Gold GOLD PRO WEEKLY, June 07 - 11, 2021

Sive Morten

Special Consultant to the FPA

Last week we've come to conclusion that gold rally right now is fragile and not reliable in long term. We could consider bullish setups on daily chart but it becomes more and more tricky to do it on monthly time frame. The major component is Fed stubborn position to deny rising inflation, suggesting that this is temporal splash and later it shows more gradual levels. Since Fed keeps holding interest rates low - it is artificially converges return of bonds and gold that generates no interest. We said that can't last forever and sooner rather than later, this song will be over. This is the reason why we treat current upward action mostly as retracement rather than continuation of long-term bull trend that, as we suggests, living its final days.
Recent NFP data with hourly earnings numbers shows that inflation is rising. Now we have growth in all three components - CPI, PCE and hourly earnings. All of them shows strong pace of inflation. Gold firmed on Monday and was on course for its biggest monthly jump since July 2020, as the U.S. dollar headed for a second month of decline while growing inflationary pressures also lifted bullion’s appeal.

As we've said yesterday in our FX weekly research, Fathom consulting also expects splash in inflation within few months, when households start to spend accumulated money during pandemic and they think that Fed could start action quicker:

Owing to the scale of the fiscal support packages put in place by authorities in the US, not only did household incomes not suffer a sustained fall during the deepest recession on record, they actually began to rise at a more rapid rate. Consumption of goods fell a little in the early months of the pandemic, but has subsequently recovered to such an extent that it is now above its pre-COVID trend. With ballooning incomes but limited opportunities to spend, particularly in the all-important services sector, US households had, by the end of 2021 Q1, built up excess savings worth close to 10% of US GDP. We expect to see around a quarter of these savings spent during the remainder of this year, boosting consumption of services as households effectively make up for lost time. If we are right, we are likely to see a material, cyclical pickup in inflation, posing a challenge for the FOMC, which has signalled that it does not intend to raise the Fed funds rate until at least the end of 2023.

Market overview

Gold firmed on Monday and was on course for its biggest monthly jump since July 2020, as the U.S. dollar headed for a second month of decline while growing inflationary pressures also lifted bullion’s appeal.

“The dollar is staying weaker, that’s fairly supportive. Gold bulls now have their eyes set on $2,000, and most are thinking it’s going to go quite a lot higher,” said Stephen Innes, managing partner at SPI Asset Management.

Data on Friday showed U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target and posting its largest annual gain since 1992.

For as long as the Fed refuses to change its monetary policy in response to rising inflation, real interest rates will continue sliding ever further into negative territory, which is good news for gold,” Commerzbank analyst Carsten Fritsch said in a note.
Keeping gold’s advance in check was a slight uptick in U.S. Treasury yields, translating into higher opportunity cost of holding non-yielding bullion.
“However, this (higher yields) is unlikely to weigh on gold for any prolonged period so long as yields remain below the rate of inflation. We therefore expect the price to climb to $2,000 per troy ounce by year’s end,” Commerzbank analyst Carsten Fritsch said in a note. The disappointing performance of the platinum price recently is also reflected in ETF demand. In contrast to gold, platinum has registered ETF outflows of late,” Fritsch added.

“It is quite clear from Friday’s (consumer price) data that there are ongoing concerns about inflation emerging. This is all part of a developing story, and one which would develop very much in the second half of this year,” independent analyst Ross Norman said.
Data showed U.S. manufacturing activity picked up in May as pent-up demand boosted orders.

“The mounting pile of evidence that suggests we have reached peak economic momentum raises the risk that inflation-hedging flows into gold could start drying up,” TD Securities said. However, if inflation is indeed transitory, then we’re likely to see a prolonged period of uber-easy monetary policy, which suggests that market pricing for Fed hikes is too hawkish and ultimately that gold prices could firm further,” it added in a note to clients.

“As for the precious metals’ outlook in the short-term, it depends on how global inflation data develops and how central banks, mostly the Fed, respond to it,” IG Market analyst Kyle Rodda said.

“A weaker dollar and high inflation (both expected and real) should lend support to gold. We continue to see gold at $2,000 sometime in the second half of the year,” ED&F Man Capital Markets analyst Edward Meir said.

