Sive Morten
Special Consultant to the FPA
- Messages
- 18,639
Fundamentals
So, yesterday we've taken a look at financial component of our fundamental view. Now we know in details Fed problems and possible scenarios that they could choose. Both of them will be supportive to the gold. Now we take a look at some specific suggests on commodities markets - gold market overview, some political issues and how competition on hydrocarbon markets could impact on medium-term perspectives of gold market.
Market overview
Gold fell after high producer prices exceeded market expectations, reinforcing concerns of the Federal Reserve’s aggressive policy stance to combat stubbornly high inflation. Prices paid to US producers surged in May, underscoring persistent inflationary pressures across the economy, figures showed Tuesday. That added to data released last week showing consumer inflation unexpectedly accelerated to its highest level in four decades.
The Fed hikes rate by 75 basis points. That damps demand for precious metals, which bear no interest, at least theoretically. But the major driver for the gold is real rates, not nominal rates. Currently a kind of real rate stands at 0.5, but this is fake rate. It's based on 5-year forward inflation that is determined by futures prices and derivatives, which are highly manipulated by Treasury dealers and strongly related to Fed forecasts of inflation, which we have shown yesterday that it is junk.
Real interest rates now stand at "-6%", despite recent Fed rate change, because as it is mentioned above - CPI also have increased recently. Here is real Fed Fund rate (white) and real 10-year yield (green):
But markets see a bit different chart, that is based on 5-year forward inflation rate.
Still, there some underlying support for gold as a haven asset as recession risks loom on the back of aggressive monetary-policy tightening.
Bloomberg - Wealth Shock Delays Gold Bull Market as Goldman Revises Targets
Gold has been hit by a large “wealth shock” on the back of a weaker yuan following the economic impact of the lockdowns in China, the world’s largest consumer, according to Goldman Sachs Group Inc., which revised its price targets. Still, the worst may be over, it added.
The ongoing food and energy crisis and rising US rates have also seen other emerging market currencies under pressure, analysts including Mikhail Sprogis said in a June 14 note. This negative wealth effect for bullion has been further compounded by liquidation of short-term-oriented futures and exchange-traded fund positions, which are sensitive to trends in the dollar, they said.
Goldman economists expect two 75 basis-point hikes over the summer, which could sap US growth, add to fears of recession risks and boost gold investment demand.
The bank kept its upside outlook for the gold price but delayed the path by revising its three - and six-month targets to $2,100 and $2,300, from $2,300 and $2,500, respectively. The 12-month target of $2,500 was unchanged.
Gold hit a one-month trough of $1,824.63 post the inflation data, but rebounded strongly as economic concerns took centre stage. That volatility has extended into Monday with bullion beating a sharp retreat from a one-month high hit during the Asian session.
How LNG shortfall impacts the gold market
Of course, the impact is not direct. Mostly, the shortfall of gas impacts the economy, making recession (although we are not agree that this is recession. Recession is a cyclical issue, while we have structural crisis) more probable, coming sooner, and lasting longer. Our strategy is based on suggestion that Fed and ECB push the backpedal under the first signs of recession and start the printing machine again. Actually, we already see that ECB does it.
Now, when you get clear details on what is going on with LNG supply to the Europe - you understand what I'm talking about. Just surfing the news and statistics - it is hard to get the core, as it is too sophisticated. We provide you the transcription of gas situation. We already have mentioned last time the Freeport plant accident. Initially it was suggested that it repairs work within three weeks. Now the recovery will last until September:
Freeport LNG declares force majeure on LNG exports until September: Bloomberg
The Freeport LNG plant is one of the largest in the US, producing 20% of all export LNG, which is 22-23 bln c.m. per year and delivers 70% of its total production to EU, which is around 16 bln c.m. per year.
In general, Europe consumes around 400-500 bln. c.m. per year, according to Statista:
Let's go further, just using a simple maths.
The average share of total US LNG exports to Europe stands 13% (2018), 36% (2019 and 2020) , 33% (2021) , and almost 72% in 2022! So the US exports 2/3 of all LNG to Europe. This is approximately 80 bln c.m. per year, approximately 18-20% of total needs (burning its own reserves as we discussed it last week).
