Gold GOLD PRO WEEKLY, March 28 - 01, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,092
Fundamentals

Gold now stands in a bit specific environment when basic facts that stand on the surface looks bearish on the first glance, but market reaction and the way how they react on these issues look different. Besides, few other specific indicators, such as real interest rates shows that overall background is not negative for the gold. Thus, our task is to not be deceived by surface facts, rumors and public opinion and take reasonable view the situation.

Market overview

Gold prices fell over 1% to a near one-week low on Tuesday after U.S. Federal Reserve Chair Jerome Powell hinted at big rate hikes this year to fight against soaring inflation, sending Treasury yields higher. Gold is highly sensitive to rising U.S. interest rates, as they increase the opportunity cost of holding non-yielding bullion.

"next launching pad for gold would be the $1,900 area," said Rob Lutts, chief investment officer at Cabot Wealth Management.

"Another escalation around Ukraine will drive significant safe haven flows to gold, even inflation hedge moves if we see sanctions that trigger another commodity surge," said Craig Erlam, senior market analyst at OANDA.

"Even if the Fed's upper estimates of rate raises become reality, inflation will still be ahead, and real interest rates negative, maintaining a positive environment for gold in the medium term," analysts at Heraeus precious metals wrote in a note.

Powell said on Monday policymakers needed to move "expeditiously" as inflation runs hot, and he raised the possibility of 50 basis point (bps) hikes. Powell's hawkish stance triggered a sharp bond market sell-off and sent the benchmark 10-year yields to their highest since May 2019. Traders are now pricing in as much as a 50 bps rate hike at the Fed's next meeting in May. Last week, the Fed raised rates by 25 bps for the first time in three years.

Despite this, pressure on gold has been relatively muted since investors' focus is on the Ukraine conflict, with any big developments likely to trigger sharp price swings, analysts said. Rising gold exchange-traded fund holdings show that despite day-to-day price fluctuations, asset managers are moving back into gold to diversify and as a hedge against inflation and an economic downturn, said Saxo Bank analyst Ole Hansen.

Holdings of the world's largest gold-backed ETF, SPDR Gold Trust, hit their highest since March 2021 this week.
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"What's phenomenal at the moment and a good indicator of a beginning of a gold bull market is ETF (exchange traded fund) demand remains remarkably strong", independent analyst Ross Norman said.

"You're seeing a little bit of safe-haven demand and a little perceived bargain hunting at lower price levels in the gold market," said Jim Wyckoff, senior analyst at Kitco Metals. High inflation is in favour of precious metals and it is "not going to go away anytime soon," Wyckoff said. He added that rising bond yields were limiting the gains in gold and could force the metal to trade "sideways and choppy."

Bank of America (BofA) joined a small but growing number of top investment banks calling for more aggressive interest rate increases from the Fed against a backdrop of soaring inflation data. The bank now expects two hikes of 50 basis points (bps) each at its June and July meetings with "risks" of those expectations being pulled forward into May and June respectively.

Citi, on the other hand, sees 50 basis-point increases in May, June, July, and September. The bank also expects 25 basis-point tightening in October and December.

"Our economists also now expect the Fed to keep hiking each meeting until they reach a 3-3.25% range in May '23," economists at the bank said. "This represents a 25 bps higher terminal rate achieved 7 months earlier vs previously forecast." Citi expects the Fed to continue hiking into 2023, reaching a policy rate target range of 3.5-3.75%.

Money markets are assigning an 80% probability of a 50 bps rate hike in May and about 200 basis points in cumulative hikes by the end of 2022 after the Fed raised rates by a quarter point last week.

Goldman Sachs expects as much as seven rate hikes in 2022 and as many as five in 2023.

"Recent Fed speak raised our conviction that Chair (Jerome) Powell and the broader committee will support a 50-bp rate hike in May, despite balance sheet reduction announced at the same meeting," Citi said in its latest note. "It appears that 50-bp would have been delivered in March if not for acute uncertainty related to geopolitical tensions," Citi said.

"The one thing everyone can agree upon is inflation is going to be longer-lasting and a lot of that will be sticky and that will complicate what central banks do," said Edward Moya, senior market analyst at Oanda in New York. "You will probably see the dollar lead the charge with rate hikes, Europe will lag and that interest rate differential should provide some support for the dollar."

Contracts to buy U.S. previously owned homes dropped to the lowest level in nearly two years in February while consumer sentiment was dented in part by climbing gasoline prices, which boosted inflation expectations to the highest level since 1981. German business morale deteriorated in March due to worsening supply chain issues resulting from high petrol prices and driver shortages, a survey showed on Friday.

Side-by-side declines in U.S. equity and fixed income markets are pushing investors into cash, commodities and dividend-paying stocks as geopolitical uncertainty and worries over a hawkish Federal Reserve rock asset prices. Investors moved $13.2 billion to cash and $2.1 billion to gold over the last week, data from BoFA Global research showed. U.S. stocks saw $3.1 billion in outflows, their largest in nine weeks. The firm’s latest survey showed fund managers’ cash positions earlier this month at their highest since March 2020 . George Young, a portfolio manager at Villere & Co, is raising his portfolio’s cash allocation to nearly 15%, well above the typical 3% of assets he normally holds.

"The capital flow is going to be I don’t want to be in Europe, it is closer to Ukraine literally in the geographical sense, but also it is the fallout from the sanctions, there is a lot of money rotating back out of Europe and back towards the States," said Huw Roberts, head of analytics at Quant Insight. If we get another round of sanctions, then people therefore say the blowback on the West is going to fall on Europe disproportionately."

The US Federal Reserve lifted the fed funds target rate at its March meeting and indicated that this would be the first of seven rate increases this year. Although the March increase was widely expected, the number of rate increases signaled by the ‘dot plot’ for the rest of the year seemed to catch investors by surprise:

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So far so good, because the Fed is in a tight spot. Tighten too quickly and it risks tipping the economy into recession; tighten too slowly and upward price pressures could become entrenched, requiring an even quicker pace of tightening that could prove more costly in economic terms to bring inflation under control further down the line.

Earlier in the pandemic Fed officials had labelled above-target inflation as transitory, saying it was due to factors such as supply chain disruptions and the price of second-hand cars. But as inflation has continued to rise, and the median CPI (which isn’t affect by one-off shocks to individual items) has reached levels not seen since the early 1990s, reflecting how inflationary pressures have become more prolonged and widespread than the Fed had originally expected, the language from the Fed has become more hawkish in response.

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The median term outlook for inflation remains uncertain. A general withdrawal of fiscal stimulus should ease inflationary pressures somewhat in the short to medium term. Meanwhile, many of the technological and demographic factors that had weighed on inflation before the pandemic have not disappeared. But Russia/US conflict in Ukraine has triggered a spike in oil prices and further price pressures that are likely to push inflation higher in the near term: especially in Europe, but also in the US.

By comparison with other periods of higher inflation, the Fed is behind the curve on several measures. For example, in the period since 1990, inflation was 2.3% on average when the Fed started tightening policy. Currently, inflation is 7.9%. The real rate of interest was -7.6% before the Fed increased rates this week compared to an average of 2.3% at the start of the typical policy tightening in this period.
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The difference between the 10Y and 2Y US Treasury yields, commonly referred as the slope of the yield curve, is also a lot narrower now than it has previously been at the start of tightening cycles: 0.2% now versus 1.3% on average. An inverted yield curve is widely considered as a harbinger of recession.

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For now, the market seems happy enough with the Fed’s policy stance. The Fed will be very keen to keep its credibility intact, and keeping a lid on inflation expectations will be key to doing so. The University of Michigan survey shows that US households expect above-target levels of inflation to persist over the next 12 months. Longer-term inflation expectations appear well anchored and are a lot lower than they were in the early 1980s, at least according to this measure. But any further uptick in this metric could put the Fed in an uncomfortable spot, and prompt it either to signal a faster pace of tightening or to risk losing some of its hard-won credibility. Some market-based measures have started drifting higher in recent weeks, raising the stakes.

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Investors also have been watching so-called real yields, or the nominal yield of a bond minus the rate of inflation.

Negative real yields on Treasuries have burnished the attractiveness of stocks and other comparatively risky assets for more than two years, helping to underpin the S&P 500’s doubling from its March 2020 lows. Yet they have started to move higher in recent weeks, reflecting the Fed's increasingly hawkish stance. That may signal further trouble ahead for the S&P 500, which is down 5.2% this year.

Other segments of the market appear to have been positioned for higher yields, however. CFTC data on Treasury futures, which captures positioning by hedge funds and other shorter-term market participants, shows investors have a net short position on 10-year Treasury futures since mid-October.