Gold slid as much as 2.3% on Thursday as better-than-expected U.S. employment and service sector data propelled the dollar higher and boosted expectations that the strong economic readings may reignite taper talk from the Federal Reserve. The better-than-expected data has put traders on the defense. They’re preparing for possible statements from the Federal Reserve on tapering or higher rates, although not immediately.

Signaling a strong labor market recovery, new U.S. jobless claims dropped below 400,000 last week, while private employers stepped up hiring in May, the ADP National Employment Report showed.

Meanwhile, a measure of U.S. services industry activity increased to a record high in May.

“A much stronger-than-expected ADP result suggesting a similar bounce back in payrolls tomorrow after last month’s terrible print has driven the dollar notably higher and triggered long liquidation in gold under $1,890,” said Tai Wong, head of metals derivatives trading at BMO. The $1,850-60 support is significant and should hold in gold.”

Gold was set for its biggest weekly decline since March on Friday, pressured by a firm dollar and upbeat U.S. data that pointed to a strengthening labor market, raising expectations for strong nonfarm payrolls data.

While a stronger-than-expected U.S. jobless claims data has already raised concerns about early tapering by the Federal Reserve, much really hinges on Friday’s job figures, as “gold has been building up for a correction for quite a long time now”, said Ole Hansen, head of commodity strategy at Saxo Bank. A shift to tighter policy from the Fed could cut some of gold’s appeal. There is a risk that gold’s correction could turn a bit deeper on a strong jobs report, but if gold stays above $1,825, then the market could view the current correction just as a mild one within a strong uptrend, added Hansen.

Initial claims for state unemployment benefits fell below 400,000 last week, while U.S. private employers boosted hiring in May, data showed on Thursday “Amid receding growth and inflation risks, we thus believe that the demand for gold and silver as a safe haven should fade further, leading prices lower in the medium to longer-term,” Carsten Menke, analyst at Julius Baer said in a note.

Gold rebounded from a more than two-week low after U.S. nonfarm payrolls did not rise as much as expected, although bullion was still on course to register its biggest weekly decline since March. U.S. nonfarm payrolls increased by 559,000 last month versus 650,000 forecast in a Reuters poll, while new orders for U.S.-made goods fell more than expected in April.

“Part of what we’re seeing in terms of the strength in gold are inflation expectations and those are partly based on the stronger economic data, like higher jobs growth, a broader recovery in the U.S. (and) parts of Europe, and China is still doing well,” said Jeffrey Christian, managing partner of CPM Group. Gold prices will probably continue to trade between $1,855 and $1,920-an-ounce levels,” Christian said.

U.S. Treasury Secretary Janet Yellen said on Saturday that she is urging the G7 wealthy democracies and other countries to keep up fiscal support for their economic recoveries and to make investments to fight climate change and inequality, and said U.S. inflation this year would be elevated but transitory.

"G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths," Yellen said. "This is why we continue to urge a shift in our thinking from 'let’s not withdraw support too early' to 'what more can we do now.'"

Yellen said inflation will remain elevated at 3% on a year-over-year basis until about the end of 2021.

"I personally believe that this represents transitory factors," she said. Production bottlenecks had caused elevated prices in some industries, such as motor vehicles, while other prices, such as airline fares, were rebounding back to more normal levels, she added. "We'll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary," Yellen said.

There is still slack in the labor market, she said, because of people who had lost jobs permanently, and it will take a while to reabsorb those workers into the economy.
"So we shouldn't expect this process to be complete in a month or two," Yellen said. "And while we're seeing some inflation, I don't believe it's permanent."

COT Report

The firmer dollar is weighing on gold, and “we’re probably seeing some profit-taking,” Commerzbank analyst Daniel Briesemann said.

“Many market players have opened long positions in gold in the last few weeks, as can be seen by the CFTC statistics. But now it appears that at least some of these positions have been closed again, keeping gold in check,” Briesemann added. However, Commerzbank’s Briesemann said bottlenecks in the supply chain and rising commodity prices could limit U.S. manufacturing growth potential, and that the Federal Reserve is paying attention to labour market data.

Among commodity funds, precious metal funds saw an inflow of $35 million, the lowest in four weeks.