Now, because of Freeport accident, Europe is losing about 4-5 billion cubic meters of gas from the United States – that's for sure. And there is no way to compensate this amount elsewhere - everything is working at the limit.
That's what about US. The next is Gazprom, and here is where the fun begins. Nord Stream II is not functioning by political reasons. The pumping with Nord Stream I is reduced for 40%, because Siemens can't supply necessary parts to serve pumping turbines, as they are produced in Canada and now are under anti-Russian sanctions. According to Nord Stream I agreement, Siemens is a counterpart who is responsible for all servicing works on the pipe.
Approximately month ago Ukraine has blocked one of the pipe ways of gas supply to Europe, because it passes on Lugansk region territory, but it is not broken and could be fully operational.
According to Spydell Finance, the real numbers for daily pumping are:
It was167-170 million cubic meters were pumped through the Nord Stream I previously- now it is 100 million cubic meters
It was about 100 million cubic meters were pumped through the GTS of Ukraine, now it is 40 million cubic meters
It was 40 million cubic meters were exported through the Turkish Stream, now 20 million cubic meters
It was through Yamal-Europe in the best years they pumped 100 million cubic meters, recently 35 million cubic meters, and now exactly zero!
Last year, Gazprom's average supply to Europe was for 3.1 billion cubic meters per week. From May 11 to June 10, 2022, supply fells by 60% in 2022 relative to 2021.
Now we could calculate average daily supply, which stands around 1.1 billion cubic meters per week (100+40+20+0 million cubic meters per day) is three times lower than the not-so-successful 2021 and losses of up to 2 billion cubic meters per week.
Thus, Europe now is losing up to 1.3 billion cubic meters per month of LNG shortfalls and up to 8 billion cubic meters from Gazprom, which exceeds ~ 110 billion cubic meters per annum, i.e. 25% of annual consumption.
It seems that the plan to fill gas storage facilities for the winter period is closed, guys. Let's bring more sanctions - good and variable, although I do not understand, why sanctions are called "anti-Russian"... anyway, now you easily could imagine what tough winter comes in EU and it is big choice yet to be made - either to warm the houses or support the industry. I'm not talking about the food, migration, unrests etc. etc. With so hard collapse of EU economy, gold obviously should get more support.
But this is not the end of the story, we also have new -
Geopolitical component
Lithuanian authorities said a ban on the transit through their territory to the Russian exclave of Kaliningrad of goods that are subject to EU sanctions was to take effect from Saturday. News of the ban came on Friday, through a video posted by the region's governor Anton Alikhanov. The EU sanctions list notably includes coal, metals, construction materials and advanced technology, and Alikhanov said the ban would cover around 50% of the items that Kaliningrad imports.
Sandwiched between EU and NATO members Poland and Lithuania, Kaliningrad receives supplies from Russia via rail and gas pipelines through Lithuania.
When Special Military Operation (SMO) just has started, we, at FPA have made a suggestion that the conflict could become wider within few months, because involving East European countries easily could be build-in in the strategy of their masters. Besides, they were paid for it. At first glance what's the problem - yes, the ban, land blockade for some goods, nothing special. Besides, Russia could transit goods by sea. The problem is the Agreement between Russia and Baltic countries and their entry in EU. According to this agreement they could be members of EU only if not impede of free link of Russian territories. Now they create the precedent of breaking the core agreement. Of course hardly any significant consequences follow immediately, but formally Russia has legal right to denounce it, which automatically will lead to exclusion Lithuania off EU. Geopolitical situation is becoming hotter, guys, everywhere - Baltic countries, Poland, Moldova etc.
Next week of PMI's reports
Next week we mostly will be watching for PMI numbers. Advance readings of June purchasing managers' indexes (PMIs), due on Thursday, will make for interesting reading, showing how businesses coped with this month's surge in the cost of capital and a souring in consumer sentiment.
So far this year, European and U.S. PMIs have held above the 50 mark, while Chinese zero-COVID policies dragged Asia into contraction. Now though, European and U.S. PMIs are going the other way, as higher borrowing costs bite. Economists polled by Reuters expect June PMIs to show further modest weakening.
