Sive Morten
Special Consultant to the FPA
- Messages
- 18,816
Fundamentals
This week on gold market sentiment was changing several times. First, fears of virus pandemic supports gold market and price stubbornly stand around the same support area. Rumors on coming rate cut also supports gold. But later in the week, when fears of global recession, crush of stock market and palladium have made pressure on gold market as well.
Gold prices retreated on Friday as investors booked profits from a 1% jump in the last session, but the metal had some support as mounting concerns over the rapid
spread of coronavirus lifted expectations of rate cuts by major central banks.
"This virus is getting a lot more serious ... People are worried there might be a need for some more stimulus measures, so that means lower (interest) rates," said John Sharma, economist at National Australia Bank, adding that high prices prompted some profit-taking.
Bets rose that the U.S. Federal Reserve would cut interest rates as soon as next month to cushion the economy from the virus' impact. Lower interest rates reduce the opportunity cost of holding non-yielding bullion. Bullion has added almost 3% so far this month, its third straight monthly gain. Prices hit a 7-year high of $1,688.66
earlier this week.
World share markets were headed for the worst week since the 2008 financial crisis as investors braced for the virus' impact on economic growth.Countries on three continents reported their first cases of the coronavirus on Friday, and the World Health Organization said all countries needed to prepare to combat the virus.
Coronavirus panic sent world stock markets tumbling again on Friday, setting them on course for their largest weekly fall since the 2008 global financial crisis, with over $5 trillion wiped from global market value so far this week.
Stocks shaved some losses on Wall Street after Federal Reserve chairman Jerome Powell said the central bank will act as appropriate to provide support to the U.S. economy, but the S&P 500 index remained on track for its second-largest weekly percentage decline since 1940.
Yields on U.S. government bonds, widely seen as the world’s most secure asset, posted fresh record lows.
Disruptions to international travel and supply chains, school closures and cancellations of major events have all blackened the outlook for a world economy that was already struggling with fallout from the U.S.-China trade war.
Hopes the epidemic, first detected in China in December, would be over swiftly and economic activity quickly return to normal have been shattered as the World Health Organization warned it could spread worldwide.
“The uncertainty hovering over the markets will only be alleviated when there is a sense that the worst is almost over,” said Quincy Krosby, chief market strategist at Prudential Financial Inc. “Until then it is risk off.”
The over $5 trillion lost in market cap is roughly equivalent to Japan’s yearly GDP, the third-largest in the world.
About 10 countries have reported their first virus cases over the past 24 hours, including Nigeria, the biggest economy in Africa.
Expectations the Fed will cut interest rates to cushion the blow are rising in money markets and Powell’s remarks reinforced the sentiment. Fed funds futures are now fully pricing in a rate cut next month, with the question only being how large it will be.
The European Central Bank historically lags the Fed but it is now seen cutting by another 10 basis points by June.
“The market is pricing in a rate cut by March and three rate cuts this year, which is a huge turnaround from the start of the year. But the fact that it looks like coronavirus has a long way to go means this is not surprising,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
Oil prices slumped again and were set for their steepest weekly fall in years on fears of drooping demand.
Palladium led a free fall in precious metals on Friday, slumping nearly 13% at one point earlier in the session, while gold slid as much as 4.6% en route to its biggest daily drop in almost seven years, as coronavirus drove panic-stricken investors to liquidate assets across the board.
“A lot of investors and traders are having to meet margin calls for other products, so they are selling what they can. That’s why it is hitting gold and the gold mining stocks,” said Michael Matousek, head trader at U.S. Global Investors. “People are trying to sell whatever they can. It’s an overall sell-off.”
“As sentiment has deteriorated, investors have closed some of their open positions in currencies, but most likely also in gold. Therefore, gold prices have failed to make new highs now that equity markets have aggressively sold off,” ABN Amro analyst Georgette Boele wrote in a note. “If risk aversion were to result in a market panic, investors will find cash and very liquid assets attractive. They will probably liquidate gold investment positions.”