This week CFTC data doesn't reflect yet the impact of NFP release. Still, it shows low interest to the market as open interest has dropped. Maybe this was a profit taking before employment data as gold has shown good performance in recent 3-4 weeks. Speculative position has increased slightly:


So, from market reaction on data releases and comments above, it is obvious that first - market waits for 2000$ area till end of 2021, suggesting that Fed will keep its dovish position. Indeed, it is difficult to believe that once Yellen on G7 was talking that inflation is transitionary and then suggest action from Fed on June 15th meeting. It seems that gold-friendly combination of rising inflation and holding nominal interest rates by the Fed should last for some time, pushing real interest rates deeper in negative area. As we've said in updates last week, overall price action looks bearish in interest rates and supportive to the gold. Now it seems that yields are aiming on 1.53% target that should help gold to test 1925$ or even 1950$ area. Sentiment should stay positive on a gold market at least for 2-3 months probably, through the summer.

At the same time it doesn't contradict to our longer-term view that upside potential for the gold is limited and market is doomed in perspective of 8-12 months. Even now, despite all positive factors, investments stand low, significantly below the pace of price recovery, based on SPDR Fund statistics. Situation stands very similar to 2012-2013. Once US Dollar starts rising (as we expect from 87.40 level), interest rates will follow and this will be the cramp word for the gold market.



Monthly picture fits well to our long term view. Despite great May performance, trend here still stands bearish, suggesting that it is more propriate to treat this move as a retracement. If price returns back to top appearing of divergence here might be important sign.

Since price was able to pass through 1850$ resistance area and hits 1875$ daily AB-CD target as well, it is logical to suggest that next target is 5/8 major Fib resistance here that stand around 1925$ area. It is very interesting what will happen around major 5/8 Fib resistance area:


Here we have another step to 1925 area. Weekly context is bullish - MACD trend is up, price is above monthly pivot. With upward breakout of K-resistance area, here we do not see strong barriers for upside continuation, as overbought level stands rather far from here. So, mostly weekly picture confirms ability to hit 1922-1925$ and maybe 1950$ area.

On retracement price filled our condition to stay above 1850$ broken area. As on EUR currency that we've discussed yesterday - here you could see the shape of possible reverse H&S pattern , that should lead market first to 1950-1960$ neckline area and then back to 2075$ top. But this is still the hypothesis that yet to be checked.
Market stands very sensitive to statistics and speeches, so, situation could change at any moment. Still, upside AB-CD leads to appearing of "222" Sell pattern, and, accompanied with divergence, it could become starting sign of major reversal on gold market.


Trend stands bearish here, our B&B "Buy' trade has worked nice on Friday, reaching intraday 5/8 Fib resistance level, so no it is done. The major concern around daily picture is the shape of retracement - whether it will be two-leg or single leg and market is ready to move to XOP target immediately. Last week, I was thinking that downside AB-CD action looks more probable. But with recent comments and reaction on NFP data now I'm not as sure as before.

Another shake waits us on Thursday, when we get CPI report. Last time it has made solid impact and this time again, numbers are promised to be high that theoretically could trigger the second leg.

As it was mentioned above, market mostly treats the 1825$ area as vital for short-term bullish context. Indeed, this is K-area and daily oversold that probably sets the price floor for next week. Hopefully we get some clarity through the week concerning retracement shape. Currently, with 1950$ target anyway is not comfortable to go long as risk/reward ratio is not attractive, if even you place it just below $1855 level. So only if you have B&B position, you could keep it with breakeven stop. For new long entry it is more reasonable either to use Stop "Buy" with the breakout of 1916$ top or wait for deeper retracement and 2-leg downside action.


Still we could use few indirect signs that could help us with decision making. First is, on 4H chart we could keep an eye on 1910$. Once it will be broken up - that is early bullish sign that significantly decreases chances on 2nd leg of retracement and suggests direct upward continuation. In this case price returns back inside the broken channel and forming bullish reversal swing:

Second moment to consider - market response to intraday support levels. If price will be able to stay above 1H supports, especially 1880 K-area - this is another sign of strength. (Our Friday's H&S has worked fine here). With the price drop below 1868 significantly increases deeper daily downside action. From that standpoint, it is possible to consider long entry, if gold forms, say, "222" Buy here to 1880$ area with stops somewhere below 1868$. This is if you want to trade on intraday charts...