PMI watchers might choose to train their sight on Asia, where readings nudged higher in May and may do so again this month, as swathes of China emerged from lockdowns and authorities stepped up investment. And Chinese PMIs' return to expansionary territory would be a bonus for the global economy.
But it seems that China is becoming among of first countries, that is falling in recession. The favorite real estate market is dropping, and sentiment stands low, while households consumption is worse in decade:
Conclusion:
Based on the data that we've got currently and from report yesterday - we do not see any reasons to change our plan, guys. Crisis is entering the hot stage, it is barely could be seen yet, but first signs are impossible to hide already. We could see changes everywhere, stock market problems are evident already, yesterday we've shared with you some data of jobs market that is deteriorating. This is one of our parameters - two months ago we said that we expect rising of unemployment within 6-8 months three times, to ~8-9%. Bitcoin is already under $20K level - run out from risky assets continues. Gold is partially hurts as well, because investors vitally needs the liquidity and have to contract positions wherever they could. This is the reason why we talked about gold market weakness until the autumn, and through the summertime.
Fed and ECB policy will not bring any relief, because they have to act drastically, strong and decisively. And I would say - radically. But it is impossible in current environment. People, markets must be prepared to this and political establishment has to be united to struggle this challenge. But none of these conditions are met. Read about this in our FX report.
Finally, situation on commodities markets are going with the bad scenario. The degree of social unrest, economy problems keep going higher, as we come closer to the winter. If we bring here the geopolitical component and US political struggle in November - we get absolutely outstanding hot mix of events that should be supportive to the gold market.
Thus, we see no reasons to step out from our trading plan because partially it is executed already, as we start to get worse statistics. Gold is going with the downside trend as we've suggested, that should give us good investing levels to buy it later. The only moment that we need to wait is capital flows back from other assets that are becoming more and more toxic. And the major one is the US and EU bonds.
Technicals
Monthly
Market supports our hopes on standing above YPP, that is the sign of bullish sentiment. It probably could the miracle, if we would get bullish grabber last month. Now, trend turns bearish, but market shows nice bounce from YPP. If trend turns bullish in June - this could be very strong sign of reversal.
Generally speaking - gold shows great performance with the negative background that we have - just compare it with other markets behavior. Definitely it should be treated as a pause in long-term bullish trend, rather than reversal down.
Weekly
Weekly trend stands bearish, market is coming higher with big efforts, so overall performance starts to look like wide flag consolidation, which is potentially bearish. At the same time, market resists well to any solid sell-off. The example of the last week shows that gold rebound fast after initial reaction on Fed action. It is interesting how long we should wait when investors disappoint with other markets.
Daily
The most tricky moment, guys, stands on the daily chart. If you take a look, say, at some Retail Broker chart, such as FX Choice in my case - you'll see the bullish grabber. But in reality we have the opposite pattern. This is great example on how we have to check arguable patterns - always look at futures, that provides real closing price and they have pit session as a part of the total daily session:
Intraday
With weekly bearish trend and bearish grabber on daily - picture looks absolutely different, compares to FX Choice charts. It suggests that we should search chances to go short instead. At least, until daily grabber is valid, because this is, actually, the only clear pattern that we have now.
But, you could ask - what we should do with the bullish setup that we have? Our AB-CD retracement is done accurately, and even bullish grabber that we would like to get - stands in place. This is bullish setup!
First is, let's get it with the grabber's target. This pattern doesn't suggest that price have to go above the top, but only above the minor lows in the circle. For bears it means that before daily grabber starts to work - gold could climb closer to its invalidation point. But of course hazard of daily pattern's failure exists.
Taking it together - bullsh could try to take position with the grabber on 4H chart and move stops to breakeven as soon as possible. Also bulls could consider using Stop "Buy" order above $1860, when daily grabber fails, and bearish context will be broken.
Bears, in turn, could wait when 4H grabber works - this gives optimal risk/reward ratio and let to take position near the invalidation point, providing very small risk. Besides, if upside action will be fast - setup could be cancelled. But for now the combination exists, when both grabber could work.
