Gold GOLD PRO WEEKLY, June 14 - 18, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,036
Fundamentals

These days discussion of fundamental background for the gold market is very similar to FX market and any other financial market, as the central driving factor is inflation and interest rates. All discussion stands around terms - when, how and how much. If on EUR currency we could involve EU domestic fiscal component in a way of economy statistics and ECB policy, gold is international market and depends only on global economical trends. And this puts it in direct relation to US dollar and US interest rates. Thus, here we consider mostly the same information that we did yesterday, but in application to the Gold market.

Market overview

Gold was standing in a tight range below the $1,900 an ounce level on Wednesday as investors looked to U.S. inflation data and a European Central Bank meeting for clues on monetary policy and the future of economic support measures.

Too sharp a rise in the inflation rate could even weigh briefly on gold as it could fuel speculation about an earlier exit by the U.S. Fed from its ultra-loose monetary policy,” Commerzbank analyst Carsten Fritsch said in a note.

U.S. Treasury Secretary Janet Yellen on Sunday noted that a slightly higher interest-rate environment “would be a plus for society’s point of view and the Fed’s point of view”.

The European Central Bank said it would continue to run its emergency bond purchases at a higher pace than at the beginning of the year, fearing that any retreat could sharply raise borrowing costs and smother a long delayed recovery.

Gold prices nudged up on Thursday after data showed U.S. consumer prices increased more than expected last month but eased fears over the Federal Reserve tapering its monetary support.

Data showed U.S. consumer prices increased further in May as continued economic recovery from the pandemic boosted domestic demand. Weekly jobless claims also dropped to their lowest level in nearly 15 months.

The key takeaway (from the inflation data) is that this market is firmly believing that the U.S. Federal Reserve is not going to change stance anytime soon and the (accommodative policy) playbook for gold remains,” said Edward Moya, senior market analyst at OANDA. Some pricing pressures remain for gold, but ultimately the belief that “runaway” inflation, which could trigger a Fed policy tightening, is unlikely should keep gold supported, Moya said.

We expect gold prices to move higher in coming weeks, and inflation expectations will remain a focal point,” said Suki Cooper, an analyst at Standard Chartered, adding that recent growth in investor appetite has more than offset weak physical gold demand, particularly from India and China.

Gold prices slipped on Friday, hurt by a strengthening dollar as some investors bet that recent spikes in U.S. consumer prices are temporary.

TD Securities commodity strategist Daniel Ghali said gold’s failure to break above $1,900 per ounce after U.S. non-farm payrolls and CPI data suggests inflation hedging flows were slowing at the same time as physical flows were weakening. As a result a pullback in gold should unfold,” Ghali said, adding that while there could be a near-term pullback to $1,850 per ounce, gold in the medium-term should be supported by dovish central bank policies for a prolonged period of time.


Market participants now eye next week’s U.S Federal Reserve policy meeting.

Expectations that the Fed will stick to the “inflation is transitory script” are high, but recent labour market improvements and a “red-hot” inflation number raise the risk that the Fed will be less dovish, Edward Moya, senior market analyst at OANDA, wrote in a note.

“The FOMC next week is now likely to be a non-event, and barring a sharp rise in the dollar. Gold looks set to test resistance at $1,920 early next week, as the asset price appreciation trade gains new momentum,” said Jeffrey Halley, senior market analyst at OANDA.

Focus now turns to the Fed's meeting next week, although traders now say that there may not be much of a shift in rhetoric which has played down the need to taper stimulus. A plan for reducing bond buying is expected to be announced in August or September a Reuters poll of economists found, but it isn't forecast to begin until next year.

The Federal Reserve is likely to announce in August or September a strategy for reducing its massive bond buying program, but won’t start cutting monthly purchases until early next year, a Reuters poll of economists found.

A significant number of Fed watchers also said the central bank would wait until later in the year before announcing a taper, now the main focus for markets fretting over rising inflation as an end to the pandemic in the United States is in sight.

Booming demand with the U.S. economy reopening is expected to continue and push up consumer prices this year, with the June 4-10 Reuters poll of over 100 economists showing an upgrade to both growth and inflation forecasts.

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Nearly 60% of economists, or 29 of 50, who responded to an additional question said a much-anticipated taper announcement from the central bank will come next quarter, despite a patchy recovery in the job market in recent months.

"We expect to hear clear hints at the Jackson Hole Conference that the Fed is now discussing the merits of QE tapering and this will be developed further at the September FOMC which is just four weeks later," said James Knightley, chief international economist at ING. At that point we suspect the Fed will indicate the market should be braced for a formal QE taper announcement with outlined path forward at the December FOMC."

Nearly 60% of economists, or 26 of 45, said the reductions would start in the first quarter of next year. Among those who ventured a guess by how much monthly bond purchases would be reduced gave a median forecast of $20 billion. The Fed is currently purchasing $80 billion a month in Treasuries and $40 billion in MBS.

Driven by massive government spending and a rapid inoculation drive, the U.S. economy was expected to grow at a seasonally adjusted annualized rate of 10.0%, 7.0% and 5.0% in the current, next and the fourth quarter, respectively. That compared to 9.5%, 6.7% and 4.7%, respectively, forecast in the previous poll.