The bottom line:

So, as you could see - things that we hear from the Fed and its economists and what we see on the markets are quite different. While Fed appeals to strong economy growth and low unemployment, suggesting good economy pace, markets stand aware of recession. Why it is so different view? In previous report we have provided the detailed explanation how it was possible to the US economy show growth in previous cycles. But, this time the US economy doesn't have necessary input to show solid upside cycle. The growing effect in the past was based on ability to ease rates more and Fed always had sufficient room to drop the rate. But no more. And the last cycle in 2016-2018 has shown the first problems. The "extended easing" provides ability to companies and households to re-finance their debts at lower rate and extract some money for additional consumption or production expansion. This provides power for economy growth. Now situation has changed.
Usually rates upside cycle was standing for 3 years with rate change around 4-5%. This tendency holds since 1995, and earlier if we exclude turmoil of 1980's inflation. While downside cycle was in excess of 5% rate cut. Last cycle when it has been done was around 2008 crisis. By the result of easing cycle rates have dropped to 0.5%. And attempt to hike them in 2016 very soon crushed the economy so that Fed was have to cut it back very fast. Thus, last time economy was able to absorb only 2.5% rate hike. But more important, that on a easing cycle, Fed was not able to cut rate more as it has hit zero level. Thus, economy hasn't got necessary reserve of consumption power.
Now, inflation stands very high and Fed suggests upside cycle with 2.8-3% terminal rate somewhere in 2024. Major banks already suggest that Fed has to move faster, with 0.5% on every meeting this year, and we agree. Because currently we have a bit wrong picture. The point is statistics do not reflect yet the commodity prices explosion in March. And that's why it seems that Fed 0.25% action is proper. We suggest that starting from May-June we get real view of energy prices impact on the economy.
Indirect signs already show problems. Thus, housing market starts dropping and mortgages service expenses already stands for 20% of households' monthly budget. Just after single Fed tick, guys. Sentiment is dropping. Markets suspect something, as 2/10 year spread doesn't show performance of bullish economy cycle. While previously 2/10 year spread hits zero area at the end of the cycle - now it already stands there. Last "easing" cycle has let 2/10 spread to widen just around 1%, which is two times narrower than usual. Finally, basic parameters of current cycle suggest rise rates until 2024 with the same terminal rate around 2.8%. With forecast of GDP around 2.8% and inflation above 4% - the US economy this year gives negative return.
These thoughts lead us to conclusion that we stand closer to recession than it seems at first glance. Fed doesn't get necessary time and room to reach 2.8-3% rate level, because economy feels depression earlier than this happens. Even by the end of 2022 we could get clear signs of that, by our opinion. As Fed definitely lags 2 steps behind inflation pace, the real rates should remain negative, which is the major driving factor for the gold. This is the reason why we do not expect any bearish trend on gold market any time soon, although volatility might be greater than usual because of high degree of uncertainty and untypical situation.
Now the chain inflationary spiral could start. The wealth of the households is gradually devaluing and its consumption ability is dropping. Companies could rise prices to compensate rising expenses but people can't increase the wage by their own. EU meets even greater problems and can't pay for expensive US goods.
Finally geopolitics... Conflict in Europe stands for the long term. In December Putin set strict conditions to NATO - move borders back to 1997 year. Slowly but stubbornly but he will keep trying to reach this target. There are a lot of uncertainty on the way of the conflict in general as multiple scenarios of hard escalation could be easily suggested. Besides, situation becomes hotter in other parts of the world - Taiwan, recent missiles attack in S. Arabia, N. Korea new missile launch etc.
As EU is tending to shift on LPG delivery from the US, it is big challenges ahead of the EU economy as well. All these moments definitely keep demand for the gold at very good level. Thus, in the long term, gold definitely looks as an asset that could be considered for investing and the way to save the wealth.

Technicals
Monthly

Monthly trend remains bullish, while price is coiling around YPR1. Recent pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. In fact, the grabber failure here is a reasonable result, as its appearing in current conditions could be looking curious.

