Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
In general, situation stands in a row with our long term view. As we've discussed - gold should remain under pressure for 2-3 months more, before problems in the US economy should become evident to everybody. Now they are still stand under mask of foreign capital inflows, mostly from EU and Japan and a kind of positive statistics, that do not reflect yet the new economical reality and is based on Feb-March data. As a result of good consumption and moderate inflation data, low unemployment gold has moved slightly lower again.
Market overview
Gold slipped to a more than two-month trough on Wednesday as the dollar rallied on expectations of aggressive monetary policy tightening by the U.S. Federal Reserve. The dollar index charged to its highest level since January 2017, fuelled by expectations that the U.S. central bank will be more hawkish than peers and safe-haven flows fanned by concerns over slowing growth in China and Europe. The Fed is expected to increase rates by 50 basis points at its May 3-4 meeting.
With inflation running at its highest levels in four decades, Utah business owner Steve Allred is concerned about the declining purchasing power of the U.S. dollar.
To help protect against the possibility that it will get worse, Allred, like many investors, has bought gold. He has also begun to accept some forms of the precious metal as payment in the three hardware stores that he owns with his brother.
Allred is among a group of Americans that are increasingly turning to gold as an alternative currency as unprecedented government spending and Federal Reserve easing threatens to further erode the value of the greenback.
The dollar has lost 86% of its purchasing power since 1971, according to U.S. government data, when President Richard Nixon ended the fixed convertibility of dollars to gold. Gold prices have jumped from around $40 per ounce to $1,900 during this time.
U.S. dollars in circulation are $2.25 trillion, up from $1.80 trillion in early 2020 and just over $800 billion in 2007, Federal Reserve data show.
Gold's use as a currency started gaining traction after the financial crisis of 2007-2009 and has accelerated during the pandemic since 2020 as the government spent trillions, and the Federal Reserve bought unprecedented amounts of bonds in an effort to revive the economy.
While it will not challenge the primacy of the greenback, its use is growing fast. Innovations that allow people to use the metal for even the smallest daily transactions are helping to propel the movement.
Allred began accepting Goldbacks at his stores around three months ago. This money is infused with particles of gold and comes in denominations ranging from 1, which is 1/1,000th of an ounce of gold, to 50, which is 1/20th of an ounce. In that time Allred's customers have bought around $3,000-$4,000 in goods using the currency. He hopes the use of the notes increases and that it can be used for a wide variety of products and services in his community, especially if the greenback continues to depreciate.
Jeremy Cordon, founder and president at Goldback Inc, said that around a quarter to half of small businesses in Utah will accept the notes. The company has sold around $30 million across the country and Cordon thinks the Goldbacks could grow to around $1 billion over the next five or six years, though the speed of growth is constrained by how quickly the company can print the money.
Jason Cozens, founder and CEO of gold trading and investment app Glint Pay, has also seen strong demand to use gold as a currency.
Customers can use Glint to purchase gold, which is held in a vault in Switzerland, and spend their holdings using a Mastercard. Cozens says around half of its 105,000 customers are in the United States, and registered users increased by 500% in the first quarter over the fourth quarter.
Utah recognized gold and silver as legal tender in 2011, and Oklahoma and Arizona have followed. States are increasingly lifting tax restrictions.
Jp Cortez, a policy director for the Sound Money Defense League, said that 41 states have wholly or partially exempted gold and silver from sales taxes, with another 5 considering legislation to do the same. The group is also working with legislators to remove capital gains taxes. Arizona has eliminated state capital gains tax on precious metals, though most states continue to levy this and the taxes are also payable at a federal level.
Cortez notes that ultimately, “if you can’t write off capital losses in the value of the dollar, we shouldn’t be taxed for capital gains when that gain in the price of gold isn’t really a gain - it's just a representation of the loss of purchasing power of the dollar.”
The dollar index rallied on Thursday to its highest level since December 2002 amid widespread weakness in its major rivals.
Gold has declined about 2.7% this month, which could be its biggest monthly fall since September, on expectations of an aggressive monetary policy tightening by the U.S. Federal Reserve and a stronger dollar. Rapid rate hikes will increase the opportunity cost of holding non-yielding bullion.
