Gold GOLD PRO WEEKLY June 06 - 10, 2022

Sive Morten

Special Consultant to the FPA

As we've got more or less positive NFP data, logically it has made some pressure on gold market last week. Positive data suggests that no hurt yet comes to economy from Fed tightening policy and Fed has more room to proceed and push rates higher. This theoretically should increase real interest rates and makes short-term negative impact on the gold. The major question is to how treat current statistics. Positive numbers accompanied with dangerous moments on the US bond market and Fed has very limited tools to control it, as we've discussed on our FX weekly report. But, as we know, the bond market and interest rates is the major driving factor for the gold. The deteriorating processes are going in the US economy, but they are not visible yet in statistics, partially because Fed tries to hide it and minimize negative effect. But the changes that we see this week makes us to follow our long-term view and no reasons by far to change it.

Market overview

Right before NFP release gold edged higher to build on last week’s advance as the dollar declined amid buoyant risk sentiment in other markets. European stocks and US futures gained on Monday after China relaxed some of the strictest virus controls of the pandemic. The greenback retreated as demand for the haven currency diminished.
The precious metal rose last week on signs the Federal Reserve’s tightening path may not be as aggressive as feared. The personal consumption expenditures price index, a gauge favored by the Fed, showed inflation cooling in April from March, according to data released Friday, while minutes of the central bank’s latest meeting were less hawkish than expected.

Bullion has risen past $1,850 an ounce in the second half of May as concerns about aggressive Fed rate hikes are balanced by the possibility they’ll lead to a recession in the US.

“The gold price has held up very well considering that bond yields have risen sharply this year and the dollar has strengthened,” analysts at Heraeus Metals Germany GmbH & Co. wrote in a note. “If the price can hold above $1,800/oz, then perhaps gold can make further gains if inflation stays higher than anticipated for longer.”

U.S. dollar advanced on Wednesday after stronger-than-expected economic data was unable to assuage investor concerns of high inflation and an impending recession driven partly by rising oil prices. A report by the Institute for Supply Management (ISM) showed U.S. manufacturing activity picked up in May as demand for goods remained strong even with rising prices.

The survey followed data released last Friday showing U.S. consumer spending, the largest contributor to American economic output, increased in April even amid growing concerns of a recession. Market sentiment, however, has remained bearish due to the prevailing uncertainty caused by the pace of the U.S. Federal Reserve's interest rate hikes, and the impact of the Russia-Ukraine war on food and commodity prices.

Global equity markets fell as U.S. Treasury yields reached two-week highs on Friday after data showed the American economy generated a greater-than-expected number of jobs in May, signaling the Federal Reserve will likely continue raising interest rates in its effort to curb inflation. The Labor Department's closely watched employment report showed the U.S. economy added 390,000 jobs in May, with the unemployment rate holding steady at 3.6% for a third straight month, beating most analyst estimates.

Traders were hoping the jobs report would reveal stronger signs of weakness in the U.S. economy that would help persuade the Fed to soften its stance on inflation and interest rates to avoid triggering a recession.

"It was strength across the board with the exception of retail trade, and the economy on the jobs front continues to power forward," said Josh Wein, portfolio manager at Hennessy Funds in Chapel Hill, North Carolina. "The Fed still needs to unfortunately destroy a little bit of demand and they are going to continue to do that for at least the next few meetings with 50-point rate hikes."

U.S. Treasury yields advanced to two-week highs after the strong jobs data. Benchmark 10-year notes were up at 2.946%, while the rate-sensitive two-year year note gained and was up at 2.6606%. Gold prices fell nearly 1% after bullion's appeal was dented by the rise in the U.S. dollar and Treasury yields following the strong jobs data.

"Some of the rally (in equities) of late was due to the Fed acknowledging that in the fall they could reassess and take a pause perhaps. But the market is retracing some of their earlier losses and saying basically that's all off the table," Wein said.

Data for commodity funds showed investors exited gold and precious metal funds worth $521 billion after purchases of $1.33 billion in the previous week.

Different look at inflation

So, the belief is taking hold that economic growth is already being choked out of the system, and that inflation is already over. That’s very questionable. The following chart is from a fascinating Man Group paper on investing in inflationary regimes by Teun Draaisma, Campbell R. Harvey, Henry Neville, Ben Funnell and Otto van Hemert, which can be found in summary form here, and with all the statistics you could possibly want here. The researchers identified six inflationary eras since the 1920s. Here they are, along with the performance of the stock market, and the recession periods when growth was negative:

Several things jump out from this. First, inflation regimes seldom overlap with recessions, with the stagflationary 1970s the significant exception. Usually, inflationary eras tend to last somewhat longer than recessions (the Great Depression was the major outlier) and to end immediately before the recession starts. Second, the volatility of inflation has reduced dramatically in the last three decades. Typically when inflation is let out of the bottle, a period of sharply varying inflation ensues, with several separate peaks. This was the pattern both around World War II and during the “Great Inflation” era of the 1970s. Inflation may well have just made a peak; history suggests that we can expect subsequent waves and heightened volatility before it’s over.
If we look at the US and the UK, which has tended to have a worse problem with rising prices and has now seen headline inflation reach double figures, it’s again clear that inflation tends to move in waves. It doesn’t reach a higher plateau and stay there:

That suggests that even though the focus is already shifting to whether there is evidence of a growth slowdown — and a lot of measures are slowing down, but nothing yet suggests outright sustained negative growth — there’s a strong chance that by the end of the year we’ll be waiting to see how low inflation can go, and then bracing for another “wave.” Even if inflation does continue to decline for the next few months, which is likely, it would be wise to position for further bouts before this inflationary era is over.

As for commodities, substantially everything managed to protect you from inflation, but some (energy and precious metals) did much better than others:

The rally in commodities so far likely limits the gains that can be made from here. But it’s impossible to ignore this sector if you think inflation will keep rising.
higher food prices are having a disproportionate impact on inflation and incomes in the emerging world. Many of these commodities are priced in US dollars on global markets, and the strength of the dollar has further exacerbated the inflationary impact.

A sizeable share of household income is spent on food. Before prices began to rise, food already accounted for over 15% of the inflation basket in advanced economies, and this proportion will be higher for lower income individuals. That percentage jumps to around 20-25% of the inflation basket in the Latin America, emerging Asia and ‘Central & Eastern Europe, Middle East, North Africa’ regions, and a massive 40% in Sub-Saharan Africa

Rising food prices have historically been associated with political instability in developing countries. Surging prices of wheat in 2010 were said to have been a key driver behind the Arab Spring, while anger at record food prices contributed to recent protests against the government in Sri Lanka. Amid concerns about potential food shortages and rising prices, a number of countries have placed restrictions on the export of certain foods to other countries.
As inflation soars across the globe, the surge in food prices is exacerbating current economic and social problems in the developing world. Against this ominous backdrop, the risk of political instability is likely to be on the rise. According to Fathom’s Financial Vulnerability indicator, Western Asia and the Middle East & North Africa look especially at risk of a sovereign crisis. This is, however, a global story with the risk over the coming year now at its highest since 2012.


US Bond market problems

Last week, guys, we already have mentioned that Fed already has floating losses bonds that it has on its balance, standing for ~ $330 Bln. Treasuries dealers and big banks foresee liquidity problems in the US "Bond distribution" system, counted for more than $20 Trln. Dealers worry that Fed could not find the buyers for "toxic" US Treasury bonds with "-6%" yield. And this already comes to reality. We also have made the suggestion (Based on Spydell analysis), that Fed probably intends to use the US Treasury cash position to finance lack of demand on the bond market.
s, to the degree that the Fed’s retreat does impact yields, it will most likely be higher. Many analysts thought the Fed kept benchmark yields artificially low and contributed to a brief inversion of the Treasury yield curve in April.