So, yesterday we've taken a look at financial component of our fundamental view. Now we know in details Fed problems and possible scenarios that they could choose. Both of them will be supportive to the gold. Now we take a look at some specific suggests on commodities markets - gold market overview, some political issues and how competition on hydrocarbon markets could impact on medium-term perspectives of gold market.
Market overview
Gold fell after high producer prices exceeded market expectations, reinforcing concerns of the Federal Reserve’s aggressive policy stance to combat stubbornly high inflation. Prices paid to US producers surged in May, underscoring persistent inflationary pressures across the economy, figures showed Tuesday. That added to data released last week showing consumer inflation unexpectedly accelerated to its highest level in four decades.
The Fed hikes rate by 75 basis points. That damps demand for precious metals, which bear no interest, at least theoretically. But the major driver for the gold is real rates, not nominal rates. Currently a kind of real rate stands at 0.5, but this is fake rate. It's based on 5-year forward inflation that is determined by futures prices and derivatives, which are highly manipulated by Treasury dealers and strongly related to Fed forecasts of inflation, which we have shown yesterday that it is junk.
Real interest rates now stand at "-6%", despite recent Fed rate change, because as it is mentioned above - CPI also have increased recently. Here is real Fed Fund rate (white) and real 10-year yield (green):
But markets see a bit different chart, that is based on 5-year forward inflation rate.
Still, there some underlying support for gold as a haven asset as recession risks loom on the back of aggressive monetary-policy tightening.
Bloomberg - Wealth Shock Delays Gold Bull Market as Goldman Revises Targets
Gold has been hit by a large “wealth shock” on the back of a weaker yuan following the economic impact of the lockdowns in China, the world’s largest consumer, according to Goldman Sachs Group Inc., which revised its price targets. Still, the worst may be over, it added.
The ongoing food and energy crisis and rising US rates have also seen other emerging market currencies under pressure, analysts including Mikhail Sprogis said in a June 14 note. This negative wealth effect for bullion has been further compounded by liquidation of short-term-oriented futures and exchange-traded fund positions, which are sensitive to trends in the dollar, they said.
Goldman economists expect two 75 basis-point hikes over the summer, which could sap US growth, add to fears of recession risks and boost gold investment demand.
The bank kept its upside outlook for the gold price but delayed the path by revising its three - and six-month targets to $2,100 and $2,300, from $2,300 and $2,500, respectively. The 12-month target of $2,500 was unchanged.
Gold hit a one-month trough of $1,824.63 post the inflation data, but rebounded strongly as economic concerns took centre stage. That volatility has extended into Monday with bullion beating a sharp retreat from a one-month high hit during the Asian session.
How LNG shortfall impacts the gold market
Of course, the impact is not direct. Mostly, the shortfall of gas impacts the economy, making recession (although we are not agree that this is recession. Recession is a cyclical issue, while we have structural crisis) more probable, coming sooner, and lasting longer. Our strategy is based on suggestion that Fed and ECB push the backpedal under the first signs of recession and start the printing machine again. Actually, we already see that ECB does it.
Now, when you get clear details on what is going on with LNG supply to the Europe - you understand what I'm talking about. Just surfing the news and statistics - it is hard to get the core, as it is too sophisticated. We provide you the transcription of gas situation. We already have mentioned last time the Freeport plant accident. Initially it was suggested that it repairs work within three weeks. Now the recovery will last until September:
Freeport LNG declares force majeure on LNG exports until September: Bloomberg
The Freeport LNG plant is one of the largest in the US, producing 20% of all export LNG, which is 22-23 bln c.m. per year and delivers 70% of its total production to EU, which is around 16 bln c.m. per year.
In general, Europe consumes around 400-500 bln. c.m. per year, according to Statista:
Let's go further, just using a simple maths.
The average share of total US LNG exports to Europe stands 13% (2018), 36% (2019 and 2020) , 33% (2021) , and almost 72% in 2022! So the US exports 2/3 of all LNG to Europe. This is approximately 80 bln c.m. per year, approximately 18-20% of total needs (burning its own reserves as we discussed it last week).
Now, because of Freeport accident, Europe is losing about 4-5 billion cubic meters of gas from the United States – that's for sure. And there is no way to compensate this amount elsewhere - everything is working at the limit.
That's what about US. The next is Gazprom, and here is where the fun begins. Nord Stream II is not functioning by political reasons. The pumping with Nord Stream I is reduced for 40%, because Siemens can't supply necessary parts to serve pumping turbines, as they are produced in Canada and now are under anti-Russian sanctions. According to Nord Stream I agreement, Siemens is a counterpart who is responsible for all servicing works on the pipe.
Approximately month ago Ukraine has blocked one of the pipe ways of gas supply to Europe, because it passes on Lugansk region territory, but it is not broken and could be fully operational.
According to Spydell Finance, the real numbers for daily pumping are:
It was167-170 million cubic meters were pumped through the Nord Stream I previously- now it is 100 million cubic meters It was about 100 million cubic meters were pumped through the GTS of Ukraine, now it is 40 million cubic meters It was 40 million cubic meters were exported through the Turkish Stream, now 20 million cubic meters It was through Yamal-Europe in the best years they pumped 100 million cubic meters, recently 35 million cubic meters, and now exactly zero!Last year, Gazprom's average supply to Europe was for 3.1 billion cubic meters per week. From May 11 to June 10, 2022, supply fells by 60% in 2022 relative to 2021.
Now we could calculate average daily supply, which stands around 1.1 billion cubic meters per week (100+40+20+0 million cubic meters per day) is three times lower than the not-so-successful 2021 and losses of up to 2 billion cubic meters per week.
Thus, Europe now is losing up to 1.3 billion cubic meters per month of LNG shortfalls and up to 8 billion cubic meters from Gazprom, which exceeds ~ 110 billion cubic meters per annum, i.e. 25% of annual consumption.
It seems that the plan to fill gas storage facilities for the winter period is closed, guys. Let's bring more sanctions - good and variable, although I do not understand, why sanctions are called "anti-Russian"... anyway, now you easily could imagine what tough winter comes in EU and it is big choice yet to be made - either to warm the houses or support the industry. I'm not talking about the food, migration, unrests etc. etc. With so hard collapse of EU economy, gold obviously should get more support.
But this is not the end of the story, we also have new -
Geopolitical component
Lithuanian authorities said a ban on the transit through their territory to the Russian exclave of Kaliningrad of goods that are subject to EU sanctions was to take effect from Saturday. News of the ban came on Friday, through a video posted by the region's governor Anton Alikhanov. The EU sanctions list notably includes coal, metals, construction materials and advanced technology, and Alikhanov said the ban would cover around 50% of the items that Kaliningrad imports.
Sandwiched between EU and NATO members Poland and Lithuania, Kaliningrad receives supplies from Russia via rail and gas pipelines through Lithuania.
When Special Military Operation (SMO) just has started, we, at FPA have made a suggestion that the conflict could become wider within few months, because involving East European countries easily could be build-in in the strategy of their masters. Besides, they were paid for it. At first glance what's the problem - yes, the ban, land blockade for some goods, nothing special. Besides, Russia could transit goods by sea. The problem is the Agreement between Russia and Baltic countries and their entry in EU. According to this agreement they could be members of EU only if not impede of free link of Russian territories. Now they create the precedent of breaking the core agreement. Of course hardly any significant consequences follow immediately, but formally Russia has legal right to denounce it, which automatically will lead to exclusion Lithuania off EU. Geopolitical situation is becoming hotter, guys, everywhere - Baltic countries, Poland, Moldova etc.
Next week of PMI's reports
Next week we mostly will be watching for PMI numbers. Advance readings of June purchasing managers' indexes (PMIs), due on Thursday, will make for interesting reading, showing how businesses coped with this month's surge in the cost of capital and a souring in consumer sentiment.
So far this year, European and U.S. PMIs have held above the 50 mark, while Chinese zero-COVID policies dragged Asia into contraction. Now though, European and U.S. PMIs are going the other way, as higher borrowing costs bite. Economists polled by Reuters expect June PMIs to show further modest weakening.