Sive Morten

Special Consultant to the FPA
Greetings everybody,

So, gold setup looks very similar to the EUR - possible chances for direct upward continuation and great support area slightly below. Yesterday price has completed necessary conditions for long entry and shown nice upward performance, but now we have few bearish signs that could become the reason either for pullback and appearing of butterfly pattern on daily chart, or even for deeper retracement back to 1820 level. CPI should play not the last role in price performance this week:

On 1H chart market hits XOP around 5/8 major Fib resistance, forming bearish divergence as well. Thus, some pullback is probable. To keep chances on butterfly forming, gold has to stay above major support areas - either 1880 or 1873. If you intend to make a bet on upside daily butterfly, you need to think about entry. Most simple way is to split position and take it gradually on both levels. Keep an eye also on H&S pattern that could confirm action to 1873...

Sive Morten

Special Consultant to the FPA
Greetings everybody,

While market stands above 1855 support area on daily chart, it keeps chances on direct upward continuation and we're still watching for it. Potentially it might be steep butterfly pattern with the target at the same level as XOP here, but currently it more reminds just triangle consolidation.

Today market shows more bullish background. On 4H chart we could get bullish grabber within few hours, that could trigger upward continuation:

On 1H chart, yesterday we've talked about retracement back to 1870 K-support area that has happened, although very short-term, in fact in a way of spike. As we've said, this is an area to consider long entry with stops below 1868.

In general, although we could recognize the shape of H&S, but it is not the bearish type of action here. Price should behave differently if market is bearish. This makes us think that we probably deal here with triangle, rather than H&S and upward continuation looks more probable, at least now:

Besides, Interest rates are falling below major target area, which should provide additional support to gold performance:

Sive Morten

Special Consultant to the FPA
Greetings everybody,

As well as FX market, the Gold also has failed an attempt to go higher yesterday. Today market is started preparation to CPI report, making investors to close positions. On daily chart picture mostly stands the same and if price stands above 1855 area - butterfly might be formed. Otherwise, it would be better to consider 1820 area for long entry.
So, if you prefer to not trade data releases - let's wait for CPI report and then make a decision on position taking. If you like to trade data releases - you could try to take position using this butterfly pattern in advance of CPI report:

If CPI numbers will be good, we could get another bullish pattern on daily chart - "222" Buy, once gold completes downside AB=CD pattern. Yesterday we haven't got the grabber here and market failed attempt to go higher:

1855 K-area has worked fine on 1H chart providing two times support to the market and triggering upside bounce, but still has been broken recently. Here we have another minor AB-CD with XOP around major 5/8 support area. Since price shows acceleration to OP, XOP probably should be reached.

That's being said, we're mostly waiting for CPI report. If you still would like to buy in advance, you could consider XOP level with stops below the 1855 lows, using butterfly daily pattern. Bearish view is also not forbidden, of course, but whatever trade you choose - this mostly is bet on CPI report...
We do not consider bearish trades as they're mostly intraday, while we're focused on upside continuation and daily XOP target. And just need proper level to enter.

Sive Morten

Special Consultant to the FPA
Greetings everybody,

Despite recent volatility market was able to keep short-term bullish sentiment and chances on direct upward continuation by daily butterfly pattern. In general, many dollar rivals now have bullish sentiment and forming consolidations before coming upside breakout supposedly.

At the same time, US interest rates shows much stronger performance that is not reflected in Gold price action by far. While 10-year yield has dropped to 1.4% area, gold mostly stands in the same range of 1855 retracement.
Still, next week we get Fed statement and market already thinks about weekend and Fed meeting, so hardly today we get any strong action:

On 4H chart market is forming triangle and is trying to break it up right now. Recent CPI drop has turned to bullish reversal candle:

Still, recent performance let us easily control current situation. As we're watching for butterfly and deep retracement to 1874 Fib support is done already - real bullish market should not erase this recent upward action. Thus, if you already have long position - move stops to breakeven or below 1869. If you don't but think about long entry - consider only 1882 and 1890 levels, and escape entry in a case of plunge down. Any retracement has to be gradual here. Harmony suggests that the pullback might be to 1885-1890 area here, as it is possible to see some hints on H&S pattern:

If market erases recent upward action - bullish context is under question.