“The risk is the market is unable to absorb the additional supply and you do have a big adjustment in valuations,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. “We will still see more long-end supply than we did pre-COVID for quite some time, so all else being equal that should pressure rates a bit higher and the curve a bit steeper.”

When the BlackRock asset manager talked that yield hardly increases 3% this year, he means the same, that Fed tries to hold it under control, to hide recession processes in the economy and postpone inflation impact on post-election period, after November, or, at least, tries to keep it as long as possible.

Because, just take a look - the US government bond market, high yield market and US IPO are mostly paralyzed. Yes this happens before as well, but not three months in a row and with different economy conditions.

The same you could see on High Yield bonds. Previously it counts for 25% of total bonds issue, but now it is barely above the 4%:


But we see rally on the stock market and stable-to-low interest rates. Who is paying for this banket? The answer is - US Treasury. Last week its cash account was around 900+ Bln. Take a look - within a week it has dropped for ~ $140Bln:

This is the precise sum that the US financial system, banks have got within recent week. As a result, market "set the bottom" in mid-May, moving into growth. The total liquidity in the system from the Fed and Treasury has increased by 168 billion since the end of April in the absence of QE. The plan is to compensate (or cover) the reducing of the Fed's balance sheet by 190 billion in 3 months (QT programme) by the cash position of the US Treasury – they have 780 billion left there to balance.

Problems will begin when the cache will be spent. With closed capital markets and a frozen treasury market the road to hell is opened. Just control Treasury cash position on Fed Reserve account. Additionally we will update other indicators to understand the whole process in details.

Finally, the positive viewers appeal to strong consumption, speaking, where do you see the recession - take a look at employment, take a look at consumption. We already talked about employment. As stock market keep going lower, people who enjoy stocks "welfare" from invested Covid stimulus will lost them very soon. Approximately this is 5 Mln people, that should start searching job very soon. Now they are not included in unemployment statistics as they do not search for the job by far. As a result unemployment very fast should jump to 8-9%.
Speaking on consumption - yes, indeed, recent data looks not bad. But how people pay for consumed goods? They spend their savings, as prices rise:


Almost all "easy Covid money" from the Government are spent already. Inflation doesn't stop, Fed doesn't stop with rising interest rates and very soon we should see the drop in consumption. Walmart and Target already reports on big drop of retail sales. In fact, the drop in consumption is the way to healthy economy, as dollar should lose 50% of its value to balance real economy capacity and purchase power of population.

That's being said - we have just the vision of positivity. Fed uses fiscal tools that it has to hide bad processes in economy, but they can't hide forever. Very soon it comes to the surface. Meantime, while other investors believe that Fed policy brings the fruits and crisis is coming to an end, gold should remain under pressure. That's what we've talked about before, and everything goes with our plan. This situation stands in favor of those who understand what we're waiting for.

To be continued...

Sive Morten

Special Consultant to the FPA

While Fed finds the way to pull one over on all investors, we expect possible deeper action on gold. Although, for the truth sake, it resists very good and is able to stay above YPP, holding bullish long-term sentiment. Time is limited, and most probable that reversal comes between the YPP and YPS1, which means that current action is just a pullback in long-term upside trend.

Monthly trend has turned bearish and it is reasonable that we haven't got the bullish grabber here.
Chances on downside continuation to YPS1 and lows around 1685$ increases as everybody tries to collect "free" dollars across the Globe to serve the debts as interest rates rising. It makes pressure on the gold market.


Weekly trend stands bearish, gold market now shows reasonable reaction on OP Agreement support and oversold area. Initially we thought that pullback could reach 1900 area and major resistance level. This scenario is still possible, but recent performance looks weak, market has formed "indecision" candle here. So, we have to be careful to bearish signs on lower time frames, as downside action could continue as well.



Daily trend remains bullish by far, gold has not broken yet predefined support levels, but here we've got engulfing pattern as well. Taking in consideration "uncertainty" on the week chart, it would be better to get bullish reversal patterns around support levels before taking long positions:



Gold drops to 1845 K-area that we've discussed on Friday:

Scalp traders should be happy probably as downside action from XOP was nice, market has completed steep AB-CD target as well. But right now we do not have any bullish patterns on 1H chart by far and 4H/1H trend is bearish. It means that we need to see how price response to the K-area. Potentially DiNapoli patterns are also possible here, as downside action was thrusty.



Hi Sire Sive. Great work as always. I want to know if retracement to 0.236 and extension to all the extension areas could still be called COP, OP XOP ? Or it always suppose to retrace to atleast 0.382 before it could be called(qualifies).

Sive Morten

Special Consultant to the FPA
Hi Sire Sive. Great work as always. I want to know if retracement to 0.236 and extension to all the extension areas could still be called COP, OP XOP ? Or it always suppose to retrace to atleast 0.382 before it could be called(qualifies).
Hi Danny,
the extension ratio doesn't depend on the depth of BC retracement leg, actually. Still, to avoid price noise fluctuations treating as "BC" leg retracement, it would be better to get more or less acceptable pullback. For example, you could use 3x3 DMA and follow extensions with the BC retracement penetrates 3x3.
Alternatively, you could watch for "C" point of AB-CD pattern and BC retracement at least to 0.382 support of most recent upside swing on the same time frame. Hardly this might be used as rule of thumb, but at least this should save you to get ABC where it doesn't exist.


Hi Sive… personally, I think precious metal will continue to fall until after the much anticipated 2nd US$ interested rate hike on 14-15 June’22, after which Gold will go back up to the 1900 levels and Silver to the 24-26 levels. Then before the next expected US$ rate hike on 26-17 July’22, precious metal will once again trend downwards to repeat the same process. I am trading Silver and so will wait for it to go down to 20.50-40 to take some longs for the ride up to 24.40 … after that, I have absolutely no idea where precious metals will go as they is so much jittery in the world’s economy. I’ll probably focus on EUR/USD after July’22.

I could be wrong, but that’s how I see market movements for precious metal.

Sive Morten

Special Consultant to the FPA
Greetings everybody,

We suspect that yesterday Fed has made first QT step by some indirect signs. We had no important statistics yesterday, but BTC has collapsed for 5+%, interest rates jumped above 3%, 6-month Bill auction results 0.15% worse that suggested, as investors start demanding higher return. This makes indirect impact on gold as well.
On daily chart context still stands bullish as market shows just minor pullback by far. Still we have to be careful with long positions:

For example, recall our weekend analysis. Price was standing at strong 1846 K-area and OP agreement. It was seemed like perfect area for entry. Indeed, gold has shown bounce up from it, but later keep going lower to the next support. Now the story is repeating - gold stands at next major K-support area:

... and this is also Agreement but with the XOP target. Price also starts upside bounce. The question is - could we take the long position? There are two options. First way is to wait for clear bullish pattern here. This just confirms that market is reversing up. This is conservative and our preferrable way for current situation.
Second way is to buy without pattern, because of strong level. Probably it gives best entry level if you guess it right. But anticipation of the reversal cares risk of further downside continuation. If it suitable for you and you ready to take it - you could buy just at level without getting the clear pattern.


Got that really. Thanks so much as usual sire.
Hi Danny,
the extension ratio doesn't depend on the depth of BC retracement leg, actually. Still, to avoid price noise fluctuations treating as "BC" leg retracement, it would be better to get more or less acceptable pullback. For example, you could use 3x3 DMA and follow extensions with the BC retracement penetrates 3x3.
Alternatively, you could watch for "C" point of AB-CD pattern and BC retracement at least to 0.382 support of most recent upside swing on the same time frame. Hardly this might be used as rule of thumb, but at least this should save you to get ABC where it doesn't exist.