With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
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Weekly

Trend stands bullish here and market has completed the minimal reaction on the butterfly pattern, showing 3/8 pullback. Still, as we've got large "Evening star" pattern, it suggests compounded shape of the retracement, which means a kind of AB-CD shape on lower time frame, and deeper target. This week, we've got the typical pullback, that usually happens every time when we have either engulfing pattern or evening star. Pattern might be cancelled only if price jumps above its top. As it seems not very probable for now, the target reaching, in a shape of AB-CD pattern on lower time frame looks more probable. Thus, despite long term bullish context, we're not hurry up with long entry by far:
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Daily

Here we're keep going with the same AB-CD shape that is consistent with the weekly analysis. The next step that we're watching now is the starting point of CD leg. Last week Gold has hit predefined 1960$ intraday resistance. Potentially it was suitable area for downside reversal. But based on the market reaction now and new informational background that we've got, it seems that gold could try to climb higher:
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Intraday

In general, as 1H chart shows, gold could show downside reaction on 1960 K and Agreement resistance area, moving to 1930-1944 Fib levels. Now it seems that it should be only technical respect of the level, not downside reversal by far. Thus, for taking short position it seems that it would be better to wait at least until XOP Agreement around 2000 area, while scalp traders also could consider long entry around mentioned levels:
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Sive Morten

Special Consultant to the FPA
Messages
16,092
Greetings everybody,

So, as we've talked in our weekly report, in nearest few weeks we suggest deeper downside retracement on gold market because of weekly patterns and fundamental background. As we've said, it would be nice to get daily bearish grabber around 2K area, but now it seems that "C" point is set, and downside action starts. The only big risk factor that we see now is final EU decision on gas ruble payments. Denying to do this might trigger strong crisis and bring "surprise" support to the gold market as well. Although technical picture looks like some compromise should be found.
Now have two downside targets - daily OP around 1800 area:
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And XOP on 4H chart, around 1850:

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Thus, on 1H chart, market still turned down from 1960 area. If you have sold gold there - well done. Now we need to wait final bearish confirmation by downside breakout of support area and "C" point lows. This gives us bearish reversal swing and erases upside AB-CD, confirming starting of downside extension. Once this will happen - we could get another chance for short entry with some minor upside pullback:
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Sive Morten

Special Consultant to the FPA
Messages
16,092
Good morning,

At first glance we've got proper reaction on easing of geopolitical tensions that market was waiting too long. Still our opinion is market overreacting and emotional. We've got no breakthrough yet, and based on the price action today - investors start to understand this as well. Besides, we're coming to major risk factor - ruble gas payments. This makes us to suggest two things - no shorts by far, second - you have to make decision on participation on short-term bullish context. Risk is high but potential result is attractive as well.

On daily chart price was not able to proceed and hit COP extension, as well as to complete 4H XOP that mostly stands in the same area. Instead of that we've got W&R and hammer pattern:
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On 4H chart we've got bullish divergence as well. And take a look - price still stands at daily K-support:
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For the participation in bullish setup, we have clear invalidation point - recent lows. And setup in general is easy. If you decide to take it - just try to step in around some Fib support, with stops below the lows. As an option - it is possible to wait for "222" Buy pattern, which very often happens on the gold market.
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Sive Morten

Special Consultant to the FPA
Messages
16,092
Greetings everybody,

So, bulls take the control over short-term situation and bears now have to wait when it will be over in one of two ways - either failure and downside breakout or target completion. As Dollar Index is dropping, as well as interest rates, gold has good support from other markets to proceed upward action:
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On 4H chart we could talk probably about Double Bottom pattern. At least divergence and W&R action is very typical for them:
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On 1H chart market hits predefined resistance around 1935$ and now gold gives the 2nd chance for those who would like to go long. Since we have "V" shape reversal, it suggests high chances for "222" Buy pattern. At least gold forms it very often. Besides, gold has the habit to form deep retracement. It means that conservative traders could wait for the pullback to 1910 area, especially if get minor bearish grabber here. Other traders could think about scale-in entry at both support areas. A lot of statistics and geopolitical factors could shake the boat and action might be different. Invalidation point is the same - recent lows:
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Sive Morten

Special Consultant to the FPA
Messages
16,092
Greetings everybody,

So, we've got nice performance yesterday and short-term bullish context remains valid, although we expect the pullback today. In general, by looking at daily picture- market stands at strong K-support area, and whether it keeps going higher depends on its ability to hold intact recent lows. The appearance of Double Bottom pattern also depends on the same thing. Overall action looks not too fast, but let's see how NFP data impacts today
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On 4H chart everything mostly stands the same. Let's keep watching whether market forms bullish grabber here:
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On 4H chart downside action is taking AB-CD shape. This makes us to keep an eye on 1922-1926 area first, and 1912 Agreement support second. Once again - if you would like to buy gold, make a decision on how you intend to enter, gradually or at some predefine level. Both ways have their own adv. and disadv.
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Downside breakout of 5/8 Agreement level tells that bullish party is over and we need to prepare for downside continuation.
 
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