Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
This week gold doesn't have a lot of drivers. In fact, market was watching for the Fed mostly as they had have to clarify the look on US economy perspective and announce measures to support it. Things that traders heard are good enough to support market. It has happened not immediately but after 1-2 days, when investors were able to think what J. Powell said. This has led to fizzle of stock rally and supported gold.
Additionally we've got UK GDP data that was like a cold shower to the markets. The specific of UK is monthly GDP. UK is the only country that publishes monthly data. And this is great source as we could see what is going on in economy faster. 20% drop in GDP gives the hint and warning that IIQ US GDP numbers hardly will be good and things are only going to get worse.
Global unrest, political crisis as inside US as in foreign affairs, especially in China direction also keep situation tough. May be all these factors are not enough to trigger strong rally, but they are enough to keep gold around the top and even gradually push it higher from time to time.
Gold rose nearly 1% to a one-week high on Wednesday after the U.S. Federal Reserve held onto its pledge to ease the economic pain from the coronavirus pandemic,
boosting bullion's safe-haven appeal.
"(Gold) hit daily high following the FOMC statement, which painted a pretty dour picture for the U.S. economy, although not unexpected," said Kitco Metals senior analyst Jim Wyckoff. "We didn't see any good news coming out of that FOMC statement and we did see that the interest rates are going to remain at the same levels, which are very low, through 2022 - and that's probably a little friendly for the gold market too."
The Fed repeated its promise of continued extraordinary support for the economy as policymakers projected a 6.5% decline in gross domestic product this year and a 9.3% unemployment rate at year's end. On Wall Street, major indices such as the S&P 500 and Dow Jones Industrial Average were negative, while the dollar slumped to fresh three-month lows against other major currencies as investors. Large stimulus measures tend to support gold, which is often considered a hedge against inflation and currency debasement.
Goldman Sachs expects gold to reach $1,800 per ounce on a 12-month basis and the tail risk of above-target inflation as a potential driver for prices to climb beyond $2,000.
"Macro uncertainty, lower interest rates and accommodative central banks should remain long-term supports (for gold)," ANZ analysts wrote in a note. As the pandemic shows no signs of slowing down, so will uncertainty and that along with rising trade tensions should keep strong safe-haven demand for gold, ANZ analysts said.
Gold rose on Friday as fears over the resurgence of coronavirus infections and a grim economic outlook by the U.S. Federal Reserve boosted demand for bullion, leading the metal towards its biggest weekly gain since early-April. Fed policymakers projected the U.S. economy to shrink 6.5% in 2020, while data showed that Britain's economy shrank by 20.4% in April.
"One of the reasons has been the statement form the FOMC and the testimony of the (Fed Chair) Jerome Powell, painting a darker picture of the U.S. economy," said Quantitative Commodity Research analyst Peter Fertig. Also, "there is talk about a second wave especially after cases of new infections of the virus have risen again in some countries. A warning which many people ignored."
"Despite the tentative stock market rebound this morning, we're seeing gold prices climb because there's still steady safe-haven demand by institutional traders," said Edward Moya, senior market analyst at broker OANDA.
A recent spike in COVID-19 cases in about a dozen U.S. states partially reflects increased testing, but many of those states are also seeing rising hospitalizations.
"This is not a second wave. This is just the virus working its way throughout the country and you're going to see that derail a lot of the reopening plans across the country, which means slower economic activity - that should support gold prices," Moya added.
Speaking on COVID, guys, these worries are not in vain. Indeed, as communication among protesters increased, the new cases start to rise. Besides, India reported its biggest single-day jump in coronavirus cases on Saturday, adding 11,458 confirmed infections and taking the its total count to more than 300,000, according to data from the federal health ministry.
Then, a Beijing district official said on Saturday the district was in “wartime emergency mode” following a spike in novel coronavirus cases centered around a major wholesale market there. Chu Junwei, an official of Beijing’s Fengtai district, said at a briefing that throat swabs from 45 people, out of 517 tested at the district’s Xinfadi market, had tested positive for the new coronavirus. Beijing will suspend sports events and inter-provincial tourism, effective immediately, a city spokesman said at the same briefing. The spokesman said all six confirmed coronavirus patients in Beijing on Friday had visited the Xinfadi market.
But taking a wider look at restrictions relief, we have not equal spread of virus on continents. As developed countries and Eurasia are mostly passed the plateau, Latin America, Mexico, Africa are standing in the most furious stage. This is big risk factors. In modern world migration is very active and once bordered will be opened - virus starts spreading again despite all controlling measures in airports, seaports and rail stations etc.
On a foreign affairs side, US China relationship stands far from optimal. As we've said yesterday, in FX research, the Trump administration has criticised the Chinese government for not being transparent about the virus at the onset of the pandemic. Beijing has forcefully pushed back against those claims, and has exacerbated friction by moving forward with a controversial security law that many think would challenge Hong Kong’s autonomy. All told, relations between the world’s two superpowers have deteriorated, leaving big questions around January’s Phase One trade deal. With the Chinese economy weak, targets signed as part of that agreement that were previously exceedingly ambitious now appear almost certain to be missed. Indeed, a small increase in gross trade flows at the beginning of the year has partially unwound. And the economic relationship between the US and China appears more likely to shrink than grow, irrespective of who is in the White House next year. There are reports that the UK, too, wishes to reduce its reliance on Chinese imports. Whether this decoupling spreads to other European partners, particularly the EU remains a big unknown in the years ahead.
U.S. Secretary of State Mike Pompeo will meet China’s top diplomat Yang Jiechi in Hawaii, trying to ease tensions between the world’s two largest economies over various issues, according to media reports. Pompeo was planning the trip “quietly” and the arrangements were not yet finalized, Politico said. Pompeo has been vocal in criticizing China on a range of issues from the origins of the coronavirus pandemic to its Hong Kong policy to the treatment of its ethnic and religious minorities, The U.S. State Department and the Chinese embassy in Washington did not immediately respond to requests for comment. Hong Kong’s South China Morning Post newspaper cited an unidentified source as saying that Yang, a state councilor and member of the Communist Party Politburo, will represent the Chinese side for the meeting. Relations between the countries have deteriorated in recent months, and U.S. President Donald Trump has said he could even sever relations.
Pompeo said last month that China could have prevented the deaths of hundreds of thousands of people around the world by being more transparent about the coronavirus and accused it of refusing to share information. He also said Chinese plans to impose national security laws on Hong Kong would be the “death knell” for the former British colony’s autonomy.
Political situation also stands tough in US. While few months ago D. Trump was ahead of J. Biden in President's rally, now it stands behind him. Everybody forgets fast all positive achievements of US economy during D. Trump term, accusing him in anemic struggle against pandemic, weak external policy, loosing of the control inside the country making possible wide unrest in US.
In the early stages of the crisis, most leaders around the world received a boost in popularity. This ‘rally around the flag’ effect appears to be waning in most places, with some notable exceptions including Germany and South Korea. Both countries have had world-leading COVID-19 responses. One leader who did not receive any such bump is the US president Donald Trump. Indeed, a series of polls shows him trailing the Democratic nominee Joe Biden nationally by double digits while others show him behind in key swing states including Florida, Michigan and Pennsylvania. Despite a polling deficit, the betting markets had continued to price the incumbent as more likely to win November’s race for the White House. That has changed in recent days, and Joe Biden is now marginally favourite to win. There are still five months to go, and so it is too early to have strong conviction. But for now, Biden is the frontrunner.
The June 11 equity selloff brought the spotlight back onto the Cboe Volatility Index or VIX -- Wall Street's "fear gauge". It pared a weeks-long drift lower to rise above 40, its highest close since April 23, amid renewed fears for U.S. growth and the coronavirus trajectory.
A raft of U.S. data due in coming days might allay some concerns if they reveal an economy on the mend. April retail sales plunged a record 16.4% but hopefully that was the nadir. Industrial production and housing starts are the other anticipated data points.
The VIX could react, however, if infections rise further. Also, with U.S. presidential election campaigning getting underway, VIX futures are starting to capture political risks — there’s a visible bump in volatility expectations closer to the Nov. 3 vote.
CFTC Data
Recent report shows some divergence between speculators and long-term traders. Thus, COT data shows rising of open interest, but decreasing of net long position. It comes due closing of the longs and opening of new shorts. A lot of "locked", spreading positions have appeared. Hedgers also have closed shorts, probably not believing in fast gold appreciation.
