Sive Morten
Special Consultant to the FPA
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Fundamentals
On Gold market we have only two headlines this week - interest rates and Powell's testimony. I would add here another one that has become known yesterday - 1.9 Trln
Biden's pack has been approved that makes impact on the market right on Monday. Interest rally has become negative surprise for all markets but in particular to gold as it has been strongly pressed down. But by few reasons situation could change in the beginning of the week.
Bonds have been bruised by the prospect of a stronger economic recovery and yet greater borrowing as President Joe Biden’s $1.9 trillion stimulus package progresses.
“Yield curves have continued to steepen, as COVID infection rates decline further, reopening plans are discussed and a large U.S. fiscal stimulus package looks likely,” said Christian Keller, Barclays’ head of economics research. This in principle signals a better medium-term growth outlook for the U.S. and beyond, as other core yields curves are moving in the same direction,” he added. “Meanwhile, central banks seem set to look through this year’s inflation increase, keeping the curves’ front end anchored.”
“Real assets are outperforming financial assets big in ‘21 as cyclical, political, secular trends say higher inflation,” the analysts said in a note. “Surging commodities, energy laggards in vogue, materials in secular breakouts.”
One commodity not doing so well is gold, partly due to rising bond yields and partly as investors question if crypto currencies might be a better hedge against inflation.
There are still investors who suggest gold appreciation in long term due inflation and stimulus:
"We are seeing investment flows into gold as market participants grow more anxious about rising real rates that can impact equity valuations," said TD Securities commodity strategist Daniel Ghali, pointing to rising Treasury yields.
"The dollar at the moment is low and that is supporting. Also, the real reason for the gold prices to increase in the longer term is the chances of inflation picking up," Commerzbank analyst Eugen Weinberg said.
Powell told the U.S. Senate Banking Committee that monetary policy still needed to be accommodative with economic recovery "uneven and far from complete". His testimony continues later in the day. He also mentioned that the increase in bond yields was due to higher inflation and growth expectations. Powell in his testimony before the U.S. Senate Banking Committee pushed back on suggestions that loose monetary policy risked unleashing inflation and financial risks in what may be
an emerging economic boom.
"Powell did say that the recent run-up in bond yields was a statement of confidence in the U.S. economy, and that ... could mean the Fed is willing to allow rates to run even higher, which will create a challenge for gold," Saxo Bank analyst Ole Hansen said. For gold to recover again, it needs to be the inflation focus. The focus has faded and has been substituted by the current nervousness about the yields going higher."
Rising yields tend to hurt bullion's appeal as an inflation hedge since they increase the opportunity cost of holding the metal. But Powell's remarks also indicated that "the stimulus trade is unlikely to go away anytime in the next six months", Michael Langford, director at corporate advisory AirGuide said, adding the potential impact of inflation as a result of stimulus measures will be a key upward driver for gold.
More expensive services and industrial goods led a rebound in euro zone inflation in January after months of falling prices, data showed on Tuesday.
COVID-19 vaccine makers told Congress on Tuesday that U.S. supplies should surge in the coming weeks due to manufacturing expansions and new vaccine authorizations.
"Rising bond yields continue to weigh on the gold market. Gold has not found any path to a sustainable recovery even with talks about additional stimulus measures," said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.
“Rising longer dated yields are a primary weighing factor on the precious metals,” DailyFX strategist Margaret Yang said, adding that reflation hopes could push yields even higher. The primary trend for gold is downward biased but some short-term rebound is still possible if the U.S. COVID-19 relief bill is approved by the Congress by Friday,” Yang said, adding the medium-term outlook remained bearish.
Reflecting investor sentiment, holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, fell to their lowest since May 2020 on Wednesday.
“Investor demand for gold has been distracted by moves in other alternative asset classes,” ANZ analysts said in a note. We expect gold prices will trade sideways for the next quarter or so as the bond selloff continues and investors play the reflation trade through risky asset classes. But gold’s time in the sun is not over.”
The recent rise in real rates is a sign of growing optimism about the recovery and does not warrant a response from the Federal Reserve, Kansas City Fed President Esther George said, echoing Fed Chair Jerome Powell’s testimony on Tuesday.
“Rising government bond yields are at least short-term bearish for the precious metals markets. The shorter-term, chart-based futures trader bears are having their way with the gold market at present,” said Kitco Metals senior analyst Jim Wyckoff in a note.
"The main factor weighing on gold is the surge in bond yields, which makes gold less attractive because it doesn't pay any interest," said Commerzbank analyst Carsten Fritsch. Gold fell out of favour of investors, a clear sign you can see from continued outflows in gold exchange-traded funds (ETFs)," Fritsch said.
"Bullion has failed to hold $1,800 and has now broken the support at $1,775, opening space for further declines," ActivTrades chief analyst Carlo Alberto De Casa said in a note. A strong greenback could be detrimental for gold as investors are switching back to bonds in the search for yields."
“Gold is in trouble once more and the near-term outlook isn’t looking great,” OANDA analyst Craig Erlam said in a note. Rising yields and now a jump in the dollar are piling the pressure on gold and, barring a reversal in bond markets, it’s tough to envisage its fortunes improving.”
Meanwhile, January data showed U.S. consumer spending increased by the most in seven month.
While these numbers discourage some safe-haven buying “the trillions (in stimulus) that have been printed have to get into the system and interest rates are expected to stay low, which should help gold and silver down the road,” said Bob Haberkorn, senior market strategist at RJO Futures.
“Rising 10-year yields, along with the U.S. dollar moving higher, and we had a resurgence in risk appetite. All that was a very bad recipe for gold,” said Bart Melek, head of commodity strategies at TD Securities.
COT Report
Here we mostly see not just some position taking but drop of the interest in general. Although net long position has diminished slightly, but the major change is drop of open interest for 50K contracts, that is around 10% of total market:
So, currently we could say couple of things. First of all about short-term situation. Rates has dropped back from the 1.6% top below 1.42% and second - 1.9 Trln stimulus pack has been approved on Saturday. These two factors, accompanied with some technical issues, should support gold on coming week.
In medium term perspective, some traders still believe in mantras of stimulus and low interest rates, others are talking that reflation games might be temporal and exhaust within few months. As inflation pressure drops - gold could get a chance to jump again. In fact, we also think that interest rates will show deep retracement after this rally, but we do not think that this will be end of reflation game but logical retracement and step to next greater upside rally. From that standpoint we just confirm the same thing - gold could shows come backs in nearest 1-2 months, but upward trend is over, global economy is stepping in bullish cycle that is not good environment for the gold.
Technicals
Monthly
So, currently all questions are off the table concerning direction, even on long-term charts. Price stands below yearly pivot, MACD trend is down, "last hope" of the bullish grabber has been destroyed.
Based on the monthly chart next area where gold could show some bounce is 1685-1690$ K-support and oversold. As interest rates are just started upward action, it is not very strong and stable. It means that gold should keep ability of propriate reaction on meaningful technical conditions, such as strong K-areas on long-term charts.
Almost in the same area, around 1655$ we have an OP target of monthly AB-CD pattern so 1655-1685$ is next area to watch on monthly chart.
Weekly
Here we have another one, smaller AB-CD and market hits the OP target and Agreement support area. Oversold area also stands at the same level of 1730-1740$. Despite that context stands bearish, as well as MACD trend - upside reaction has good chances to happen right on Monday, especially on a background of supportive factors mentioned above.
Daily
Gold is oversold on daily chart as well. Here we do not have any patterns yet but we could consider possible upside reaction levels. The ceil, supposedly should be around overbought and 1850-1860 K-resistance area, while any other level theoretically could be reached with the pullback. It is difficult to estimate precise level as no patterns have been formed yet and reaction is not started:
Intraday
As we have steep downside butterfly here with 1.618 extension target - the pattern that we could suggest here is reverse H&S, if any reaction follows, of course. In this case the neck of the pattern should be around K-resistance area of 1810-1815$. But some other shapes are also possible, of course.
Thus, if you just search chance to go short again and not interested with short-term tactical setups - just ignore any bullish background and wait for the bounce to resistance, where you could consider new short entry. Others who trades on intraday charts might be interesting with bullish setup around 1740 major support area:
On Gold market we have only two headlines this week - interest rates and Powell's testimony. I would add here another one that has become known yesterday - 1.9 Trln
Biden's pack has been approved that makes impact on the market right on Monday. Interest rally has become negative surprise for all markets but in particular to gold as it has been strongly pressed down. But by few reasons situation could change in the beginning of the week.
Bonds have been bruised by the prospect of a stronger economic recovery and yet greater borrowing as President Joe Biden’s $1.9 trillion stimulus package progresses.
“Yield curves have continued to steepen, as COVID infection rates decline further, reopening plans are discussed and a large U.S. fiscal stimulus package looks likely,” said Christian Keller, Barclays’ head of economics research. This in principle signals a better medium-term growth outlook for the U.S. and beyond, as other core yields curves are moving in the same direction,” he added. “Meanwhile, central banks seem set to look through this year’s inflation increase, keeping the curves’ front end anchored.”
“Real assets are outperforming financial assets big in ‘21 as cyclical, political, secular trends say higher inflation,” the analysts said in a note. “Surging commodities, energy laggards in vogue, materials in secular breakouts.”
One commodity not doing so well is gold, partly due to rising bond yields and partly as investors question if crypto currencies might be a better hedge against inflation.
There are still investors who suggest gold appreciation in long term due inflation and stimulus:
"We are seeing investment flows into gold as market participants grow more anxious about rising real rates that can impact equity valuations," said TD Securities commodity strategist Daniel Ghali, pointing to rising Treasury yields.
"The dollar at the moment is low and that is supporting. Also, the real reason for the gold prices to increase in the longer term is the chances of inflation picking up," Commerzbank analyst Eugen Weinberg said.
Powell told the U.S. Senate Banking Committee that monetary policy still needed to be accommodative with economic recovery "uneven and far from complete". His testimony continues later in the day. He also mentioned that the increase in bond yields was due to higher inflation and growth expectations. Powell in his testimony before the U.S. Senate Banking Committee pushed back on suggestions that loose monetary policy risked unleashing inflation and financial risks in what may be
an emerging economic boom.
"Powell did say that the recent run-up in bond yields was a statement of confidence in the U.S. economy, and that ... could mean the Fed is willing to allow rates to run even higher, which will create a challenge for gold," Saxo Bank analyst Ole Hansen said. For gold to recover again, it needs to be the inflation focus. The focus has faded and has been substituted by the current nervousness about the yields going higher."
Rising yields tend to hurt bullion's appeal as an inflation hedge since they increase the opportunity cost of holding the metal. But Powell's remarks also indicated that "the stimulus trade is unlikely to go away anytime in the next six months", Michael Langford, director at corporate advisory AirGuide said, adding the potential impact of inflation as a result of stimulus measures will be a key upward driver for gold.
More expensive services and industrial goods led a rebound in euro zone inflation in January after months of falling prices, data showed on Tuesday.
COVID-19 vaccine makers told Congress on Tuesday that U.S. supplies should surge in the coming weeks due to manufacturing expansions and new vaccine authorizations.
"Rising bond yields continue to weigh on the gold market. Gold has not found any path to a sustainable recovery even with talks about additional stimulus measures," said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.
“Rising longer dated yields are a primary weighing factor on the precious metals,” DailyFX strategist Margaret Yang said, adding that reflation hopes could push yields even higher. The primary trend for gold is downward biased but some short-term rebound is still possible if the U.S. COVID-19 relief bill is approved by the Congress by Friday,” Yang said, adding the medium-term outlook remained bearish.
Reflecting investor sentiment, holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, fell to their lowest since May 2020 on Wednesday.
“Investor demand for gold has been distracted by moves in other alternative asset classes,” ANZ analysts said in a note. We expect gold prices will trade sideways for the next quarter or so as the bond selloff continues and investors play the reflation trade through risky asset classes. But gold’s time in the sun is not over.”
The recent rise in real rates is a sign of growing optimism about the recovery and does not warrant a response from the Federal Reserve, Kansas City Fed President Esther George said, echoing Fed Chair Jerome Powell’s testimony on Tuesday.
“Rising government bond yields are at least short-term bearish for the precious metals markets. The shorter-term, chart-based futures trader bears are having their way with the gold market at present,” said Kitco Metals senior analyst Jim Wyckoff in a note.
"The main factor weighing on gold is the surge in bond yields, which makes gold less attractive because it doesn't pay any interest," said Commerzbank analyst Carsten Fritsch. Gold fell out of favour of investors, a clear sign you can see from continued outflows in gold exchange-traded funds (ETFs)," Fritsch said.
"Bullion has failed to hold $1,800 and has now broken the support at $1,775, opening space for further declines," ActivTrades chief analyst Carlo Alberto De Casa said in a note. A strong greenback could be detrimental for gold as investors are switching back to bonds in the search for yields."
“Gold is in trouble once more and the near-term outlook isn’t looking great,” OANDA analyst Craig Erlam said in a note. Rising yields and now a jump in the dollar are piling the pressure on gold and, barring a reversal in bond markets, it’s tough to envisage its fortunes improving.”
Meanwhile, January data showed U.S. consumer spending increased by the most in seven month.
While these numbers discourage some safe-haven buying “the trillions (in stimulus) that have been printed have to get into the system and interest rates are expected to stay low, which should help gold and silver down the road,” said Bob Haberkorn, senior market strategist at RJO Futures.
“Rising 10-year yields, along with the U.S. dollar moving higher, and we had a resurgence in risk appetite. All that was a very bad recipe for gold,” said Bart Melek, head of commodity strategies at TD Securities.
COT Report
Here we mostly see not just some position taking but drop of the interest in general. Although net long position has diminished slightly, but the major change is drop of open interest for 50K contracts, that is around 10% of total market:
So, currently we could say couple of things. First of all about short-term situation. Rates has dropped back from the 1.6% top below 1.42% and second - 1.9 Trln stimulus pack has been approved on Saturday. These two factors, accompanied with some technical issues, should support gold on coming week.
In medium term perspective, some traders still believe in mantras of stimulus and low interest rates, others are talking that reflation games might be temporal and exhaust within few months. As inflation pressure drops - gold could get a chance to jump again. In fact, we also think that interest rates will show deep retracement after this rally, but we do not think that this will be end of reflation game but logical retracement and step to next greater upside rally. From that standpoint we just confirm the same thing - gold could shows come backs in nearest 1-2 months, but upward trend is over, global economy is stepping in bullish cycle that is not good environment for the gold.
Technicals
Monthly
So, currently all questions are off the table concerning direction, even on long-term charts. Price stands below yearly pivot, MACD trend is down, "last hope" of the bullish grabber has been destroyed.
Based on the monthly chart next area where gold could show some bounce is 1685-1690$ K-support and oversold. As interest rates are just started upward action, it is not very strong and stable. It means that gold should keep ability of propriate reaction on meaningful technical conditions, such as strong K-areas on long-term charts.
Almost in the same area, around 1655$ we have an OP target of monthly AB-CD pattern so 1655-1685$ is next area to watch on monthly chart.
Weekly
Here we have another one, smaller AB-CD and market hits the OP target and Agreement support area. Oversold area also stands at the same level of 1730-1740$. Despite that context stands bearish, as well as MACD trend - upside reaction has good chances to happen right on Monday, especially on a background of supportive factors mentioned above.
Daily
Gold is oversold on daily chart as well. Here we do not have any patterns yet but we could consider possible upside reaction levels. The ceil, supposedly should be around overbought and 1850-1860 K-resistance area, while any other level theoretically could be reached with the pullback. It is difficult to estimate precise level as no patterns have been formed yet and reaction is not started:
Intraday
As we have steep downside butterfly here with 1.618 extension target - the pattern that we could suggest here is reverse H&S, if any reaction follows, of course. In this case the neck of the pattern should be around K-resistance area of 1810-1815$. But some other shapes are also possible, of course.
Thus, if you just search chance to go short again and not interested with short-term tactical setups - just ignore any bullish background and wait for the bounce to resistance, where you could consider new short entry. Others who trades on intraday charts might be interesting with bullish setup around 1740 major support area:
