talked about ECB and Fed recent activity. Things that we've seen look not very pleasant. As Fed as ECB ignores all promising on tightening and keep printing money by announcement of new QE that now calls as TPI in EU, while Fed just silently keep providing liquidity to the market, breaking announced QT shedule. It means the only one thing - inflation keep going higher and we do not see any reasons to agree with big banks that it should slow down.
As we said previoulsy - one of the nearest signs of economy difficulties should be rising unemployment. Here we go - Initial claims are rising for eight consecutive week, reaching the level of 2020:
While shares of AT&T slumped for 11%. Do you know why? Because people postpone payment for the phone, having problems with the wealth. AT&T triggers the same drop among other companies, such as Verizon:
I would ask you - if people start saving money on the link, what you could expect from economy?
Thus, we make a suggestion that recent gold jump is an indicator that more and more people start to understand what is going on. As lower gold will go and as more evident signals we get from economy statistics - the higher demand for the gold will be. Thus, we agree with two conclusions made above -
We suggest that gold could rise two-three times as result of this crisis, at least to $3500-5000 per Oz. Ultimate crisis scenario with tail probability could suggest even more radical rally, up to $20K/Oz, but this is in the worst case.
And gold price manipulation by central banks and their dealers now start playing very definite role. Previously I already talked about it, that gold markets are controlled artificially by big futures positions without delivery and controlling investors minds, spreading the information that gold is not attractive now. But Basel III requirements show the truth - they oblige banks to disclose their derivative positions. Just take a look at this - $500 Bln !!! When the whole market capitalization stands for ~ 5000 tonnes or ~$300 Bln annually. Free float of the market is two times smaller. We've talked about it in recent report.
Thus, don't be surprised why gold market is dropping - because central banks and primary dealers control it with 500 Bln futures positions. It is interesting from the chart that position starts growing as soon as global economy situation starts deteriorating. Since 2017 banks need to make growing efforts to control situation. Once demand for physical gold delivery start rising the $500 Bln could blow.
Bumpy ride on next week
We think that turning point on the gold market is approaching. We consider 1660, while Citi, UBS consider 1500-1600$ and tell that 1600$ drop will be very short-term. For long-term period it is no difference between 1660$ and 1600$. But the point is not only with technical markings. Fundamentals... they should make reversal closer. Yesterday we already talked about 27-28 of July next week. It is important for the FX market, but for the Gold market it might be even more important. Take a look:
Microsoft and Alphabet Inc. (Google) are expected to report earnings on 07/26/2022 after market close. According to Zacks Investment Research, based on 12 analysts' forecasts, the consensus EPS forecast for the quarter is $1.28. Microsoft EPS according to Zacks Investment Research is $2.28. The reported EPS for the same quarter last year was $2.17. It is rumor that reports will be worse than expected.
Finally, on 28th of July, the US economy officially steps in recession as IIQ GDP numbers will be negative:
Next day we also get PCE index, personal income and consumption that are also vital to the whole picture. So, be prepared to verbal intervention across all media screaming "recession, recession..." Within these two days of 27-28th we expect big collapse on stocks and cryptocurrencies. This, in turn, could provide positive impulse to the gold, that actually already stands under way.
To be continued...
Recent upside reaction on gold market was not totally unexpected, as we've suggested upside pullback in our daily updates. But, by looking at the strength of the reaction hardly it was triggered by purely technical factors. ECB decision is also weak driver for the gold. Most media tells about rising fears of recession that supposedly have become for gold reversal. Well, maybe, but why on this week when we had no important statistics? It is still unclear. My suggestion that market starts showing occasional unexpected spike by some cumulative effect of rising markets concern and week fundamentals, which from time to time trigger upside reactions. While gold market comes closer and closer to our major 1660-1680$ support area, these reactions should become more often.
Market overview
Gold held near an 11-month low as traders assess the outlook for further monetary policy tightening and the impact on global growth. Bullion hovered above the $1,700 an ounce level as it continued to be pressured by the strength of the US dollar, a sign of the prevailing caution in global markets. Still, a gauge of the greenback has retreated from a record hit last week.
“Gold has not been living up to its reputation as an inflation hedge and safe haven in times of crisis of late,” Commerzbank AG analyst Carsten Fritsch wrote in a note. “Although inflation rates in the US and Europe are higher than they have been for decades, and have been rising further recently, the gold price has been under selling pressure for weeks.”
Investors are awaiting the Federal Reserve’s meeting July 26-27 for a hint on how aggressive the central bank will be in raising interest rates to tackle soaring inflation. For now, the latest US data reinforce policy makers’ support for another 75-basis-point hike, according to Bloomberg Economics.
“The Fed might not need to tighten policy as aggressively as markets were initially thinking, but the rate-hiking cycle could last into early next year,” said Edward Moya, senior market analyst at Oanda Corp. “The dollar is weakening to start the trading week, but this might not be the top, which means gold might struggle to make a move above anywhere close to the $1,750 level.”
Investors continued to shed holdings of bullion-backed exchange traded funds ahead of central bank meetings over the next week that may result in more aggressive interest rate hikes. The precious metal has hovered in a narrow trading range since late last week as a gauge of the greenback retreated for three straight sessions through Tuesday in a sign of waning haven demand. Holdings in gold-backed ETFs have dropped for 15 days, the longest stretch since March 2021, according to initial data compiled by Bloomberg.
Net selling in gold and precious metal funds stood at $1.1 billion, a 63% bigger outflow than the previous week. At the same time global equity funds recorded their biggest weekly outflow in five weeks in the week to July 20, on investor caution ahead of crucial central bank meetings in which rate hikes are expected to be announced. According to Refinitiv Lipper, investors offloaded a net $13.79 billion worth of global equity funds, marking the biggest weekly outflow since June 15.
Also weighing on gold is ongoing selling by exchange-traded fund investors, Commerzbank AG analyst Carsten Fritsch said in a note. Investors have withdrawn more than 100 tons from gold ETFs during the past four weeks. ETFs recently saw outflows on 17 consecutive days,” he said.
“We don’t expect a sustained improvement in market sentiment until investors get greater clarity on the outlook for the economy, central bank policy and political risks,” UBS chief investment officer Mark Haefele said in a note. “Uncertainty in all of these areas remains elevated, in our view.”
Standard Chartered Suki Copper said we believe gold prices are holding up remarkably well given the pressures that the market's facing at the moment in terms of the dollar's strength. Such a sharp move. In the past we've seen gold breaching that $1700 level and testing the downside. But here we've seen prices holding up quite well. The physical market's been quite price elastic but also says concerns that inflation may remain elevated for a longer period of time. That hasn't seen its core investors or ETF investors heavily shorting gold just yet. Yes they've scaled back their exposure. We've seen that redemptions across the across the gold ETF impact July's on pace to be its fastest month of outflows in almost a year since March last year. And tactical positioning has been scaled back close to neutral. So it hasn't.
Gold prices could be expected to come under a lot more downside pressure. Say if you go back to 1980 where we saw this sort of pace hiking gold on an annualized basis lost 20 percent. But for gold prices to really rally we think we need to see a few factors come into play. Firstly a stabilization in those ETF outflows. Secondly we need to see if that physical market is still price elastic. We're now entering the seasonal slow period for consumption for gold. So that floor is quite vulnerable in the near term. But also we need to see that the market has already priced in a lot of this downside risk. And if we look at that tactical positioning we can see that it was actually quite elevated with the first hike back in March but now it's being rapidly scaled back. So we think there's actually scope for a relief rally coming up to the July FOMC meeting where we could see a little bit of a bounce and perhaps prices edging back towards $1750 the near term.
UBS Group AG’s wealth management unit has cut its gold forecasts to $1,600 at end-September and end-year from $1,800 and $1,700. Citigroup Inc. also flagged a potential drop to around $1,600 at some point in 2022.
Gold has lost more than $110 in July alone as traders increased bets on a full percentage-point increase in US rates after the consumer price index in June came in with a scorching 9.1% annual gain. That’s been dialed back as policy makers expressed reluctance about such a big move. The Fed is now expected to hike by 75 basis points for a second straight month when it meets later in July. The rest of the tightening cycle will depend on prevailing economic data and any evidence that prices are stabilizing.
“Dollar strength is likely to continue,” said Kristina Hooper, chief global market strategist at Invesco. “The Fed’s relative hawkishness versus other major central banks should help support the dollar.” But there may “be bouts of popularity” for the precious metal if geopolitical tensions increase or inflation doesn’t peak soon, she said.
Both Citigroup and UBS see prices reaching a trough this year before rallying in 2023. A drop to the $1,600 level is likely to be short-lived and attractive for investors, Citigroup analysts including Aakash Doshi said in a July 12 note.
Others remain confident in the metal’s role in a portfolio for diversification benefits. “Gold has done better than US cash holdings in real terms during this period of volatility, and even better in other currencies.” said Evy Hambro, global head of thematic and sector-based investing at BlackRock Inc.
Gold rose, erasing its previous decline to the lowest level in 15 months, after the European Central Bank raised rates by a larger-than-expected 50 basis points. European stocks and bonds slumped and the euro rose after the ECB joined global central banks in driving outsized rate increases to quell inflation. Bullion climbed back above $1,700 an ounce. Thursday’s increase, the first interest rate hike in 11 years by the ECB, comes as a brewing political crisis in Italy ramps up the pressure on the central bank to shield the most vulnerable euro-zone members from market speculation.
Before the ECB’s decision, bullion had been struggling to maintain its traditional status as a haven asset, according to Jeffrey Halley, a senior market analyst at Oanda Corp. Should support at around the $1,675 level fail, there’s a risk prices could fall further toward $1,450 to $1,500 an ounce, he said.
More than 5,000 “butterfly” call spreads centered around $1,825 an ounce traded Thursday, according to data compiled by Bloomberg. Here is how it looks like:
Gold held onto gains and headed for its first weekly advance since early June as investors weighed renewed concerns over economic growth. Bullion’s reversal comes with more economic data fueling fears of a recession. US business activity contracted in July for the first time in more than two years, according to data released Friday, adding to a slew of indicators earlier in the week that are painting a gloomy outlook. Meanwhile, a gauge of the greenback has retreated from its July 14 peak.
