Gold GOLD PRO WEEKLY, May 09 - 13, 2022

Sive Morten

Special Consultant to the FPA
Messages
15,954
Fundamentals

So, for the gold market the drivers this week area mostly the same - Fed statement and NFP report. We were a bit surprised that Fed has come we so dovish position and positive view on the US economy. Situation stands absolutely different compares to what Fed has said, and yesterday in our FX report we have shown the real situation. Actually, the US economy is on the edge, and the fact that after 1% rate hike we see no changes in statistics is a bad sign, showing that Fed might loosing the control over situation. From the perspective of the gold market - current situation doesn't contradict to our long term view, as we expect that gold remains under pressure at least until mid summer.
The same story is about NFP. Have you thought why employment stands at all time lows while vacancies near the high? Because we have around 10 Mln people who do not want to work and sit on the welfare from bubbling stock market. Soon this journey will be over and you will see real unemployment around 9.6%. Why this should happen - also explained in FX report.
So, on gold market to start investing, we need to wait when the high rates become not just reflection of Fed policy but investors demand for risk of default. Now we see "hidden" way of this process in a way of drastic demand drop for the US bonds. I wouldn't surprise if we see long-term rates two or maybe three times higher then now (7-9%), in a perspective of 1-2 years. Why stock market should collapsed we explain in FX report - Fed vitally needs to return demand for the bonds, which is critical for national debt serving. With booming stock market it is impossible to do. Thus, they should organize some stock market crush in near term. Stocks already stand under pressure, feeling competition from rising yields on the bond market.

Market overview

Gold firmed on Tuesday, tracking a slight retreat in U.S. Treasury yields and dollar, while investors anticipated an aggressive interest rate hike from the Federal Reserve when it concludes a two-day policy meeting.

"Gold in recent weeks has dropped significantly as the yield curve has moved up. Today a slight retreat in yields is supporting gold prices... Gold is going to be fairly range-bound," said Bart Melek, head of commodity strategies at TD Securities. Gold has pretty much priced in a fairly aggressive set of policy moves for the Fed meeting."

While gold is considered an inflation hedge, higher interest rates lift the opportunity cost of holding zero-yield bullion. If the FOMC meeting is more hawkish, gold could dip to levels indicated by real yields. However, a dovish meeting or escalation in geopolitical tensions or inflation fears could push gold back towards $1,900/oz, Standard Chartered analysts said in a note.

"The sharply higher dollar against both the Indian rupee and Chinese renminbi, the world's biggest buyers of physical gold may trigger a challenging period for gold, until buyers adapt to higher levels," Saxo Bank analyst Ole Hansen said in a note.

Gold prices are expected to hold firm this quarter as investors seek refuge from soaring inflation and risks such as the war in Ukraine, before retreating later this year as interest rates rise, a Reuters poll showed on Tuesday. Gold is traditionally seen as a safe place to invest during times of financial and economic uncertainty but, as it yields no interest, it tends to lose its attraction when interest rates rise.

The relationship has been complicated this time by fears that the aggressive pace of tightening signalled by the U.S. Federal Reserve to combat inflation may derail economic growth, which could bode well for gold.

In the latest quarterly survey of 31 analysts and traders carried out in April, the median forecast for gold prices came in at $1,920 an ounce for the April-June quarter. That compares with $1,770 in the previous quarterly poll compiled in January, and an average price so far this quarter of around $1,930 an ounce.

The median forecast for the third quarter was $1,875, while the numbers for 2022 and 2023 were $1,890.65 and $1,762.50 an ounce respectively versus $1,775.50 and $1,653 previously.

"A geopolitical risk premium is likely to keep gold prices elevated short-term," said Standard Chartered analyst Suki Cooper. Longer-term we expect the yield relationship to re-establish itself as the primary driver, and gold prices are likely to trend lower, albeit from elevated levels."

Gold climbed above $2,000 an ounce in early March after Russia invaded Ukraine, but has since retreated to around $1,850 an ounce. Capital flows into the dollar, another safe haven, also diminish gold's appeal for those holding other currencies.

"The strong U.S. dollar is definitely not good for gold, and multiple rate hikes on the agenda in the U.S. are even worse," said Frank Schallenberger, head of commodity research at LBBW.

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The median forecast for silver prices this year is $24 an ounce, easing to $22.50 for 2023, compared with $22.96 and $21.80 in the previous poll. Silver is used as a safe-haven asset and by manufacturers of goods including solar panels, automobiles and electronics.

"Industrial silver demand is still rather sluggish in our view, as silver remains one of the few industrially used metals for which demand has not grown during the fast decade," said Julius Baer analyst Carsten Menke. We still see investment demand as the dominant driver of silver prices."

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U.S. Treasury yields jumped and global equity markets tanked on Thursday, erasing the prior day's rally on Wall Street, as investors worried aggressive central bank policies around the world to tamp down inflation could easily shackle growth. The yield on 10-year Treasury notes rose 12.2 basis points to 3.037%, with inflation-hedge gold rising after Powell emphasized risks to the economy from soaring inflation.

Data shows the long end of the Treasury market has suffered the most deeply negative returns this year going back to at least 1928, said Joseph LaVorgna, chief economist for the Americas at Natixis in New York. I'm surprised by the price action in the Treasury market because this has been an extraordinary historic move," he said. This is a pretty big move on top of an already significant move. It's due to rising real yields," LaVorgna said.

Markets will remain volatile until there is a clear picture of Fed rate policy and its trajectory later this year, said Anthony Saglimbene, global market strategist at Ameriprise Financial.

Investors are "worried that when we get to the back half of this year, the Fed is going to be so aggressive with raising interest rates that they're going to take the economy into a recession," he said, adding "there's an overall negative sentiment in the market."

Britain's pound and government bond yields fell sharply after the BoE raised rates to their highest level since 2009 to counter inflation heading above 10% and warned the UK economy was at risk of recession.

German industrial orders fell more than expected in March, driven mainly by declining orders from abroad as the war in Ukraine hit manufacturing demand in Europe's biggest economy.

"The German economy is programmed for a downturn," said Thomas Gitzel, chief economist at VP Bank. The war in Ukraine, the supply chain problems and high rates of inflation are spoiling companies' appetite for investment," he said, adding that a recession was becoming increasingly likely.

Global supply chain problems look to set to worsen, a new report published on Tuesday said, as China's COVID-19 lockdowns, Russia-NATO conflict in Ukraine and other strains cause even longer delays at ports and drive up costs. The study by analysts at Royal Bank of Canada (RBC) found that one-fifth of the global container ship fleet was currently stuck in congestion at various major ports.

In China, ships awaiting berth at the Port of Shanghai now tally 344, a 34% increase over the past month, while shipping something from a warehouse in China to one in the United States currently takes 74 days longer than usual. In Europe too, ships from China are showing up an average of four days late, causing a number of knock-on effects, including a shortage of empty containers to take European-made goods to the U.S. east coast.

"Global port congestion is worsening and becoming increasingly widespread," RBC's Head of Digital Intelligence Strategy, Michael Tran, and colleague, Jack Evans, said in the report, acknowledging it was hard to say when things would improve.

Ships and containers must both be available at the right time and place to prevent cancelled bookings. Any mismatch results in ships running below full capacity, hence, more are then required to move the same amount of freight. RBC said the plethora of problems was having a "domino-like negative compounding effect across various markets".

Marine fuel prices in Singapore, the world’s largest refuelling port, meanwhile, have jumped 66% over the past year.

"Many market participants thought that supply chains would be untangled by now, but this scenario has failed to materialize," the report said.

Though vessel delays have improved fractionally over the last couple of months, the average global delay of a ship's arrival was still 7.26 days in March, a figure that rarely tops 4.5 days in normal times, RBC noted. On the U.S. West Coast, the ports of Los Angeles and Long Beach continue to struggle to keep up.

A queue of 19 vessels in Los Angeles and port level inefficiencies have seen Time of Turnaround (ToT) jump to 6.9 days from 5 days a month ago, although it is still down from the peak of 8.7 days during last year's pre-Christmas rush. The aggregate ToT for the three largest European container ports, Rotterdam, Antwerp and Hamburg, are 8%, 30% and 21% respectively above their five-year normal levels.

"Significant compression of ToT times are required before we can confidently suggest a path toward normalizing shipping costs," RBC's analysts said. "The problem? Things are getting worse".

Global manufacturing growth has started to decelerate as supply chain problems, the rising cost of energy and raw materials, and the conflict in Ukraine take their toll.
Slower manufacturing and freight growth will be quietly welcomed by policymakers since it is likely to ease supply chain bottlenecks and take some of the heat out of energy prices and inflation.

But as the sector loses momentum, it will become more vulnerable to shocks or policy errors that could turn a mid-cycle slowdown into a cycle-ending recession.
The range of possible outcomes for growth and inflation is wide and the room for policy errors is very narrow. U.S. manufacturers reported another fairly widespread expansion in business activity last month but fewer firms are reporting growth compared with 2021.

The Institute for Supply Management’s purchasing managers’ index slipped to 55.4 in April from 57.1 in March and 60.6 at the same point last year. In the eurozone, manufacturers also reported a slower expansion last month, with the purchasing managers’ index down to 55.5 in April from 56.5 in March and 62.9 last year.

In North America and Europe, the manufacturing sector is still expanding, but momentum is ebbing fast and the slowdown is likely to deepen as inflation and higher interest rates squeeze household spending. In China, manufacturers have already been hit far harder than in the other regions. China’s manufacturing index slipped to 47.4 in April from 49.5 in March and 51.1 in April 2021, according to the country’s National Bureau of Statistics.

The index has fallen to its lowest since February 2020, when the first wave of the pandemic was raging, and before that January 2009, when the economy was in the midst of the recession caused by the financial crisis. China’s manufacturers already appear to be on the brink of recession as lockdowns close factories and disrupt supply chains.

China's anti-COVID lockdowns give every indication of stretching through the spring. Alongside the strain on tens of millions of people, damage to the economic outlook - in China and globally - is immense. And markets' patience with limited policy support is wearing thin. If trade figures. Iron ore, oil and copper prices are already wavering. In the teeth of a steep U.S. hiking cycle, the slowdown also bodes ill for the wobbling Chinese yuan and in turn, for the foreigners who have placed their money in local markets.

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"While it is true that a lot of monetary tightening has been priced into the dollar, which would normally suggest more limited upside room...at the same time, we think that we definitely wouldn't exclude more hawkish repricing in terms of the terminal rate, for example, towards the 4.0% mark," said Francesco Pesole, FX strategist at ING. We think that the dollar strength induced by Fed tightening will last as long as the Fed doesn't start pushing back against market pricing in terms of (the) terminal rate."

While higher Treasury yields were expected to keep the dollar well-bid in the near term, the May 2-4 poll of nearly 70 strategists taken just before the Fed meeting showed analysts still expected the dollar to weaken over the next 12 months.

"Front-loaded monetary tightening will have consequences for growth which will result in rate hike expectations later being pared, leading to a weaker dollar," noted Lee Hardman, currency analyst at MUFG.

Rising rates mean borrowing for a house is suddenly more expensive. The 10-year Treasury note yield, a benchmark for mortgage rates, has risen on expectations of swift Fed rate hikes. The average 30-year-fixed home loan rate is now 5.37%, up more than 2 percentage points since the year began, according to the Mortgage Bankers Association.

So buyers of a typical existing home, which went for $375,000 in March, will pay $440 more each month than they would have in December, if they put 20% down and borrow the rest at a fixed rate for a 30-year term. Higher interest rates account for most of that. Meanwhile inflation is also driving up grocery bills and gasoline costs.

"The housing market is definitely out of whack," said Fed Governor Christopher Waller, who recounted last month how he sold his St. Louis home to an all-cash buyer with no inspection. "We'll see how the interest rates start cooling things off going forward."

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At the same time, mortgage applications remain above pre-COVID levels, and house prices hit a record as homes were snatched up typically within 17 days of listing.
Some of that could be a last-gasp effort of buyers, particularly those with pre-approved financing, racing to purchase homes before rates go even higher.

"The next couple of months things are going to heat up until we get to an inflection point," probably this summer, Zillow Economist Nicole Bachaud said.

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The next major U.S. economic focus will be consumer price inflation data on Wednesday. This is expected to show that price pressures rose at an annual pace of 8.1% in April, just below March's reading of 8.5%, according to the median estimate of economists polled by Reuters.

COT Report

Recent CFTC data shows clear bearish sentiment on the market as we see massive closing of the bullish positions as among speculators as among hedgers. Open interest has increased slightly as well:

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Conclusion:

So, above we've provided some curious information at first glance, concerning real estate US market, China and global shipping. You could ask - how it relates to the gold? In fact, relation is direct. Although ING analysts mentioned above suggest that rising rates, including target rate to 4% should support US Dollar and make pressure on the gold market for longer, we disagree by few reasons. First is, to be honest guys, now target rate has to be 7-8% to keep real rates around zero, but in fact it has to be even higher. Real rates of TIPS are not reliable as they are based on forward inflation rates, that is a subject for manipulations and we should take in consideration modern CPI/PCE or any other inflation index.
At first glance, everything looks quite logical - rates are rising, which is direct rival to the gold that generates no interest. Gold should start dropping, and Reuters polls suggest that it happens as soon as rates become a bit higher and inflation a bit smaller. But we suggest that this hardly happens. Yesterday, in our FX report we have in-depth view on current Fed dead way situation. The US currently meets a lot of economical headwinds. The major problem is too high debt and too negative real interest rate, which leads to fast drop of demand for the US debt. Fed needs at least 10-11 Trln each months to serve and re-issue. Now they would like to add more to free the balance sheet. Who is buying all this stuff with "-8%" return and bubbling stock market? Right, nobody. Even last year Fed was buying around the half of monthly emission. They critically need to return back the buyers on the bond market, but how? The most easy way - to grab it from the stock market. This is one of the reasons why we expect the big blow of this bubble soon.
Rising interest rates increases corporate expenses of debt servicing and reduce operating margin. In most wide market, such as Real Estate mortgages it directly hurt the wealth of households with no ability to refinance and increasing monthly spending on debt payments. This should hurt consumption. People already have spent almost all savings that they have accumulated in pandemic period. The Fed statement shows clearly, that they have no long term plan. Situation needs fast reaction as Fed is definitely late with first steps, but what reaction? Fast rate hike totally destroys growth, which we consider as most probable scenario.
China shows real signs of economy slowdown, with PMI already stands in "recession" level below 50. As country is strongly involved in western economy model we suggest further deterioration of the economy by dropping overseas demand for the goods and domestic consumption. Global shipping sector keep showing problems, high costs and delays in delivery and cargo off-loading.
Finally, geopolitical situation is escalating and approaching to the US elections in November could make it even less predictable.

In a dry residual we have strongly negative interest rates which should stay for long term, high level of political and geopolitical uncertainty as globally as inside the US, anemic Fed steps that tries to take a control over economy that is moving out of control. We see the following consequence of events that should happen: chilling of mortgage market and dropping of personal consumption. It should lead to defaults of junk bonds and "zombie" companies and trigger chain reaction on the stock market. GDP should keep dropping and we do not share the optimistic view on the IIQ data. Once stock market explodes, unemployment jumps 3-4 times higher in a very short-term period. But this will be just a beginning as the US has no source for recover - no GDP surplus and inner resources, no external capital flows as all sources are empty already, huge debt, outstanding negative trade deficit. Difficult situation in China could lead to using of foreign reserves that brings even more pressure on the US economy and investors start demanding higher rate for "default free" bonds. This should become the breakeven point for the gold. The way of this process might is not straightforward, but it definitely will not be classical scenario when high rates push inflation down while economy keep growing. We suggest that this time everything will be different.

Everything goes with the plan. Now we have to keep watching, as hotpoint has not come yet and gold is under pressure by far. Once we get signs of disaster - dropping GDP, consumption, PMI, dropping stock market, stable/rising inflation, first cases of defaults, rising credit default spreads - these our signals to start thinking about gold buying. It could seem curios, but right at this moment gold should have the low price.

Technicals
Monthly

From the scale of this time, retracement on gold is small. It accurately stands in the range between the pivots, as we suggest, keeping bullish long-term sentiment. Monthly trend remains bullish. The pullback from technical point of view 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 fact, the new Fed policy mostly is formed and acknowledged but we do not see any miserable plunge on the market. This is good sign.
The new stuff here - potential bullish grabber in May. If we get it - then situation stands even worse than we think.
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Weekly/Daily

Weekly trend stands bearish, but actually, we have no objection to see gold lower. Tactically, it seems as excellent setup for long entry, if price completes downside AB-CD, making Agreement with major 5/8 support and weekly oversold area, and forming "222" Buy pattern. If we also get monthly grabber - all the better.

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Daily trend remains bearish, oversold level also agrees with the same Fib support. Our tactical Friday's setup for minor upside bounce has worked nice, but it was very short-term and gold was not able to improve success. Currently we do not have bearish grabbers here, but still, we have to be careful to intraday bearish signs:

Intraday

While we do not have anything special on daily - we have some things on intraday charts. First is - the performance of our long entry scenario on 1H chart. Puny H&S pattern works nice and actually price hits both extensions - OP and XOP, but later gold drops back, which smells like failure, despite we have the grabber here.
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As a result, we've got two bearish grabbers on 4H chart and irrational H&S performance. While gold should show thrusting action with this bullish pattern - we see weak and heavy performance instead. As the right arm's low is set already - its breakout might become the first sign of downside continuation. Currently any bullish position cares significant risk.

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Sive Morten

Special Consultant to the FPA
Messages
15,954
Morning everybody,

The interest rates market is so overextended that Treasuries today turns to the pullback. This provides some relief to the gold as well, turning to sideways action. Still, as we've suggested in weekly report - downside action has happened, and on the daily chart flag is broken down. Besides, we do not see fast return, so, it seems that breakout is real, and downside continuation is a question of time. Thus, the OP and 1820-1830 area still stands in focus:
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On 4H chart grabbers are done excellent and H&S has failed. It suggests drop below the head soon:
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Trading setups stand on 1H chart. Bears could consider big butterfly pattern, watching for position taking around Fib resistance levels. 1873 K-area looks interesting, especially if gold forms minor H&S pattern here as it was last week. Bulls could try to trade this minor H&S pattern.
Butterfly targets envelope daily destination point. Besides, here we have uncompleted OP right under the lows, which increases risk of downside drop. So, be careful with short-term bullish setups. But whatever we have here, on 1H chart, this is just technical minor setups inside larger downside tendency.
gold_1h_10_05_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,954
Morning guys,

So, gold indeed has dropped lower yesterday, existed intraday OP and forming butterfly has left no chances to the bulls and market was not able to complete minor H&S on 1H chart that we've discussed. On daily chart, we're still watching for 1820-1825 area, our major target. Current pause stands due the pullback on interest rates and expectations of CPI report today - be careful as well.
gold_d_11_05_22.png


On 4H chart gold is start taking the channel shape and completed local minor AB=CD pattern. Now 1886-1892 seems like attractive area for consideration of short entry. 1865$ is also should be in focus, as this is minimal target of 1H butterfly:
gold_4h_11_05_22.png


On 1H chart - price has dropped through the OP as it is no exist. Just to remind you - XOP perfectly agrees with our daily 1820$ target. 1.27 butterfly is also completed, which is also the background for the pullback. Thus, you could use its lows as invalidation point for scalp long trade. Just be aware of CPI numbers today:

gold_1h_11_05_22.png
 

RahmanSL

Major
Messages
2,867
Morning guys,

So, gold indeed has dropped lower yesterday, existed intraday OP and forming butterfly has left no chances to the bulls and market was not able to complete minor H&S on 1H chart that we've discussed. On daily chart, we're still watching for 1820-1825 area, our major target. Current pause stands due the pullback on interest rates and expectations of CPI report today - be careful as well.
View attachment 76630

On 4H chart gold is start taking the channel shape and completed local minor AB=CD pattern. Now 1886-1892 seems like attractive area for consideration of short entry. 1865$ is also should be in focus, as this is minimal target of 1H butterfly:
View attachment 76631

On 1H chart - price has dropped through the OP as it is no exist. Just to remind you - XOP perfectly agrees with our daily 1820$ target. 1.27 butterfly is also completed, which is also the background for the pullback. Thus, you could use its lows as invalidation point for scalp long trade. Just be aware of CPI numbers today:

View attachment 76632
Excellent analysis Sive...very helpful, thank you very much and all the best.
 

Sive Morten

Special Consultant to the FPA
Messages
15,954
Good morning,

So, gold shows bounce after completion of 1H butterfly pattern. Now the minimal target of the retracement is completed. Still, gold has chances to move higher because of the cross markets background. For instance, 10 year yield is dropping and already stands around 2.8%.
At the same time, we do not treat current action as reversal already, because major OP is not done yet. Thus, on daily chart we should carefully watch for possible bearish grabber:
gold_d_12_05_22.png


On 4H chart price stands at 1st resistance, the next K-area looks as most interesting as for entry as for stop hiding.
gold_4h_12_05_22.png


let's use recent CPI AB-CD pattern, gold hits the OP already. But it was relatively fast and suggests possible action to the XOP. But if you worry to miss position taking or do not want to wait - you could take here 1/3 and add the rest higher, around 4H K-area if action happens. If now - you have at least 1/3 for result:
gold_1h_12_05_22.png

But, this is tactical stuff... most interesting should start once daily OP will be reached. We get huge "222" Buy" pattern guys. Mostly we already have it.
 

RahmanSL

Major
Messages
2,867
Sanctioning and taking out the world's third biggest supplier of gold, Russia, out of the supply chain will have some effect on the price of this commodity.
I am not sure just how much precious metal the alternative energy uses which will of course impact the price as developments of alternative energy intensify.
 

Sive Morten

Special Consultant to the FPA
Messages
15,954
Morning everybody,

So, situation is very similar to the EUR. Gold hits daily Agreement around 1825$. Longer term charts suggest that it is not the end probably, as it could go lower later.
gold_d_13_05_22.png


In short-term we have absolutely the same strategy. To make bet on the upside bounce, it is preferrable to get the pattern. It makes our life easier. For example reverse H&S:
gold_4h_13_05_22.png


At the same time, we do not see big risk to use hammer pattern on 4H and 1H butterfly for scalp bullish positions. Gold should try to complete the minimal butterfly target at least around 1848$ area. Right now we do not consider any bearish positions.
gold_1h_13_05_22.png
 
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