"The U.S. is on track to have recovered all its lost output in the current quarter and end the year with a larger economy than if there had been no pandemic and growth had merely continued at its 2014-19 trend," added ING's Knightley.

"While a lot of what we are seeing now is indeed transitory, structural changes are taking place in the global economy and domestic fiscal policy that could lead to more sustained high inflation," said Philip Marey, senior U.S. strategist at Rabobank.

Over 60% of economists, or 23 of 38, said higher inflation was the biggest risk to the U.S. economy, compared to just six penciling in high unemployment. And about two-thirds said they were concerned about rising U.S. inflation.

"You get the message, in large font: the peppy rollout of stimulus and vaccines is causing U.S. demand to rebound much faster than supply," said Sal Guatieri, senior economist at BMO Capital Markets. This is creating many unpleasant side-effects, like inflation...just a few quarters after the economy's collapse instead of the usual several years for imbalances to emerge after a recession. The writing is on the wall: The Fed's temporary-inflation mantra is sounding more dated by the week."

COT Report

Investors purchased $281 million worth of precious metal fund, which was a fifth straight week of inflows. Although investors were preparing to ECB and CPI release, watching also for Fed next week - we see minimum position changes in gold report, which is a bit curious. Open interest has dropped slightly for ~4K+ contracts while speculators have opened few bearish contracts. But changes are too small to make any effect on sentiment. Previously we already said that open interest is dropping, and despite positive net position, this is not the performance that market should show on upward trend. It confirms our doubts that gold might be close to reversal.

Bullish divergence of US Dollar net position and Dollar index brings more confidence to this idea. Besides, SPDR fund statistics shows that its reserves rise slower compares to gold price dynamic that has not been seen there for a long time.

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Bullish divergence of US Dollar net position and Dollar index brings more confidence to this idea. Besides, SPDR fund statistics shows that its reserves rise slower compares to gold price dynamic that has not been seen there for a long time. For instance, since the reversal, reserves are up for 2.95% while gold rises for ~14%. Even visually, it is clear could be seen on the chart that there is no such dynamic in the past since rally begins. This is not good sign for the bulls.

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So it is comic situation - everybody tells and knows that gold is like a great protection against inflation and 60% of economists now tell that inflation is a biggest risk to US economy but curious - nobody hurry up to buy gold, no gold fever at all. How we could explain that? The major reason we already discussed previously. It is misunderstanding of gold protection against inflation and here I have to ask - "what kind of inflation?" Gold protects from currency devaluation in a long-term, let's call it "core currency devaluation", but it doesn't protect from "economic cycle inflation", when currency is rising on demand and higher interest rates. Cycle currency fluctuations, inflation and deflation are wobble around very long-term average fiscal devaluation that could be seen only through decades, but not within 3-5 years. This is why many people are confused that statics shows great inflation numbers, everybody talks about high inflation but gold is dropping under pressure of currency appreciation and rising of interest rates.
Second is , a bit out from theory and closer to the practical issues - now we do know what big whales expect from Fed. Currently basic expectation suggests getting hint on tapering in September, official not on tapering in December and starting of the tapering in 2023. Initially it is expected on 20 Bln from 80 Bln monthly pack. But not the value of tapering is important. Maybe some hints also will be given in Wyoming Jackson Hole conference in late August. It means that September Fed meeting is a deadline for upward gold trend and major reversal that we're waiting for should happen somewhere in August - October. Till this moment gold should stay on a surface, either trying to climb slightly higher, back to the widely expected 2000$ level or just staying in some range. Some upward action is possible as seasonally inflation is slowing in summer. Thus, June CPI numbers are expected to be less than May. This could support gold in short-term.
Finally - poor sentiment. Market activity stands at low level, as open interest is melting week by week. It perfectly agrees to final stage of upward trend and tells that this is not good point for long term gold investments.
Taking its all together, there is no reason to change our long-term view on Gold market. We expect bearish reversal and starting of new downside long-term trend within 6-8 months. Trend usually lasts for 3-5 years.

Technicals

Monthly

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, 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, as price stands here for the 2nd week in a row.

gold_m_14_06_21.png


Weekly

Market struggles with major 5/8 resistance area by far. Recent week has become an inside one and makes no impact on technical picture. Weekly context is bullish - MACD trend is up, price is not at overbought. Technically after upward breakout of 1855 K-resistance area, here we do not see strong barriers for upside continuation once 5/8 level will be broken. Now market widely expects continuation to 2000$. Flat Fed statement and some relief in inflation statistics in summer could support this view.

As on EUR currency here we 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. At least 1780-1800 area of potential right arm will become important point for decision making.

Now it is the question of reaction to 1922$ resistance area, how deep it will be.
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Daily

Daily trend stands bearish, but despite strong drop on Friday price still stands above 1855 support area and keeps short term bullish context and potential butterfly targets around 1950$ area. In a case of 1855 downside breakout, we intend to consider 1820$ K-support area, accompanied by daily oversold. This combination makes it very attractive for long entry, making it almost riskless, as strong support area helps us to move stops to breakeven at the first bounce.

At the same time, hardly we will see very extended upside performance as well, as daily overbought is near target area.

That's being said, currently there are only two options here. Either wait for drop to 1825$ and trade on daily time frame, or try to take position based on butterfly pattern, as we've tried to do this last week.

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Intraday

The chain of the events makes situation tricky, especially relation to daily butterfly. Take a look, it is started from total ignorance of CPI numbers and relation on Fed strong position that has led to rally, although it should be vice versa. But later market comes to its senses, scared and dropped, showing proper reaction jump in inflation. As a result, we have fake upside triangle breakout and erasing of the rally. In fact, market has done everything that we do not want to see, when we plan to buy.
It means that chances to complete OP target here are increased, and butterfly pattern stands at the edge:
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The only bullish scenario that theoretically still exists here is "222" Buy pattern. But as we've said on Friday, bullish context doesn't suggest deep retracement, as market should had to stay above one of the support level that now are broken already. Besides, downside action stands fast. But this is the only way to take position on butterfly pattern that we have. Otherwise, we need to wait for something else and keep an eye on deeper daily support level that we've discussed above.

gold_1h_14_06_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,036
Greetings everybody,

So, as we've said in weekend - although some theoretical chances were existed recently, downside breakout was predefined, and it has happened. Daily butterfly pattern has been erased. Right now we have "222" Buy in place around 1855$ daily support and theoretical chances exist on upward action, but - for the truth sake, it seems that another dive has a bit more chances to happen.

1850 already has been tested once, and price was not able to break above 1922, now this is second test of the level that has become weaker.
gold_d_15_06_21.png


On 4H chart triangle has been broken down with good acceleration, OP and butterfly targets have been reached. Still, we could get bearish grabber here that could trigger downside continuation to XOP target around 1805 that agrees with daily K-area.
gold_4h_15_06_21.png


On 1H chart we have bearish B&B setup that has not reached the target yet. 4H grabber could extend downside action:
gold_1h_15_06_21.png


As sell-off was too strong on Friday, despite the healthy bounce we should get more evident reversal signs and bullish patterns for the long entry. Especially before Fed meeting.
 

Sive Morten

Special Consultant to the FPA
Messages
15,036
Greetings everybody,

On daily chart we have inside session, so no real impact on daily picture. Anyway, today Fed stands in focus and we have to think about value of the same Fed statement - how strong it could support the market.
This is the key to understanding of price performance today. Personally I think that upward reaction on flat Fed statement will be short-term as it is totally priced - in while markets fears on inflation are growing.

Besides, on CPI report we saw the price of Fed. After first reaction on strong CPI data - market later has reversed and collapsed down. It shows that the value of Fed "transitory" theory is decreasing. Thus, we think that it could happen here as well...
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First of all - lets take a look at 1H chart. B&B "Sell" here is done perfectly, and market has formed "222' Buy pattern that we've discussed yesterday. Thus, if you want to go long before Fed statement - it is not too late.
gold_1h_16_06_21.png


But it is highly likely that upside reaction might be very short-term. In general we could get either upward AB-CD to 1860, or market could start forming downside butterfly.
gold_1h_16_06_21.png


Thus, it seems that we still could keep in focus daily K-area for long entry. For taking short position it would be better to wait for Fed, see the reaction and then take a look what patterns will be formed. At first moment, upward reaction should happen and it gives better entry price probably.
 

Sive Morten

Special Consultant to the FPA
Messages
15,036
Greetings everybody,

So, as we've expected downside action even with flat Fed statement - the new hawkish moments in release has made the stunning effect and crushed short-term sentiment, leading price down to 1800 area. This is the subject for weekly report, but despite market stands right now at daily K-area support, Agreement and oversold - this is not enough for long position taking. We should get clear bullish reversal pattern on intraday charts, that we do not see yet:
gold_d_17_06_21.png


Grabber and B&B "Sell" on 4H chart has worked nice. Market has completed XOP target, showing minor pullback now. It should take few sessions to form some reaction on support area. Despite that level is strong, with the new environment we need additional confirmation of possible bullish action and have to wait for the bullish patterns on intraday charts.

At the same time, as market stands at oversold - right now it is not good point for taking the short position as well.
gold_4h_17_06_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,036
Greetings everybody,

So, here I have to repeat almost the same that we said today on EUR, because gold is just a reflection of EUR chart - same levels, same patterns.

It seems Fed has made stronger impact on investors' mind and current action might be not just reaction on the Fed, but starting of global trends change. At least, as EUR as gold stand at the edge of a bullish context.

On daily chart right now we have bullish "Stretch" pattern that suggests some pullback. Obviously that it is stupid to count on reversal and return back to 1925 area with new environment.

Even with the Stretch pattern we have to be careful and take position only if we get clear bullish reversal patterns on intraday charts:
gold_d_18_06_21.png


Currently we do not have them yet, as market needs more time to form them. As a potential targets of upside bounce we could consider nearest level and next K-resistance that coincides with the broken daily K-support area:
gold_4h_18_06_21.png


But this is the tactical issue. More important is to understand what is in investors' mind that we intend to do in weekly report.
 
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