The U.S. economy contracted in the first quarter amid a resurgence in COVID-19 cases and a drop in pandemic relief from the government. Meanwhile, weekly jobless claims fell 5,000 to 180,000.
The yen plunged to a new two-decade low versus the dollar on Thursday after the Bank of Japan doubled down on its super-low yield policy. The euro, down 5% already this month, is at five-year lows to the greenback, while China's yuan has also slid 4.6% in April, falling another 0.8% on Thursday. Given the scale and speed of such currency moves, it's worth watching out for what policymakers say or do, especially in the euro zone where inflation is running already at record highs.
All these currencies -- and many across emerging markets --- are being crushed under the wheels of a runaway dollar, which has powered to five-year highs against a basket of peers , lifted by expectations of big U.S. interest rate hikes. But another driver, arguably, for the yuan and euro is the speed at which the global growth outlook is deteriorating. So the data-packed day ahead may offer clues on this subject.
Expectations that the European Central Bank will hike interest rates sooner rather than later have provided no solace to the euro, battered by concerns that the currency bloc is headed for a sharp slowdown.
Equities were under pressure after data showed that monthly inflation surged by the most since 2005 while U.S. consumer spending increased more than expected in March amid strong demand for services. Also, first quarter U.S. labor costs surged by the most in 21 years, pointing to rising wage inflation, supporting Federal Reserve policy tightening ahead of its scheduled meeting next week. And it's hard to ignore the dotcom bubble flavoured 'irrational exuberance' whiff that surrounds Elon Musk's $44 billion cash deal for Twitter, particularly when the social media reported revenue and ad sales that fell short of expectations.
The benchmark 10-year U.S. yields , having risen as high 2.981% on April 20, its highest level since December 2018, were eying five straight months of gains.
Retail sales growth has been in long-term decline in China. Efforts to rebalance China’s economy towards a more consumer-oriented growth model have met with little success. Retail sales returned to contractionary territory, falling by 3.5% on a twelve-month basis in March, after increasing 6.7% on a similar basis in the January-February period. Significant weakness was evident in catering services, which fell 16.4% amid the sharp spike in virus cases. Automobile sales were 7.5% lower than a year earlier. With virus cases and lockdowns increasing in April, the near-term outlook looks bleak for households. Indeed, the urban unemployment rate has increased by 0.7 percentage points this year to 5.8% in March, and wage growth slowed sharply in 2022 Q1. Amid a slowing economy, the Chinese authorities have been enacting measures to support growth, although there has been a lack of emphasis on boosting consumer spending. Without a meaningful shift to a more consumer-oriented economic model, trend growth will continue to slow and China will struggle to catch up with the US.
COT Report
Of course, solid pressure from as the US Dollar growth as interest rates one can't pass unsigned. It makes pressure on the gold price, although it shows good resistance as well. Although obviously we see contraction of net long position - it is not dramatical. Here we see that the drop in the position mostly comes from closing of the longs but not of the new shorts. It more indicates some caution rather than direct change of the sentiment into bearish.
The same we could see from the performance of the SPDR Fund - the small downtick happens only this week:
Conclusion:
In two words speaking - everything goes according to the plan. We probably do not agree with those who tells about running into the "safety" as the US Dollar rising. Indeed, this is one of the features of "running to safe haven" , but it is always accompanied with gold positive performance that we do not see yet. Conversely we see two major drivers of current action. This is greed and hunting for higher return, that supports demand for the US bonds. Second - capital flows from the EU and Japan that we've discussed earlier.
At the same time, as we've said in recent FX report we've shown information that the oversea flows to the US is narrowing. EU, Japan and GB are largest donors of capital for the US. Japan now moving off the distance, since its trading balance and current account narrows because of huge raw materials expenses and devaluation of the yen. As a result, its balance from strongly positive now stands slightly above the zero. So, no new money comes to the US from Japan this year. The same we could say about EU, but there situation even worse, as conflict stands in the region. GB is too busy with attempt to build its own currency zone in Europe trying to use ruining EU economy. It is not occasionally we've mentioned JPY and stock market above.
Situation in the US is deteriorating dramatically. Households have spent around 70% of their savings, trying to keep consumption on the same levels. That's why, people who said that the US economy at the good pace because of strong consumption and low unemployment are wrong. Actually the "surprise" negative GDP explains many things. We said that it should be negative in IQ. They just can't hide real inflation data any more. Besides, if you take a look at the structure of the GDP - it looks very poor with big part belonging to the service sphere. Inflation and rising rates makes impact on real estate market and increase interest expenses to serve loans, mortgages etc. Stock market is overvalued even harder than during dotcom bubble. Liquidity is drying fast, as QE was closed in March and now it should turn to QT. We expect that this hurts junk companies and its debt where the way of mass defaults should start. This triggers chain reaction, pushing stock market over the edge. Demand for the US Treasuries is contracting this year and many countries start to diversify dollar assets. US has all time record of trade deficit, consuming two times greater than producing. And closer to the summer, the background of rate rising gradually change, although many investors will not recognize it, as rates should keep going higher, but not because of Fed policy but because of higher demand for risk of default.
Russia is working on Rubble collateral with commodities, which raised against USD for ~8% (!) in two months. Gold stands among the most obvious collateral, but it might be backed by gathering of commodities and its natural reserves. This is the time bomb under modern pricing system. It is no secret that 90% of all futures are not deliverable. So they have no real asset on the back. Just imagine that Russia runs domestic exchange in rubble where gas/oil/wheat whatever real delivering contracts is quoting in rubles with no relation to western pricing, as it starts pricing in the way of gas/gold, wheat/gold etc., with absolute different quotation . As Ruble will be backed by real assets, the Forex quotation fails, making dollar few times cheaper and pushing commodities prices on western exchanges to the sky. The global system when EUR and USD are backed by commodities of other countries gradually is fading. These currencies are loosing collateral that were coming from delivery of commodities in exchange to these currencies. Now this stream is narrowing drastically. Money supply remains but no real assets stand behind them.
Finally, we see now rising risk of military escalation in western Ukraine with possible intruding of Poland and Romania. There are few major targets of this step but it doesn't matter for this report. It is enough to say that moving escalation on the new level could become another supportive factor for the gold. That's being said, in a case if everything goes without big shakes - situation starts to change closer to the mid summer. With the rising of geopolitical escalation gold could get additional support earlier.
Technicals
Monthly
Although gold has dropped a bit, it holds our suggestion by far, that it should remain between YPP and YPR1. Monthly trend remains bullish. Market really shows some difficulties with upside breakout as 2nd challenge to pass through 2000K is also unsuccessful by far. But we do not see any tragedy here. In fact, the pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
In general, everything goes with our timing, as we suggest that gold remains under pressure until the mid summer or slightly longer. A the same time, gold shows good resistance to different headwinds of rising interest rates and dollar in particular. Our suggestion is confirmed by Saxo Bank comments above that investors still accumulating gold, forming the financial cushion.
Thus, although downside action likely to be more extended - it doesn't break the bullish long-term picture.
Weekly
Trend has turned bearish here, and market has broken first 3/8 Fib level. As oversold stands lower - we have no natural barriers that could hold downside action here. It means that AB=CD target becomes most prominent in current situation, as it also agrees with 5/8 support area and oversold. So, we're watching for 1830$ area in mid term.
Daily
Here market is not at oversold any more. Trend remains bearish here, and we're watching for the same pattern as on the weekly chart. The only intrigue comes from intraday H&S pattern that is not failed formally by far.
Intraday
So, the first step of our trading plan starts well, as market indeed turns down from the K-area that we've discussed. So, bears could move stops to breakeven and just watch the movie. Those who missed entry could consider using of Stop "sell" entry order around 1975 lows to step in during downside breakout. But first - keep an eye on 1886-1890 Agreement support. If gold fails to stay above it - this becomes strong sign of downside continuation:
Bulls, in turn, also should keep an eye on the same level, but for different purposes - to make a decision on entry. This area provides minimal risk of the potential long trade, as you could hide stops just under Agreement area. Speaking on bullish position - personally, I do not like a bit fast downside action. This is weakness sign for the H&S pattern. Besides, we expect that Fed comments on 3-4 of May are likely to be more hawkish that decreases chances on success of bullish trade. But this is only our suggestion by far and maybe the reality goes in different way.
In general, situation stands in a row with our long term view. As we've discussed - gold should remain under pressure for 2-3 months more, before problems in the US economy should become evident to everybody. Now they are still stand under mask of foreign capital inflows, mostly from EU and Japan and a kind of positive statistics, that do not reflect yet the new economical reality and is based on Feb-March data. As a result of good consumption and moderate inflation data, low unemployment gold has moved slightly lower again.
Market overview
Gold slipped to a more than two-month trough on Wednesday as the dollar rallied on expectations of aggressive monetary policy tightening by the U.S. Federal Reserve. The dollar index charged to its highest level since January 2017, fuelled by expectations that the U.S. central bank will be more hawkish than peers and safe-haven flows fanned by concerns over slowing growth in China and Europe. The Fed is expected to increase rates by 50 basis points at its May 3-4 meeting.
With inflation running at its highest levels in four decades, Utah business owner Steve Allred is concerned about the declining purchasing power of the U.S. dollar.
To help protect against the possibility that it will get worse, Allred, like many investors, has bought gold. He has also begun to accept some forms of the precious metal as payment in the three hardware stores that he owns with his brother.
Allred is among a group of Americans that are increasingly turning to gold as an alternative currency as unprecedented government spending and Federal Reserve easing threatens to further erode the value of the greenback.
The dollar has lost 86% of its purchasing power since 1971, according to U.S. government data, when President Richard Nixon ended the fixed convertibility of dollars to gold. Gold prices have jumped from around $40 per ounce to $1,900 during this time.
U.S. dollars in circulation are $2.25 trillion, up from $1.80 trillion in early 2020 and just over $800 billion in 2007, Federal Reserve data show.
Gold's use as a currency started gaining traction after the financial crisis of 2007-2009 and has accelerated during the pandemic since 2020 as the government spent trillions, and the Federal Reserve bought unprecedented amounts of bonds in an effort to revive the economy.
While it will not challenge the primacy of the greenback, its use is growing fast. Innovations that allow people to use the metal for even the smallest daily transactions are helping to propel the movement.
Allred began accepting Goldbacks at his stores around three months ago. This money is infused with particles of gold and comes in denominations ranging from 1, which is 1/1,000th of an ounce of gold, to 50, which is 1/20th of an ounce. In that time Allred's customers have bought around $3,000-$4,000 in goods using the currency. He hopes the use of the notes increases and that it can be used for a wide variety of products and services in his community, especially if the greenback continues to depreciate.
Jeremy Cordon, founder and president at Goldback Inc, said that around a quarter to half of small businesses in Utah will accept the notes. The company has sold around $30 million across the country and Cordon thinks the Goldbacks could grow to around $1 billion over the next five or six years, though the speed of growth is constrained by how quickly the company can print the money.
Jason Cozens, founder and CEO of gold trading and investment app Glint Pay, has also seen strong demand to use gold as a currency.
Customers can use Glint to purchase gold, which is held in a vault in Switzerland, and spend their holdings using a Mastercard. Cozens says around half of its 105,000 customers are in the United States, and registered users increased by 500% in the first quarter over the fourth quarter.
Utah recognized gold and silver as legal tender in 2011, and Oklahoma and Arizona have followed. States are increasingly lifting tax restrictions.
Jp Cortez, a policy director for the Sound Money Defense League, said that 41 states have wholly or partially exempted gold and silver from sales taxes, with another 5 considering legislation to do the same. The group is also working with legislators to remove capital gains taxes. Arizona has eliminated state capital gains tax on precious metals, though most states continue to levy this and the taxes are also payable at a federal level.
Cortez notes that ultimately, “if you can’t write off capital losses in the value of the dollar, we shouldn’t be taxed for capital gains when that gain in the price of gold isn’t really a gain - it's just a representation of the loss of purchasing power of the dollar.”
The dollar index rallied on Thursday to its highest level since December 2002 amid widespread weakness in its major rivals.
Gold has declined about 2.7% this month, which could be its biggest monthly fall since September, on expectations of an aggressive monetary policy tightening by the U.S. Federal Reserve and a stronger dollar. Rapid rate hikes will increase the opportunity cost of holding non-yielding bullion.
The U.S. economy contracted in the first quarter amid a resurgence in COVID-19 cases and a drop in pandemic relief from the government. Meanwhile, weekly jobless claims fell 5,000 to 180,000.
The yen plunged to a new two-decade low versus the dollar on Thursday after the Bank of Japan doubled down on its super-low yield policy. The euro, down 5% already this month, is at five-year lows to the greenback, while China's yuan has also slid 4.6% in April, falling another 0.8% on Thursday. Given the scale and speed of such currency moves, it's worth watching out for what policymakers say or do, especially in the euro zone where inflation is running already at record highs.
All these currencies -- and many across emerging markets --- are being crushed under the wheels of a runaway dollar, which has powered to five-year highs against a basket of peers , lifted by expectations of big U.S. interest rate hikes. But another driver, arguably, for the yuan and euro is the speed at which the global growth outlook is deteriorating. So the data-packed day ahead may offer clues on this subject.
Expectations that the European Central Bank will hike interest rates sooner rather than later have provided no solace to the euro, battered by concerns that the currency bloc is headed for a sharp slowdown.
Equities were under pressure after data showed that monthly inflation surged by the most since 2005 while U.S. consumer spending increased more than expected in March amid strong demand for services. Also, first quarter U.S. labor costs surged by the most in 21 years, pointing to rising wage inflation, supporting Federal Reserve policy tightening ahead of its scheduled meeting next week. And it's hard to ignore the dotcom bubble flavoured 'irrational exuberance' whiff that surrounds Elon Musk's $44 billion cash deal for Twitter, particularly when the social media reported revenue and ad sales that fell short of expectations.
The benchmark 10-year U.S. yields , having risen as high 2.981% on April 20, its highest level since December 2018, were eying five straight months of gains.
Retail sales growth has been in long-term decline in China. Efforts to rebalance China’s economy towards a more consumer-oriented growth model have met with little success. Retail sales returned to contractionary territory, falling by 3.5% on a twelve-month basis in March, after increasing 6.7% on a similar basis in the January-February period. Significant weakness was evident in catering services, which fell 16.4% amid the sharp spike in virus cases. Automobile sales were 7.5% lower than a year earlier. With virus cases and lockdowns increasing in April, the near-term outlook looks bleak for households. Indeed, the urban unemployment rate has increased by 0.7 percentage points this year to 5.8% in March, and wage growth slowed sharply in 2022 Q1. Amid a slowing economy, the Chinese authorities have been enacting measures to support growth, although there has been a lack of emphasis on boosting consumer spending. Without a meaningful shift to a more consumer-oriented economic model, trend growth will continue to slow and China will struggle to catch up with the US.
COT Report
Of course, solid pressure from as the US Dollar growth as interest rates one can't pass unsigned. It makes pressure on the gold price, although it shows good resistance as well. Although obviously we see contraction of net long position - it is not dramatical. Here we see that the drop in the position mostly comes from closing of the longs but not of the new shorts. It more indicates some caution rather than direct change of the sentiment into bearish.
The same we could see from the performance of the SPDR Fund - the small downtick happens only this week:
Conclusion:
In two words speaking - everything goes according to the plan. We probably do not agree with those who tells about running into the "safety" as the US Dollar rising. Indeed, this is one of the features of "running to safe haven" , but it is always accompanied with gold positive performance that we do not see yet. Conversely we see two major drivers of current action. This is greed and hunting for higher return, that supports demand for the US bonds. Second - capital flows from the EU and Japan that we've discussed earlier.
At the same time, as we've said in recent FX report we've shown information that the oversea flows to the US is narrowing. EU, Japan and GB are largest donors of capital for the US. Japan now moving off the distance, since its trading balance and current account narrows because of huge raw materials expenses and devaluation of the yen. As a result, its balance from strongly positive now stands slightly above the zero. So, no new money comes to the US from Japan this year. The same we could say about EU, but there situation even worse, as conflict stands in the region. GB is too busy with attempt to build its own currency zone in Europe trying to use ruining EU economy. It is not occasionally we've mentioned JPY and stock market above.
Situation in the US is deteriorating dramatically. Households have spent around 70% of their savings, trying to keep consumption on the same levels. That's why, people who said that the US economy at the good pace because of strong consumption and low unemployment are wrong. Actually the "surprise" negative GDP explains many things. We said that it should be negative in IQ. They just can't hide real inflation data any more. Besides, if you take a look at the structure of the GDP - it looks very poor with big part belonging to the service sphere. Inflation and rising rates makes impact on real estate market and increase interest expenses to serve loans, mortgages etc. Stock market is overvalued even harder than during dotcom bubble. Liquidity is drying fast, as QE was closed in March and now it should turn to QT. We expect that this hurts junk companies and its debt where the way of mass defaults should start. This triggers chain reaction, pushing stock market over the edge. Demand for the US Treasuries is contracting this year and many countries start to diversify dollar assets. US has all time record of trade deficit, consuming two times greater than producing. And closer to the summer, the background of rate rising gradually change, although many investors will not recognize it, as rates should keep going higher, but not because of Fed policy but because of higher demand for risk of default.
Russia is working on Rubble collateral with commodities, which raised against USD for ~8% (!) in two months. Gold stands among the most obvious collateral, but it might be backed by gathering of commodities and its natural reserves. This is the time bomb under modern pricing system. It is no secret that 90% of all futures are not deliverable. So they have no real asset on the back. Just imagine that Russia runs domestic exchange in rubble where gas/oil/wheat whatever real delivering contracts is quoting in rubles with no relation to western pricing, as it starts pricing in the way of gas/gold, wheat/gold etc., with absolute different quotation . As Ruble will be backed by real assets, the Forex quotation fails, making dollar few times cheaper and pushing commodities prices on western exchanges to the sky. The global system when EUR and USD are backed by commodities of other countries gradually is fading. These currencies are loosing collateral that were coming from delivery of commodities in exchange to these currencies. Now this stream is narrowing drastically. Money supply remains but no real assets stand behind them.
Finally, we see now rising risk of military escalation in western Ukraine with possible intruding of Poland and Romania. There are few major targets of this step but it doesn't matter for this report. It is enough to say that moving escalation on the new level could become another supportive factor for the gold. That's being said, in a case if everything goes without big shakes - situation starts to change closer to the mid summer. With the rising of geopolitical escalation gold could get additional support earlier.
Technicals
Monthly
Although gold has dropped a bit, it holds our suggestion by far, that it should remain between YPP and YPR1. Monthly trend remains bullish. Market really shows some difficulties with upside breakout as 2nd challenge to pass through 2000K is also unsuccessful by far. But we do not see any tragedy here. In fact, the pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
In general, everything goes with our timing, as we suggest that gold remains under pressure until the mid summer or slightly longer. A the same time, gold shows good resistance to different headwinds of rising interest rates and dollar in particular. Our suggestion is confirmed by Saxo Bank comments above that investors still accumulating gold, forming the financial cushion.
Thus, although downside action likely to be more extended - it doesn't break the bullish long-term picture.
Weekly
Trend has turned bearish here, and market has broken first 3/8 Fib level. As oversold stands lower - we have no natural barriers that could hold downside action here. It means that AB=CD target becomes most prominent in current situation, as it also agrees with 5/8 support area and oversold. So, we're watching for 1830$ area in mid term.
Daily
Here market is not at oversold any more. Trend remains bearish here, and we're watching for the same pattern as on the weekly chart. The only intrigue comes from intraday H&S pattern that is not failed formally by far.
Intraday
So, the first step of our trading plan starts well, as market indeed turns down from the K-area that we've discussed. So, bears could move stops to breakeven and just watch the movie. Those who missed entry could consider using of Stop "sell" entry order around 1975 lows to step in during downside breakout. But first - keep an eye on 1886-1890 Agreement support. If gold fails to stay above it - this becomes strong sign of downside continuation:
Bulls, in turn, also should keep an eye on the same level, but for different purposes - to make a decision on entry. This area provides minimal risk of the potential long trade, as you could hide stops just under Agreement area. Speaking on bullish position - personally, I do not like a bit fast downside action. This is weakness sign for the H&S pattern. Besides, we expect that Fed comments on 3-4 of May are likely to be more hawkish that decreases chances on success of bullish trade. But this is only our suggestion by far and maybe the reality goes in different way.