As a result, net long position has decreased. It is curious, but net long position is dropping since the world was gripped by epidemic. At the same time, long-term traders keep long positions. Reflecting investor appetite, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, rose to 1,136.22 tonnes on Friday, its highest in over seven years.
Source: cftc.gov
Charting by Investing.com
So, what do we have, shortly... It is total uncertainty with COVID relapse, treatment and timing of restrictions easing. Currently nobody can tell whether we will get 2nd wave, does easing come too early and could they trigger "continuation" of 1st wave and when efficient treatment and Covid pill/vaccine will be invented. Definitely virus is a source of uncertainty and supportive factor for the gold.
Second - political situation. D. Trump is losing control over it. At least it seems now that he is loosing control. D. Trump also is not as simple as it seems. Anyway, it doesn't take a Sherlock Holmes to figure out that Democrats stand beyond the unrest as in US as in EU. In Europe they are preparing background for "new policy" and give a scaring hint, the signal to political elite in EU what will happen if they will not obedient to "new masters". Probably they try to last this game till November. Currently D. Trump cares the burden of accusing in all sins and he critically needs to take some measures to response, some strong breakthrough on any direction - either in foreign affairs or domestically, better if they come both. Because now it is really national disaster - national debt is doubled, pandemic is not under total control, difficult political situation inside the country, no success in foreign policy. As longer this situation will stand as lower D. Trump's rating will be. Let's see, maybe on G7 meeting in September something will happen.
And finally, third - awful fiscal global policy. Markets starts worry on USD devaluation as you can't print 10% of global economy without consequences. Yale's university professor suggests that dollar could lose 35% of its value within 1-2 years. Inflation should appear in consumer prices within 8-12 months, when first it appears in commodities then comes to companies' expenses and finally in prices or lack of some goods. Gold prices could be artificially controlled using futures market as well.
Thus, these factors, at least, do not suggest reversal on the gold market and change in long-term sentiment.
Technicals
Monthly
Only last week, when price has dropped below the top again it was seemed that this is the end, and gold is ready for deeper retracement. But fundamental factors have given the 2nd breath and price returns back above the doji range.
MACD trend here still stands bullish. Upside targets stand the same - with overbought level around 1800 and no Fib levels above next logical destination is top of 2012 around 1800 area and then 1920 top, which in general agrees with Goldman's targets.
In a case of downside retracement, the bottom of the doji is strong support area of YPP and K-area, accompanied by monthly oversold. But, I hope that it it won't run to that. More probable is reaching of some strong support areas inside the doji range.
Market can't stay in "Indecision" condition too long. It critically needs upside continuation to bring bullish momentum as more traders will step in as soon as price will break 1750 resistance area. And current background is friendly for this challenge.
Weekly
Last week we talked on 1645 support area but situation has changed on Wed, due Fed statement and gold turns up again. Formally, trend is bearish here, but price accurately keeps pivots, staying outside of the range of big sell-off in Feb, coiling around its top and doesn't drop below MPS1. This is potentially bullish sign as Pivot support usually holds retracement on long-term bull trend.
Daily
Friday session was inside one and market still stands at crucial point. As we've said, currently we should get either H&S pattern and retracement to 1645, or H&S failure and upside continuation. In recent few days situation gradually was changing as gold shows stronger upside action that is not typical for H&S pattern. Here, on the top of the right arm, bears should take control over the market that we do not see yet. As bearish setup looks weak right now, we have to get strong bearish patterns on intraday charts, to make decision on short entry. Otherwise upside breakout will follow:
Intraday
On intraday charts we see few possible scenarios how market could follow higher. Beyond immediate upside breakout we could get reversed H&S pattern, if gold will show retracement to 1700 area where right arm could be formed. To prove bearish context market probably has to drop below 1690 area, erasing background for upside continuation. With such fundamental background and fast upside action during the week, it is psychologically difficult to consider short entry, especially when we do not have clear bearish patterns on intraday charts. The only pattern that bears could rely on is daily H&S and blindly sell with stops above 4H XOP. But this journey cares significant risk and could be costly:
This week gold doesn't have a lot of drivers. In fact, market was watching for the Fed mostly as they had have to clarify the look on US economy perspective and announce measures to support it. Things that traders heard are good enough to support market. It has happened not immediately but after 1-2 days, when investors were able to think what J. Powell said. This has led to fizzle of stock rally and supported gold.