“The preliminary PMI data for July point to a worrying deterioration in the economy,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook,” Williamson said.
Similar results were seen in Europe. The group’s index of activity in the euro area unexpectedly shrank for the first time since early 2021. Output worsened among manufacturers, while growth in the service sector came close to stalling.
The US contraction was led by a steep decline in service-sector activity. The group’s services gauge slid to 47, the lowest print since May 2020. Excluding the pandemic, the July figure was the weakest in records back to 2009. Even so, firms continued to add jobs at a solid pace. Firms’ expectations for the future also deteriorated, falling to the lowest since 2020, as weaker demand and inflation weighed on sentiment. While the employment gauges signaled continued growth in July, the report said more firms mentioned plans to cut costs and reduce staffing numbers.
We've considered PMI and recent survey with more details in our FX Report yesterday.
“We are finally starting to see some weakness in the US dollar index, as gold bounces off an oversold level, recovering above $1,700 for now,” said John Feeney, business development manager at Sydney-based bullion dealer Guardian Gold Australia. “We now expect this initial flight to the US dollar to start rotating back into gold as investors search for a true and reliable hedge against inflation.”
Investors will closely watch the Federal Reserve’s meeting on July 26-27 for clues about its monetary policy path.
Personally, guys, I do not believe that ECB decision has triggered the gold rally and think that PMI data has more chances to do it, as it really looks discouraging. Hopefully, you've read our FX report yesterday where we talked about ECB and Fed recent activity. Things that we've seen look not very pleasant. As Fed as ECB ignores all promising on tightening and keep printing money by announcement of new QE that now calls as TPI in EU, while Fed just silently keep providing liquidity to the market, breaking announced QT shedule. It means the only one thing - inflation keep going higher and we do not see any reasons to agree with big banks that it should slow down.
As we said previoulsy - one of the nearest signs of economy difficulties should be rising unemployment. Here we go - Initial claims are rising for eight consecutive week, reaching the level of 2020:
While shares of AT&T slumped for 11%. Do you know why? Because people postpone payment for the phone, having problems with the wealth. AT&T triggers the same drop among other companies, such as Verizon:
I would ask you - if people start saving money on the link, what you could expect from economy?
Thus, we make a suggestion that recent gold jump is an indicator that more and more people start to understand what is going on. As lower gold will go and as more evident signals we get from economy statistics - the higher demand for the gold will be. Thus, we agree with two conclusions made above -
- Guardian Gold Australia - “We now expect this initial flight to the US dollar to start rotating back into gold as investors search for a true and reliable hedge against inflation.”
- UBS - We don’t expect a sustained improvement in market sentiment until investors get greater clarity on the outlook for the economy, central bank policy and political risks”
We suggest that gold could rise two-three times as result of this crisis, at least to $3500-5000 per Oz. Ultimate crisis scenario with tail probability could suggest even more radical rally, up to $20K/Oz, but this is in the worst case.
And gold price manipulation by central banks and their dealers now start playing very definite role. Previously I already talked about it, that gold markets are controlled artificially by big futures positions without delivery and controlling investors minds, spreading the information that gold is not attractive now. But Basel III requirements show the truth - they oblige banks to disclose their derivative positions. Just take a look at this - $500 Bln !!! When the whole market capitalization stands for ~ 5000 tonnes or ~$300 Bln annually. Free float of the market is two times smaller. We've talked about it in recent report.
Thus, don't be surprised why gold market is dropping - because central banks and primary dealers control it with 500 Bln futures positions. It is interesting from the chart that position starts growing as soon as global economy situation starts deteriorating. Since 2017 banks need to make growing efforts to control situation. Once demand for physical gold delivery start rising the $500 Bln could blow.
Bumpy ride on next week
We think that turning point on the gold market is approaching. We consider 1660, while Citi, UBS consider 1500-1600$ and tell that 1600$ drop will be very short-term. For long-term period it is no difference between 1660$ and 1600$. But the point is not only with technical markings. Fundamentals... they should make reversal closer. Yesterday we already talked about 27-28 of July next week. It is important for the FX market, but for the Gold market it might be even more important. Take a look:
Microsoft and Alphabet Inc. (Google) are expected to report earnings on 07/26/2022 after market close. According to Zacks Investment Research, based on 12 analysts' forecasts, the consensus EPS forecast for the quarter is $1.28. Microsoft EPS according to Zacks Investment Research is $2.28. The reported EPS for the same quarter last year was $2.17. It is rumor that reports will be worse than expected.
Finally, on 28th of July, the US economy officially steps in recession as IIQ GDP numbers will be negative:
Next day we also get PCE index, personal income and consumption that are also vital to the whole picture. So, be prepared to verbal intervention across all media screaming "recession, recession..." Within these two days of 27-28th we expect big collapse on stocks and cryptocurrencies. This, in turn, could provide positive impulse to the gold, that actually already stands under way.
To be continued...
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