PMI watchers might choose to train their sight on Asia, where readings nudged higher in May and may do so again this month, as swathes of China emerged from lockdowns and authorities stepped up investment. And Chinese PMIs' return to expansionary territory would be a bonus for the global economy.
But it seems that China is becoming among of first countries, that is falling in recession. The favorite real estate market is dropping, and sentiment stands low, while households consumption is worse in decade:
Conclusion:
Based on the data that we've got currently and from report yesterday - we do not see any reasons to change our plan, guys. Crisis is entering the hot stage, it is barely could be seen yet, but first signs are impossible to hide already. We could see changes everywhere, stock market problems are evident already, yesterday we've shared with you some data of jobs market that is deteriorating. This is one of our parameters - two months ago we said that we expect rising of unemployment within 6-8 months three times, to ~8-9%. Bitcoin is already under $20K level - run out from risky assets continues. Gold is partially hurts as well, because investors vitally needs the liquidity and have to contract positions wherever they could. This is the reason why we talked about gold market weakness until the autumn, and through the summertime.
Fed and ECB policy will not bring any relief, because they have to act drastically, strong and decisively. And I would say - radically. But it is impossible in current environment. People, markets must be prepared to this and political establishment has to be united to struggle this challenge. But none of these conditions are met. Read about this in our FX report.
Finally, situation on commodities markets are going with the bad scenario. The degree of social unrest, economy problems keep going higher, as we come closer to the winter. If we bring here the geopolitical component and US political struggle in November - we get absolutely outstanding hot mix of events that should be supportive to the gold market.
Thus, we see no reasons to step out from our trading plan because partially it is executed already, as we start to get worse statistics. Gold is going with the downside trend as we've suggested, that should give us good investing levels to buy it later. The only moment that we need to wait is capital flows back from other assets that are becoming more and more toxic. And the major one is the US and EU bonds.
Technicals
Monthly
Market supports our hopes on standing above YPP, that is the sign of bullish sentiment. It probably could the miracle, if we would get bullish grabber last month. Now, trend turns bearish, but market shows nice bounce from YPP. If trend turns bullish in June - this could be very strong sign of reversal.
Generally speaking - gold shows great performance with the negative background that we have - just compare it with other markets behavior. Definitely it should be treated as a pause in long-term bullish trend, rather than reversal down.
Weekly
Weekly trend stands bearish, market is coming higher with big efforts, so overall performance starts to look like wide flag consolidation, which is potentially bearish. At the same time, market resists well to any solid sell-off. The example of the last week shows that gold rebound fast after initial reaction on Fed action. It is interesting how long we should wait when investors disappoint with other markets.
Daily
The most tricky moment, guys, stands on the daily chart. If you take a look, say, at some Retail Broker chart, such as FX Choice in my case - you'll see the bullish grabber. But in reality we have the opposite pattern. This is great example on how we have to check arguable patterns - always look at futures, that provides real closing price and they have pit session as a part of the total daily session:
Intraday
With weekly bearish trend and bearish grabber on daily - picture looks absolutely different, compares to FX Choice charts. It suggests that we should search chances to go short instead. At least, until daily grabber is valid, because this is, actually, the only clear pattern that we have now.
But, you could ask - what we should do with the bullish setup that we have? Our AB-CD retracement is done accurately, and even bullish grabber that we would like to get - stands in place. This is bullish setup!
First is, let's get it with the grabber's target. This pattern doesn't suggest that price have to go above the top, but only above the minor lows in the circle. For bears it means that before daily grabber starts to work - gold could climb closer to its invalidation point. But of course hazard of daily pattern's failure exists.
Taking it together - bullsh could try to take position with the grabber on 4H chart and move stops to breakeven as soon as possible. Also bulls could consider using Stop "Buy" order above $1860, when daily grabber fails, and bearish context will be broken.
Bears, in turn, could wait when 4H grabber works - this gives optimal risk/reward ratio and let to take position near the invalidation point, providing very small risk. Besides, if upside action will be fast - setup could be cancelled. But for now the combination exists, when both grabber could work.