Additionally we've got UK GDP data that was like a cold shower to the markets. The specific of UK is monthly GDP. UK is the only country that publishes monthly data. And this is great source as we could see what is going on in economy faster. 20% drop in GDP gives the hint and warning that IIQ US GDP numbers hardly will be good and things are only going to get worse.
Global unrest, political crisis as inside US as in foreign affairs, especially in China direction also keep situation tough. May be all these factors are not enough to trigger strong rally, but they are enough to keep gold around the top and even gradually push it higher from time to time.
Gold rose nearly 1% to a one-week high on Wednesday after the U.S. Federal Reserve held onto its pledge to ease the economic pain from the coronavirus pandemic,
boosting bullion's safe-haven appeal.
"(Gold) hit daily high following the FOMC statement, which painted a pretty dour picture for the U.S. economy, although not unexpected," said Kitco Metals senior analyst Jim Wyckoff. "We didn't see any good news coming out of that FOMC statement and we did see that the interest rates are going to remain at the same levels, which are very low, through 2022 - and that's probably a little friendly for the gold market too."
The Fed repeated its promise of continued extraordinary support for the economy as policymakers projected a 6.5% decline in gross domestic product this year and a 9.3% unemployment rate at year's end. On Wall Street, major indices such as the S&P 500 and Dow Jones Industrial Average were negative, while the dollar slumped to fresh three-month lows against other major currencies as investors. Large stimulus measures tend to support gold, which is often considered a hedge against inflation and currency debasement.
Goldman Sachs expects gold to reach $1,800 per ounce on a 12-month basis and the tail risk of above-target inflation as a potential driver for prices to climb beyond $2,000.
"Macro uncertainty, lower interest rates and accommodative central banks should remain long-term supports (for gold)," ANZ analysts wrote in a note. As the pandemic shows no signs of slowing down, so will uncertainty and that along with rising trade tensions should keep strong safe-haven demand for gold, ANZ analysts said.
Gold rose on Friday as fears over the resurgence of coronavirus infections and a grim economic outlook by the U.S. Federal Reserve boosted demand for bullion, leading the metal towards its biggest weekly gain since early-April. Fed policymakers projected the U.S. economy to shrink 6.5% in 2020, while data showed that Britain's economy shrank by 20.4% in April.
"One of the reasons has been the statement form the FOMC and the testimony of the (Fed Chair) Jerome Powell, painting a darker picture of the U.S. economy," said Quantitative Commodity Research analyst Peter Fertig. Also, "there is talk about a second wave especially after cases of new infections of the virus have risen again in some countries. A warning which many people ignored."
"Despite the tentative stock market rebound this morning, we're seeing gold prices climb because there's still steady safe-haven demand by institutional traders," said Edward Moya, senior market analyst at broker OANDA.
A recent spike in COVID-19 cases in about a dozen U.S. states partially reflects increased testing, but many of those states are also seeing rising hospitalizations.
"This is not a second wave. This is just the virus working its way throughout the country and you're going to see that derail a lot of the reopening plans across the country, which means slower economic activity - that should support gold prices," Moya added.
Speaking on COVID, guys, these worries are not in vain. Indeed, as communication among protesters increased, the new cases start to rise. Besides, India reported its biggest single-day jump in coronavirus cases on Saturday, adding 11,458 confirmed infections and taking the its total count to more than 300,000, according to data from the federal health ministry.
Then, a Beijing district official said on Saturday the district was in “wartime emergency mode” following a spike in novel coronavirus cases centered around a major wholesale market there. Chu Junwei, an official of Beijing’s Fengtai district, said at a briefing that throat swabs from 45 people, out of 517 tested at the district’s Xinfadi market, had tested positive for the new coronavirus. Beijing will suspend sports events and inter-provincial tourism, effective immediately, a city spokesman said at the same briefing. The spokesman said all six confirmed coronavirus patients in Beijing on Friday had visited the Xinfadi market.
But taking a wider look at restrictions relief, we have not equal spread of virus on continents. As developed countries and Eurasia are mostly passed the plateau, Latin America, Mexico, Africa are standing in the most furious stage. This is big risk factors. In modern world migration is very active and once bordered will be opened - virus starts spreading again despite all controlling measures in airports, seaports and rail stations etc.
On a foreign affairs side, US China relationship stands far from optimal. As we've said yesterday, in FX research, the Trump administration has criticised the Chinese government for not being transparent about the virus at the onset of the pandemic. Beijing has forcefully pushed back against those claims, and has exacerbated friction by moving forward with a controversial security law that many think would challenge Hong Kong’s autonomy. All told, relations between the world’s two superpowers have deteriorated, leaving big questions around January’s Phase One trade deal. With the Chinese economy weak, targets signed as part of that agreement that were previously exceedingly ambitious now appear almost certain to be missed. Indeed, a small increase in gross trade flows at the beginning of the year has partially unwound. And the economic relationship between the US and China appears more likely to shrink than grow, irrespective of who is in the White House next year. There are reports that the UK, too, wishes to reduce its reliance on Chinese imports. Whether this decoupling spreads to other European partners, particularly the EU remains a big unknown in the years ahead.
U.S. Secretary of State Mike Pompeo will meet China’s top diplomat Yang Jiechi in Hawaii, trying to ease tensions between the world’s two largest economies over various issues, according to media reports. Pompeo was planning the trip “quietly” and the arrangements were not yet finalized, Politico said. Pompeo has been vocal in criticizing China on a range of issues from the origins of the coronavirus pandemic to its Hong Kong policy to the treatment of its ethnic and religious minorities, The U.S. State Department and the Chinese embassy in Washington did not immediately respond to requests for comment. Hong Kong’s South China Morning Post newspaper cited an unidentified source as saying that Yang, a state councilor and member of the Communist Party Politburo, will represent the Chinese side for the meeting. Relations between the countries have deteriorated in recent months, and U.S. President Donald Trump has said he could even sever relations.
Pompeo said last month that China could have prevented the deaths of hundreds of thousands of people around the world by being more transparent about the coronavirus and accused it of refusing to share information. He also said Chinese plans to impose national security laws on Hong Kong would be the “death knell” for the former British colony’s autonomy.
Political situation also stands tough in US. While few months ago D. Trump was ahead of J. Biden in President's rally, now it stands behind him. Everybody forgets fast all positive achievements of US economy during D. Trump term, accusing him in anemic struggle against pandemic, weak external policy, loosing of the control inside the country making possible wide unrest in US.
In the early stages of the crisis, most leaders around the world received a boost in popularity. This ‘rally around the flag’ effect appears to be waning in most places, with some notable exceptions including Germany and South Korea. Both countries have had world-leading COVID-19 responses. One leader who did not receive any such bump is the US president Donald Trump. Indeed, a series of polls shows him trailing the Democratic nominee Joe Biden nationally by double digits while others show him behind in key swing states including Florida, Michigan and Pennsylvania. Despite a polling deficit, the betting markets had continued to price the incumbent as more likely to win November’s race for the White House. That has changed in recent days, and Joe Biden is now marginally favourite to win. There are still five months to go, and so it is too early to have strong conviction. But for now, Biden is the frontrunner.
The June 11 equity selloff brought the spotlight back onto the Cboe Volatility Index or VIX -- Wall Street's "fear gauge". It pared a weeks-long drift lower to rise above 40, its highest close since April 23, amid renewed fears for U.S. growth and the coronavirus trajectory.
A raft of U.S. data due in coming days might allay some concerns if they reveal an economy on the mend. April retail sales plunged a record 16.4% but hopefully that was the nadir. Industrial production and housing starts are the other anticipated data points.
The VIX could react, however, if infections rise further. Also, with U.S. presidential election campaigning getting underway, VIX futures are starting to capture political risks — there’s a visible bump in volatility expectations closer to the Nov. 3 vote.
CFTC Data
Recent report shows some divergence between speculators and long-term traders. Thus, COT data shows rising of open interest, but decreasing of net long position. It comes due closing of the longs and opening of new shorts. A lot of "locked", spreading positions have appeared. Hedgers also have closed shorts, probably not believing in fast gold appreciation.