CFTC Data
Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, fell for ~ 6 tonnes from 940 to 934 tonnes within two days. In general, this level of holdings have not seen since 2013, when it was above 1000 tonnes. In recent CFTC report we do not see yet any contraction of net long position in gold. It is still stands at all time highs around 335K contracts. But, as on EUR, we need to take a look at the data of next week, where this contraction should be shown.
Source: cftc.gov
Charting by Investing.com
China’s economy entered 2020 on weak footing
It is still too early to tell what the impact of COVID-19 on China’s economy will be. However, data suggest that the world’s second largest economy entered 2020 in a weaker position than indicated by the official figures. Fathom Consulting’s China Momentum Indicator (CMI) weights together twelve variables to gauge underlying momentum in the Middle Kingdom. The latest update of our CMI points to growth of 5.1% in December. That figure confirmed that China’s economy slowed last year, averaging growth of 4.8%, down from 5.8% in 2018.
Our estimate falls below the official government GDP data, and the two series have tended to diverge increasingly from 2012 onwards. This growth shortfall implies labour underutilisation. Taking the official labour productivity figures as given, our China Urban Underemployment Indicator (CUUI) replaces published estimates of economic activity with our own and calculates an implied measure of effective employment. According to the CUUI, 14.6% of China’s working-age urban population was underemployed at the end of last year, up from 13.7% at the end of 2018. This is well above the official 3.6% urban unemployment rate.
Looking beyond the impact of COVID-19, China’s medium-term growth prospects will be heavily determined by productivity growth. A country’s economic output can be broken down into capital, labour and total factor productivity. China’s remarkable economic transformation over the past couple of decades has been driven heavily by a large increase in capital spending. This growth in capital spending has slowed and is expected to ease further. Meanwhile, the country’s demographics are relatively poor, with the working-age population already in decline — a trend expected to get worse. That leaves total factor productivity. Progress on this front has so far been relatively poor. While the capital stock increased by an annual average rate of 11% in the 20 years to 2017, the equivalent figure for total factor productivity was just 2%.
The government has previously touted its Made in China 2025 strategy as one way to spur innovation and the programme could boost productivity significantly. However, our RiCArdo database highlights mixed progress to date. China’s Revealed Comparative Advantage (RCA) — a measure of how specialised a country is in different sectors based on exports — varies significantly across these industries. China stands out as being among the world’s leaders in advanced railway, IT and robotics. However, the country remains well below the cutting edge in aerospace and medical industry. Success across these areas may be required for China to sustain the high rates of economic growth that many have become accustomed to.
As a bottom line, we could say that again we meet the same phenomenon. Maybe you do not know how particular market will react and what factors will drive the reaction, but when you see extreme value of net long positions - be prepared to the drop. This rule is confirmed again and again by the market. Of course we couldn't foresee anyway that this will be virus epidemic, but to be honest - we do not need it. What is really matter - the direction. Indeed after final spike, gold has turned down. But this is short-term situation.
What perspective we could get in longer-term. Here we have factors that contradict to each other. From the one point of view, decreasing of global rates supports gold, makes other assets not as attractive compares to gold, that doesn't produce any interest. Collapse of stock market also supports gold and, as we see above, stronger slowdown of Chinese economy due virus spreading makes idea of global recession more probable. At the same time, drop of inflation and global activity will press on gold market.
Right now market stands in a vital point. Global virus panic either should be over in March-April, or I'm afraid we will meet real global recession problems, when everybody will sit in cash, investing in short-term bonds and cash market assets, as we saw it in 2008. If we imagine ultimate scenario - run in cash will be just first stage. Second stage will come when doubts on cash value will appear... Indeed, situation in 2008 and now are different. In 2008 this was "liquidity crisis", while now, if real hazard of total slowdown in global economy will appear on horizon - cash could be not enough to safe the capitals. In a conditions of global slowdown - there will be no good assets to invest. Rates are low, companies meet looses and shares stand in depression, basic commodities and oil are down due lack of activity in global economy. In this case this could be the Era of the Gold. This should become clear closer to the end of 2020. Now I'm thinking why it was explosive gold demand from Central banks in previous few years - may be they were preparing to this scenario? At least, their gold purchases indirectly confirms this hypothesis. Besides, recall what we've said in the middle of 2019 on changing reserve rules for EU banks by Basel III committee. Remember? They start to treat gold not as commodity but equals it to cash and exclude reservation for gold assets on Banks' balances.
In the nearest few months, while investors do not understand yet what is going on - they will try to run in cash. This process already stands underway. When you in cash you have time to make a decision and look around. During this stage all markets keep standing under pressure, except short-term interest rates. Gold probably is not an exception, but fear should not let gold to drop too much.
Technical
Monthly
On monthly chart the new episode is starting, because market has completed long-term objective point at 1660 area, which is XOP target. If we imagine that no coronavirus panic exists, then on monthly chart you see absolutely natural price reaction. Gold turns to retracement one major target is hit. Overextended speculative position provides additional advantage to retracement.
On a way up market also has tested YPR1 level. Now we see two big support clusters. First one is around YPP - 1445, where K-support area stands. Second is around major 5/8 Fib support area 1291. It includes as Fib level as YPS1 and trend line support.
In normal condition it is nothing curious to expect 30% retracement to K-support. Testing of YPP is also normal price action as it has not been tested yet this year. Beside, in February gold enters in seasonal bearish trend as well. But all these factors could be faded by exceptional situation on the market and retracement could be different.
Speaking on deep retracement, to 1300 area, it is difficult to suggest right now what factors could trigger it. Let's say here just one thing - technically it could take the shape of AB-CD pattern, based on H&S with neckline around YPP area.
Weekly
On weekly chart as well - we have two different setups in terms of time. Next week we probably should focus on nice bearish engulfing pattern. Market also comes out from strong overbought here. It means that on daily and lower time frames initially we should watch for moderate upside return back inside the engulfing body. Next step, as usual - downside extension in a shape of AB-CD pattern. As market stands not too far from oversold level as well - it seems that downside target will be around 1530 area, which is also strong weekly K-support area.
Next, longer-term scenario could appear on the table once engulfing will play out properly. It could be H&S pattern... Minor downside action should be enough to turn trend bearish and we will get MACD divergence as well.
Daily
Next week we dedicate to weekly bearish engulfing pattern. Beyond large weekly H&S pattern, on daily potentially, we have another one, smaller scale. First part of the pattern takes the shape of 1.618 butterfly. Now market is coming to neckline, which should be reached in the beginning of the next week. If we would like to play weekly engulfing - we should keep an eye on the top of right arm, that should be around 5/8 Fib resistance level and harmonically around former top of 1612 area, which is the left arm.
Around the neckline we have multiple 5/8 Fib levels, starting from 1548 and up to 1554. I've chosen this one, because this is the reaction point, from which major rally has started.
Intraday
So, on 4H chart first we wait for completion of XOP at 1556. This will be Agreement with mentioned 5/8 Fib support, by the way. This is the area where scalp traders could think about long entry, especially bullish reversal pattern will be formed.
But for us, the major level to keep an eye on - 1606-1614 resistance level, where we consider short entry to start journey with weekly engulfing sell-off. It precisely corresponds to previous 1612 top. We do not exclude action to 1638 level as well, but currently it is impossible to say what particularly level will be reached. We will try to estimate it in a process of retracement.
Conclusion:
Despite that we have unique background on the market, technically price plays accurately to long-term resistance and targets. In few weeks sentiment hardly will change significantly. Investors will remain under psychological pressure of pandemic, expectation of multiple rate cuts and economy slowdown. Thus, retracement on gold has chances to continue and our technical background has chances to play well.
Longer-term perspective still stands blur and depends on consequences of virus epidemic, as we've said in our fundamental part of research.
This week on gold market sentiment was changing several times. First, fears of virus pandemic supports gold market and price stubbornly stand around the same support area. Rumors on coming rate cut also supports gold. But later in the week, when fears of global recession, crush of stock market and palladium have made pressure on gold market as well.
Gold prices retreated on Friday as investors booked profits from a 1% jump in the last session, but the metal had some support as mounting concerns over the rapid
spread of coronavirus lifted expectations of rate cuts by major central banks.
"This virus is getting a lot more serious ... People are worried there might be a need for some more stimulus measures, so that means lower (interest) rates," said John Sharma, economist at National Australia Bank, adding that high prices prompted some profit-taking.
Bets rose that the U.S. Federal Reserve would cut interest rates as soon as next month to cushion the economy from the virus' impact. Lower interest rates reduce the opportunity cost of holding non-yielding bullion. Bullion has added almost 3% so far this month, its third straight monthly gain. Prices hit a 7-year high of $1,688.66
earlier this week.
World share markets were headed for the worst week since the 2008 financial crisis as investors braced for the virus' impact on economic growth.Countries on three continents reported their first cases of the coronavirus on Friday, and the World Health Organization said all countries needed to prepare to combat the virus.
Coronavirus panic sent world stock markets tumbling again on Friday, setting them on course for their largest weekly fall since the 2008 global financial crisis, with over $5 trillion wiped from global market value so far this week.
Stocks shaved some losses on Wall Street after Federal Reserve chairman Jerome Powell said the central bank will act as appropriate to provide support to the U.S. economy, but the S&P 500 index remained on track for its second-largest weekly percentage decline since 1940.
Yields on U.S. government bonds, widely seen as the world’s most secure asset, posted fresh record lows.
Disruptions to international travel and supply chains, school closures and cancellations of major events have all blackened the outlook for a world economy that was already struggling with fallout from the U.S.-China trade war.
Hopes the epidemic, first detected in China in December, would be over swiftly and economic activity quickly return to normal have been shattered as the World Health Organization warned it could spread worldwide.
“The uncertainty hovering over the markets will only be alleviated when there is a sense that the worst is almost over,” said Quincy Krosby, chief market strategist at Prudential Financial Inc. “Until then it is risk off.”
The over $5 trillion lost in market cap is roughly equivalent to Japan’s yearly GDP, the third-largest in the world.
About 10 countries have reported their first virus cases over the past 24 hours, including Nigeria, the biggest economy in Africa.
Expectations the Fed will cut interest rates to cushion the blow are rising in money markets and Powell’s remarks reinforced the sentiment. Fed funds futures are now fully pricing in a rate cut next month, with the question only being how large it will be.
The European Central Bank historically lags the Fed but it is now seen cutting by another 10 basis points by June.
“The market is pricing in a rate cut by March and three rate cuts this year, which is a huge turnaround from the start of the year. But the fact that it looks like coronavirus has a long way to go means this is not surprising,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
Oil prices slumped again and were set for their steepest weekly fall in years on fears of drooping demand.
Palladium led a free fall in precious metals on Friday, slumping nearly 13% at one point earlier in the session, while gold slid as much as 4.6% en route to its biggest daily drop in almost seven years, as coronavirus drove panic-stricken investors to liquidate assets across the board.
“A lot of investors and traders are having to meet margin calls for other products, so they are selling what they can. That’s why it is hitting gold and the gold mining stocks,” said Michael Matousek, head trader at U.S. Global Investors. “People are trying to sell whatever they can. It’s an overall sell-off.”
“As sentiment has deteriorated, investors have closed some of their open positions in currencies, but most likely also in gold. Therefore, gold prices have failed to make new highs now that equity markets have aggressively sold off,” ABN Amro analyst Georgette Boele wrote in a note. “If risk aversion were to result in a market panic, investors will find cash and very liquid assets attractive. They will probably liquidate gold investment positions.”
CFTC Data
Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, fell for ~ 6 tonnes from 940 to 934 tonnes within two days. In general, this level of holdings have not seen since 2013, when it was above 1000 tonnes. In recent CFTC report we do not see yet any contraction of net long position in gold. It is still stands at all time highs around 335K contracts. But, as on EUR, we need to take a look at the data of next week, where this contraction should be shown.
Source: cftc.gov
Charting by Investing.com
China’s economy entered 2020 on weak footing
It is still too early to tell what the impact of COVID-19 on China’s economy will be. However, data suggest that the world’s second largest economy entered 2020 in a weaker position than indicated by the official figures. Fathom Consulting’s China Momentum Indicator (CMI) weights together twelve variables to gauge underlying momentum in the Middle Kingdom. The latest update of our CMI points to growth of 5.1% in December. That figure confirmed that China’s economy slowed last year, averaging growth of 4.8%, down from 5.8% in 2018.
Our estimate falls below the official government GDP data, and the two series have tended to diverge increasingly from 2012 onwards. This growth shortfall implies labour underutilisation. Taking the official labour productivity figures as given, our China Urban Underemployment Indicator (CUUI) replaces published estimates of economic activity with our own and calculates an implied measure of effective employment. According to the CUUI, 14.6% of China’s working-age urban population was underemployed at the end of last year, up from 13.7% at the end of 2018. This is well above the official 3.6% urban unemployment rate.
Looking beyond the impact of COVID-19, China’s medium-term growth prospects will be heavily determined by productivity growth. A country’s economic output can be broken down into capital, labour and total factor productivity. China’s remarkable economic transformation over the past couple of decades has been driven heavily by a large increase in capital spending. This growth in capital spending has slowed and is expected to ease further. Meanwhile, the country’s demographics are relatively poor, with the working-age population already in decline — a trend expected to get worse. That leaves total factor productivity. Progress on this front has so far been relatively poor. While the capital stock increased by an annual average rate of 11% in the 20 years to 2017, the equivalent figure for total factor productivity was just 2%.
The government has previously touted its Made in China 2025 strategy as one way to spur innovation and the programme could boost productivity significantly. However, our RiCArdo database highlights mixed progress to date. China’s Revealed Comparative Advantage (RCA) — a measure of how specialised a country is in different sectors based on exports — varies significantly across these industries. China stands out as being among the world’s leaders in advanced railway, IT and robotics. However, the country remains well below the cutting edge in aerospace and medical industry. Success across these areas may be required for China to sustain the high rates of economic growth that many have become accustomed to.
As a bottom line, we could say that again we meet the same phenomenon. Maybe you do not know how particular market will react and what factors will drive the reaction, but when you see extreme value of net long positions - be prepared to the drop. This rule is confirmed again and again by the market. Of course we couldn't foresee anyway that this will be virus epidemic, but to be honest - we do not need it. What is really matter - the direction. Indeed after final spike, gold has turned down. But this is short-term situation.
What perspective we could get in longer-term. Here we have factors that contradict to each other. From the one point of view, decreasing of global rates supports gold, makes other assets not as attractive compares to gold, that doesn't produce any interest. Collapse of stock market also supports gold and, as we see above, stronger slowdown of Chinese economy due virus spreading makes idea of global recession more probable. At the same time, drop of inflation and global activity will press on gold market.
Right now market stands in a vital point. Global virus panic either should be over in March-April, or I'm afraid we will meet real global recession problems, when everybody will sit in cash, investing in short-term bonds and cash market assets, as we saw it in 2008. If we imagine ultimate scenario - run in cash will be just first stage. Second stage will come when doubts on cash value will appear... Indeed, situation in 2008 and now are different. In 2008 this was "liquidity crisis", while now, if real hazard of total slowdown in global economy will appear on horizon - cash could be not enough to safe the capitals. In a conditions of global slowdown - there will be no good assets to invest. Rates are low, companies meet looses and shares stand in depression, basic commodities and oil are down due lack of activity in global economy. In this case this could be the Era of the Gold. This should become clear closer to the end of 2020. Now I'm thinking why it was explosive gold demand from Central banks in previous few years - may be they were preparing to this scenario? At least, their gold purchases indirectly confirms this hypothesis. Besides, recall what we've said in the middle of 2019 on changing reserve rules for EU banks by Basel III committee. Remember? They start to treat gold not as commodity but equals it to cash and exclude reservation for gold assets on Banks' balances.
In the nearest few months, while investors do not understand yet what is going on - they will try to run in cash. This process already stands underway. When you in cash you have time to make a decision and look around. During this stage all markets keep standing under pressure, except short-term interest rates. Gold probably is not an exception, but fear should not let gold to drop too much.
Technical
Monthly
On monthly chart the new episode is starting, because market has completed long-term objective point at 1660 area, which is XOP target. If we imagine that no coronavirus panic exists, then on monthly chart you see absolutely natural price reaction. Gold turns to retracement one major target is hit. Overextended speculative position provides additional advantage to retracement.
On a way up market also has tested YPR1 level. Now we see two big support clusters. First one is around YPP - 1445, where K-support area stands. Second is around major 5/8 Fib support area 1291. It includes as Fib level as YPS1 and trend line support.
In normal condition it is nothing curious to expect 30% retracement to K-support. Testing of YPP is also normal price action as it has not been tested yet this year. Beside, in February gold enters in seasonal bearish trend as well. But all these factors could be faded by exceptional situation on the market and retracement could be different.
Speaking on deep retracement, to 1300 area, it is difficult to suggest right now what factors could trigger it. Let's say here just one thing - technically it could take the shape of AB-CD pattern, based on H&S with neckline around YPP area.
Weekly
On weekly chart as well - we have two different setups in terms of time. Next week we probably should focus on nice bearish engulfing pattern. Market also comes out from strong overbought here. It means that on daily and lower time frames initially we should watch for moderate upside return back inside the engulfing body. Next step, as usual - downside extension in a shape of AB-CD pattern. As market stands not too far from oversold level as well - it seems that downside target will be around 1530 area, which is also strong weekly K-support area.
Next, longer-term scenario could appear on the table once engulfing will play out properly. It could be H&S pattern... Minor downside action should be enough to turn trend bearish and we will get MACD divergence as well.
Daily
Next week we dedicate to weekly bearish engulfing pattern. Beyond large weekly H&S pattern, on daily potentially, we have another one, smaller scale. First part of the pattern takes the shape of 1.618 butterfly. Now market is coming to neckline, which should be reached in the beginning of the next week. If we would like to play weekly engulfing - we should keep an eye on the top of right arm, that should be around 5/8 Fib resistance level and harmonically around former top of 1612 area, which is the left arm.
Around the neckline we have multiple 5/8 Fib levels, starting from 1548 and up to 1554. I've chosen this one, because this is the reaction point, from which major rally has started.
Intraday
So, on 4H chart first we wait for completion of XOP at 1556. This will be Agreement with mentioned 5/8 Fib support, by the way. This is the area where scalp traders could think about long entry, especially bullish reversal pattern will be formed.
But for us, the major level to keep an eye on - 1606-1614 resistance level, where we consider short entry to start journey with weekly engulfing sell-off. It precisely corresponds to previous 1612 top. We do not exclude action to 1638 level as well, but currently it is impossible to say what particularly level will be reached. We will try to estimate it in a process of retracement.
Conclusion:
Despite that we have unique background on the market, technically price plays accurately to long-term resistance and targets. In few weeks sentiment hardly will change significantly. Investors will remain under psychological pressure of pandemic, expectation of multiple rate cuts and economy slowdown. Thus, retracement on gold has chances to continue and our technical background has chances to play well.
Longer-term perspective still stands blur and depends on consequences of virus epidemic, as we've said in our fundamental part of research.