As a result, net long position has decreased. It is curious, but net long position is dropping since the world was gripped by epidemic. At the same time, long-term traders keep long positions. Reflecting investor appetite, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, rose to 1,136.22 tonnes on Friday, its highest in over seven years.
Source: cftc.gov
Charting by Investing.com
So, what do we have, shortly... It is total uncertainty with COVID relapse, treatment and timing of restrictions easing. Currently nobody can tell whether we will get 2nd wave, does easing come too early and could they trigger "continuation" of 1st wave and when efficient treatment and Covid pill/vaccine will be invented. Definitely virus is a source of uncertainty and supportive factor for the gold.
Second - political situation. D. Trump is losing control over it. At least it seems now that he is loosing control. D. Trump also is not as simple as it seems. Anyway, it doesn't take a Sherlock Holmes to figure out that Democrats stand beyond the unrest as in US as in EU. In Europe they are preparing background for "new policy" and give a scaring hint, the signal to political elite in EU what will happen if they will not obedient to "new masters". Probably they try to last this game till November. Currently D. Trump cares the burden of accusing in all sins and he critically needs to take some measures to response, some strong breakthrough on any direction - either in foreign affairs or domestically, better if they come both. Because now it is really national disaster - national debt is doubled, pandemic is not under total control, difficult political situation inside the country, no success in foreign policy. As longer this situation will stand as lower D. Trump's rating will be. Let's see, maybe on G7 meeting in September something will happen.
And finally, third - awful fiscal global policy. Markets starts worry on USD devaluation as you can't print 10% of global economy without consequences. Yale's university professor suggests that dollar could lose 35% of its value within 1-2 years. Inflation should appear in consumer prices within 8-12 months, when first it appears in commodities then comes to companies' expenses and finally in prices or lack of some goods. Gold prices could be artificially controlled using futures market as well.
Thus, these factors, at least, do not suggest reversal on the gold market and change in long-term sentiment.
Technicals
Monthly
Only last week, when price has dropped below the top again it was seemed that this is the end, and gold is ready for deeper retracement. But fundamental factors have given the 2nd breath and price returns back above the doji range.
MACD trend here still stands bullish. Upside targets stand the same - with overbought level around 1800 and no Fib levels above next logical destination is top of 2012 around 1800 area and then 1920 top, which in general agrees with Goldman's targets.
In a case of downside retracement, the bottom of the doji is strong support area of YPP and K-area, accompanied by monthly oversold. But, I hope that it it won't run to that. More probable is reaching of some strong support areas inside the doji range.
Market can't stay in "Indecision" condition too long. It critically needs upside continuation to bring bullish momentum as more traders will step in as soon as price will break 1750 resistance area. And current background is friendly for this challenge.
Weekly
Last week we talked on 1645 support area but situation has changed on Wed, due Fed statement and gold turns up again. Formally, trend is bearish here, but price accurately keeps pivots, staying outside of the range of big sell-off in Feb, coiling around its top and doesn't drop below MPS1. This is potentially bullish sign as Pivot support usually holds retracement on long-term bull trend.
Daily
Friday session was inside one and market still stands at crucial point. As we've said, currently we should get either H&S pattern and retracement to 1645, or H&S failure and upside continuation. In recent few days situation gradually was changing as gold shows stronger upside action that is not typical for H&S pattern. Here, on the top of the right arm, bears should take control over the market that we do not see yet. As bearish setup looks weak right now, we have to get strong bearish patterns on intraday charts, to make decision on short entry. Otherwise upside breakout will follow:
Intraday
On intraday charts we see few possible scenarios how market could follow higher. Beyond immediate upside breakout we could get reversed H&S pattern, if gold will show retracement to 1700 area where right arm could be formed. To prove bearish context market probably has to drop below 1690 area, erasing background for upside continuation. With such fundamental background and fast upside action during the week, it is psychologically difficult to consider short entry, especially when we do not have clear bearish patterns on intraday charts. The only pattern that bears could rely on is daily H&S and blindly sell with stops above 4H XOP. But this journey cares significant risk and could be costly:
