Gold GOLD PRO WEEKLY, May 16 - 20, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,092
Fundamentals

This week market society mostly was watching for inflation numbers and ongoing processes in economy trying to understand the perspectives. It is expectedly that gold is dropping, as it should to, according to our analysis. When Fed dries liquidity, any other market becomes the source and gold is not an exception. But this effect lasts for limited time. In a perspective of few months we suggest that situation should start to change.

Market overview

Gold fell more than 1% on Friday and is set for its fourth straight weekly decline, as the dollar's strong run with more aggressive U.S. interest rates on the horizon sapped appetite for bullion. Spot gold fell 0.7% to $1,808.89 per ounce after hitting its lowest since Feb. 4 at $1,798.86. It has declined nearly 4% this week.

U.S. Federal Reserve Chair Jerome Powell said on Thursday that the battle to control inflation would "include some pain", as the impact of higher interest rates is felt.

"Gold is being weighed down as the Fed has been committed to raise interest rates at a fast pace and in addition, the dollar has been extremely strong," said David Meger, director of metals trading at High Ridge Futures. Going forward, the inflation numbers are what the market will closely watch."

"We fully understand and appreciate how painful inflation is," Powell said in an interview with the Marketplace national radio program, repeating his expectation that the Fed will raise interest rates by half a percentage point at each of its next two policy meetings while pledging that "we're prepared to do more" if data turn the wrong way.

"Nothing in the economy works, the economy doesn't work for anybody without price stability," Powell said. "We went through periods in our history where inflation was quite high ... The process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that's like. And that's just people losing the value of their paycheck."
With "perfect hindsight," Powell said, it "would have been better" to have begun raising rates earlier than March of this year, given inflation began a sharp turn higher in 2021.

Powell said he believes the country can avoid a serious downturn. But on the same day that the Senate confirmed him to a second four-year term as Fed chief in a bipartisan 80-19 vote, Powell also made the central bank's priorities clear. Above all else, "we can't fail to restore price stability," he said.

The U.S. economy is facing its toughest inflation problem since the 1970s and early 1980s, when prices at one point rose at an annual rate of 14.5% and then-Fed chief Paul Volcker used punishing interest rates to twice throw the economy into recession. The unemployment rate climbed above 10%.

Powell has paid frequent homage to Volcker's commitment to beating inflation, while also saying he still hopes to avoid the sharp tradeoffs that Volcker used to bring prices under control. While inflation is not approaching Volcker-era levels, the quick run-up in the cost of food, gas, housing and other daily staples has become a politically explosive issue for President Joe Biden's administration. Consumer prices in April were 8.3% higher than a year ago.

Interest rates are rising sharply as a result of the policy steps already taken by the Fed, with the rate on a 30-year fixed mortgage jumping from less than 3% last year to more than 5%, and volatile stock markets wiping out trillions of dollars in wealth that will likely prompt some consumers to spend less - and curb inflation in the process. Powell, who opened a news conference after last week's policy meeting by saying he wanted to "restore price stability on behalf of American families," used the radio interview on Thursday to amplify that broad message to the public.

"If you're going to use monetary policy to get inflation under control, what you got to do is to tighten up on the consumer to reduce spending. Certain industries, most notably housing, are going to feel that pain. You're going to have mortgage rates over 6%. It's going to make it harder for potential homebuyers to buy," said Stan Shipley, a strategist at Evercore ISI.

Biden now has filled the top two Fed jobs and seen two of his other appointees confirmed to the central bank's seven-seat Board of Governors. The president made clear this week he was giving them full sway to try to lower inflation.

The dollar index was set for a sixth consecutive weekly gain, hovering near a 20-year high. Although seen as an inflation hedge, bullion yields no interest and is sensitive to rising U.S. short-term interest rates and bond yields. At the same time it is not correct to think that gold is dropping because of bounce on the stock market. The liquidity drying makes impact on all markets with no exception. Thus NASDAQ has dropped more than 25% off the top this year and this is just a beginning:
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While cryptocurrencies are on the way to under 20K level:

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And if you compare this performance with the gold market, you understand that gold resists rather good to external factors as everybody understand of importance to keep money in real assets because performance of financial ones hardly predictable right now. At first glance the US Debt is "safe haven" but how do you know? Last week we already have showed that demand for the US bonds narrowed more than 30%. In 2021 Fed was buying back approximately the half of all new debt issues, but now they intend to throw on the market new amounts out from their balance sheet that they have accumulated during QE. But who is buying the bonds with "-8%" real yield? Now they could suck money out from the other markets to keep rates more or less stable, but when free sources will come to an end, rates keep going higher as default risks appear on the horizon.

The disbalance in the US economy stands approximately for the 50% of real GDP, which is around 15 Trln. The US economy should narrow twice in the size to set the balance between real revenues and households' spending. Because now people have two times more money for consumption than national economy could produce. With the rate of contraction around 8-9% per year, the crisis could last for 4-5 years, if it goes more or less smoothly. Now we're coming to the second stage of the crisis, when chain inflationary reaction start making inroads in all spheres of life. Prices are rising. It demands for rising of the wages, which in turn increase corporate expenses and decreases profit margin (production efficiency), making companies to rise prices. Debt serving is also increasing, making money more expensive. As it correctly said above - to hold inflation, you have to drop the public consumption what we see now is happening. This should be sharp drop, and this drop happens by sharp price increasing. People pay the same money but get two times less goods and services. Be prepared for the bumpy ride, 2-3 times jump in unemployment, drop in GDP and population poverty. It is not too long to wait for the gold investors, when it starts rising again.

Now gold is falling not because of its own devaluation, but because of the US Dollar rising. Yesterday we've said that there are three major reasons for this process.
  • The first reason is carry trade, although we suppose that it is not the primary factor. Fed rate change is faster than in EU, Japan and other countries, except GB, maybe. This makes investors to move capitals overseas. Additional reasons is geopolitical escalation in EU, lack of transparency in economical and political programme, what ECB and Brussels intend to do and how it will re-shape the economy. As we've warned in February, it already summed of ~ 1Trln. capital flow.
  • The majority of global debt is nominated in USD. Thus, to serve it, you need dollars. Now we have a liquidity crisis. In fact, Fed dries liquidity, starting QT. The liquidity crisis, leads to lack of safety and triggers accumulation of assets for debt servicing.
  • Finally, 2/3 of global debt has floating rate. As rates are rising it is more dollar needed to serve it. In a global scale, this is a huge amount of money.
That's being said - the rising of the dollar right now is a negative, sign of crisis event, when investors are running into funding currency, out from third-sided currency projects. Now Fed meets big problem - no effect of rate change but very big bad sequences, as any hike step makes people life more expensive, hurting economy performance

Now, the poison crisis fumes are spreading on other countries, that tightly involved in western economy system. GB and EU problems are well-known and mostly stand the same as in the US but at worse degree. But now, China starts to show worrying signs. Inflation is also going higher:
1652615032522.png


While loans fall to 20-year lows. Dropping of the loans means narrowing the consumption:
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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, currency turns to sharp drop to the USD as well. A sharp deceleration in Chinese economic activity has been evident from the data since March. Trouble has been brewing for some time as the economy faces challenges on multiple fronts. At the time, the regulatory crackdown against various sectors and the property market downturn were major drags on the economy. Policymakers subsequently enacted stimulus such as a modest cut in interest rates, some easing in property-related policies, and a ramping up of infrastructure spending.

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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.

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A closely watched transportation report on Thursday said "the prospect of freight recession is now considerable" as the spending shift from goods to services accelerates, inflation erodes disposable income and interest rates climb.

"Dollar is rallying as things potentially look negative in the U.S., which is hurting gold. Also, the market is realising the likelihood of seeing pretty aggressive interest rate increases," said Bart Melek, head of commodity strategies at TD Securities. "However, gold is holding relatively better when compared to the industrial precious metals," the demand for which could be hurt in a recession environment, Melek added.

"Silver is falling faster than gold, that's a bearish sign for the whole complex. With the ongoing lockdowns in China, industrial metals are struggling and US institutional investor who's bailing out a gold ETF by extension bails out of silver as well," independent analyst Ross Norman said.

U.S. consumer sentiment slumped to its lowest level in nearly 11 years in early May as worries about inflation persisted. The University of Michigan's survey on Friday showed the deterioration in sentiment, which some economists said pushed it into recessionary territory, was across all demographics, as well as geographical and political affiliation. Gasoline prices and the stock market have a heavy weighting in the survey. The University of Michigan's preliminary consumer sentiment index tumbled 9.4% to 59.1 early this month, the lowest reading since August 2011.

A deluge of data from across major economies comes at a pivotal moment in the debate over whether central banks are jacking up interest rates into a potentially sharp global growth slowdown. And with jittery investors dumping risk assets en masse, what comes next after a crypto-currency rout is also in focus. The Federal Reserve is all but certain to hike interest rates by 50 basis points at upcoming meetings. Upcoming data should show whether hefty tightening will bring a hard or soft landing for the economy. Forecasts for Tuesday's U.S. retail sales data predict a 0.7% rise in April after a 0.5% monthly increase in March.

Friday's existing home sales data could show just how quickly rising mortgage rates are cooling the housing market. The Fed's determination to contain inflation has fuelled hard landing worries. The S&P 500 is set for its worst year since 2008 -- any signs the economy is weathering higher rates would be welcome relief.

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The consumer is in trouble. Soaring food and fuel prices are eroding disposable incomes and lockdown-era savings that could have been spent on travel and shopping, are dwindling fast. Economists predict COVID curbs will have driven a 6% slump in China's April retail sales, almost double March falls. U.S. April retail sales are tipped to rise, but as in March, gasoline and food may account for most of the increase. British consumer confidence slumped in March to near the lowest in nearly half a century, research firm GfK said. A cost-of-living squeeze likely deepened shoppers' gloom in April.

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COT Report

Obviously we've got contraction of long positions. Gold now has evident bearish sentiment. This week, speculators have closed more of long positions on a background of rising open interest. This is clear sign of bearish sentiment.

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Conclusion:

Well-well, guys, what do we have after the month of active Fed struggle against the inflation? If even we try to avoid any alarmist view, there are low reasons to be happy. Fed 1% rate hike gives no effect. Its a fact. 8.3% CPI numbers I would say is "too averaging", where in fact, inflation stands significantly higher, you could hear it even on TV already. If we take a look at Food inflation in the US, or finished good PPI numbers - we see inflation above 10-15%. But the major problem is Fed has absolutely no idea how to struggle it. To be honest guys, there is no tool exist that could help with it. It is natural process that might be tougher or smoother but you just have to wait.

1652616948753.png


Another problem that Trumpist republicans and MAGA followers, although should win November elections also could do nothing with it, but at least they could accuse democrats and J. Biden administration. Actually, I do not know what the degree of mind manipulation in the US, as people just accepting "Putin did this" explanation. This is outstanding stupidity when you accuse the President of another country in your problems and your mistakes in policy. Why we can't assume any other public person? It is so comfortable to running away from problems. But its a off-topic.

Next is unprecedented liquidity crisis. Interest rates rising, cutting of the Fed balance sheet moves all cash flows, as speculative as investing into the US Dollar. While some are hunting for the carry trade bargain, others just need more dollars to serve existed debts. But Fed also needs it and they give no cent to anybody, crushing all other markets on a way of debt burden financing.

Gold market now is becoming the hostage of this process. Investors have no time to care about gold while they need cash to finance current deficit. Very soon we should see that this liquidity is not enough to support huge US national debt. Drop of the stock market and rising of the interest rates trigger massive default of junk bonds and companies, which just add more fuel into the fire and credit spreads jump. There should be the breakeven in the minds of the investors when understanding of running into the real safety comes. Interest rates keep going higher not because of the Fed rate change, but because of investors demand higher compensation for default risk. Currently the terminal rate has to be not around 3.5-4% as Fed suggest, but above 8%. Obviously they can't move it so high. In residual we get the combination of deep negative real yield, low demand for it and huge demand for liquidity to serve it. I would say that this is terrible and absolutely unstable combination. As higher Fed will rise rates - as worse situation in economy becomes and, hence, as closer we're coming to reversal on the gold market. Let's calmly watch for downside action on the gold market, as it provides us better and better price and let situation to follow its natural progress. With this Fed policy and political fight closer to November elections, hardly we will wait too long. Summertime maybe...
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Technicals
Monthly

Market shows heavy performance in May, dropping back to the YPP around 1820 area. Unconfirmed trend has turned bearish, and price is not at OS level. The May close seems vital for the short-term situation, because it tells whether gold remains above the pivot and whether we get bullish grabber here.

If we suggest that everything remans as we have now - then chances on downside continuation to YPS1 and lows around 1685$ increases. Monthly chart is driven by fundamentals mostly. And while everybody tries to collect "free" dollars across the Globe - pressure on the gold market remains.
gold_m_16_05_22.png


Weekly/Daily

This time frame stands in favor of further drop, but a bit later. In short term, there are few reasons for optimism. Thus, we have DiNapoli bullish "Stretch" pattern - the combination of Fib level (and Agreement in our case with the OP target) and weekly oversold. In general, existence of the oversold, makes downside continuation difficult and choppy for the gold market.
Thus, chances on tactical moderate bounce exist.

In longer-term, acceleration to OP target is a bad sign, making chances greater that we could proceed to 1710$ XOP later. Besides, currently we also stand at bit COP from double tops here (not shown), and breaking this level down, logically leads market to OP around 1675$ lows again.

Thus, we're watching here for the bullish patterns on lower time frames, but at the same time, treat possible downside breakout as the signal of further drop.

On daily chart we see nothing interesting yet.
gold_w_16_05_22.png


Intraday

Intraday charts also do not show something definite by far. Patterns that we were counted on, have not shown proper reaction, and now we have no choice but wait. For the truth sake I do not know at what degree we could treat current wage pattern as "bullish" one. Market shows no reaction on 1.618 butterfly target. This looks rather bearish. And now all hopes stand for weekly oversold. Thus, right now it is not comfortable to go short because of weekly OS but bullish setups do not exist either. It mean only one thing - we have to be patient.
gold_1h_16_05_22.png
 

RahmanSL

Major
Messages
2,875
"...Market shows no reaction on 1.618 butterfly target. This looks rather bearish. And now all hopes stand for weekly oversold. Thus, right now it is not comfortable to go short because of weekly OS but bullish setups do not exist either. It mean only one thing - we have to be patient."

Yes, indeed, "Patience" and lots of it because it seems like the Americans has difficulty in understanding what is causing their high and increasing inflation in the first place. Laying external blame does not help and most certainly does not drive down inflation. In the meanwhile, as long as the almighty dollar remains strong, precious metals will remain underpinned.

"....Currently the terminal rate has to be not around 3.5-4% as Fed suggest, but above 8%. Obviously they can't move it so high. In residual we get the combination of deep negative real yield, low demand for it and huge demand for liquidity to serve it. I would say that this is terrible and absolutely unstable combination. As higher Fed will rise rates - as worse situation in economy becomes and, hence, as closer we're coming to reversal on the gold market..."

Couldn't agree with you more. For those brave souls, that can be a major break to make some serious money when the sudden reversal happens, not necessarily due to actions by the FEDs, but some other major disruption to the world, perhaps like Russia sudden decision to take on the U.S.A and NATO due to pressure exerted by Finland & Sweden successfully joining NATO. My crystal ball is under service and so can't see the future.

Thank you Sive for the excellent post and, as I have informed in another post, my focus will be on silver which is more or less tied to gold.
 

chalo

Private, 1st Class
Messages
37
Technicals
Monthly

Market shows heavy performance in May, dropping back to the YPP around 1820 area. Unconfirmed trend has turned bearish, and price is not at OS level. The May close seems vital for the short-term situation, because it tells whether gold remains above the pivot and whether we get bullish grabber here.

If we suggest that everything remans as we have now - then chances on downside continuation to YPS1 and lows around 1685$ increases. Monthly chart is driven by fundamentals mostly. And while everybody tries to collect "free" dollars across the Globe - pressure on the gold market remains.
View attachment 76771

Weekly/Daily

This time frame stands in favor of further drop, but a bit later. In short term, there are few reasons for optimism. Thus, we have DiNapoli bullish "Stretch" pattern - the combination of Fib level (and Agreement in our case with the OP target) and weekly oversold. In general, existence of the oversold, makes downside continuation difficult and choppy for the gold market.
Thus, chances on tactical moderate bounce exist.

In longer-term, acceleration to OP target is a bad sign, making chances greater that we could proceed to 1710$ XOP later. Besides, currently we also stand at bit COP from double tops here (not shown), and breaking this level down, logically leads market to OP around 1675$ lows again.

Thus, we're watching here for the bullish patterns on lower time frames, but at the same time, treat possible downside breakout as the signal of further drop.

On daily chart we see nothing interesting yet.
View attachment 76772

Intraday

Intraday charts also do not show something definite by far. Patterns that we were counted on, have not shown proper reaction, and now we have no choice but wait. For the truth sake I do not know at what degree we could treat current wage pattern as "bullish" one. Market shows no reaction on 1.618 butterfly target. This looks rather bearish. And now all hopes stand for weekly oversold. Thus, right now it is not comfortable to go short because of weekly OS but bullish setups do not exist either. It mean only one thing - we have to be patient.
View attachment 76773
Dear Sive, very thankful for your helpful and succinct analysis. Navigating uncertain times in financial markets is not something I do well, however, with your great help my eyes and mind are seeing light and good reasoning, inviting patience. Thank you so much for your dedication.
 

Sive Morten

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

So, due to the technical situation that we've discussed in weekly report (weekly Stretch pattern), we consider upside bounce as highly likely in near term. Besides, today almost all markets have started the bounce and gold is not an exception.

Thus, we intend to go with our trading plan and now we need final confirmation - bullish reversal patterns on lower time frames.
gold_d_17_05_22.png


On 4H chart our wedge finally has been broken up and take a look - gold almost at the first 3/8 Fib resistance around 1833:
gold_4h_17_05_22.png


Unfortunately we do not have daily Obght, as GBP video today, but we also have XOP and Agreement resistance around 1833 level. Thus, probably we could focus on the same shape here - reverse H&S to plan long entry at the bottom of the right arm:

gold_1h_17_05_22.png


If you would like to take short position out from XOP - drop the time frame more, to 5 min chart and watch for bearish patterns, H&S, butterfly etc.
 

Sive Morten

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

So, gold market has finished the preparation of tactical bullish setup and now we need to make a decision on whether take position or not and how to take it.

On 4H chart now we need to keep an eye on possible grabber. If it will be formed - this gives us more confidence with current setup, that gold starts 2nd leg of upside bounce:
gold_4h_18_05_22.png


On 1H chart market stands right at supposed bottom of the arm, and near 5/8 support area. If you're perfectionist, you could drop the time frame even more, say to the 5 min, and try to catch bullish reversal pattern there. Also, on 1H chart - it might be DRPO "Buy" formed. Also watch here for the minor bearish grabber. It is not the fact that it will be formed, but right now it is possible. In this case minor downside spike could happen, maybe right to Fib support level.

Those who are not as concerned about pedantic entry, could just take position "around" Fib support with stops below it
gold_1h_18_05_22.png


If price starts dropping below 1797 area - chances on H&S failure become vital.
 

Sive Morten

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

So, on 4H chart we've got not one but three grabbers in a row, which lets us to use it as a background for long entry. At least, with the grabbers on board setup has clear parameters and invalidation point.

Here is I also draw a "Number 2" scenario if grabbers fail. Theoretically gold could keep some chances to turn up again from lower levels, but "#2" setup is much weaker, and I'm not sure that take part with it. It is preferrable to see upside reversal from current level, based on the grabbers.

gold_4h_19_05_22.png


On 1H chart we do not see some special patterns, but current downside action is very slow, suggesting that bearish power is exhausting. As interest rates are dropping as well - this is supportive moment for the gold as well. Drop below 1805 Fib support will become a sign that something goes wrong, as grabbers also fail in this case. So, all parameters are known, now we just have to make the choice.
gold_1h_19_05_22.png
 

gpeter991

Private, 1st Class
Messages
53
Do I get it right, that after the tactical bullish bounce on lower timeframes, we can still move to weekly/daily analysis and look out for potential bearish continuation patterns there leading to XOP 1710? And only then look at/observe for the potentially discovering/acknowledging the seriousness of the situation by market participants (inflation, etc) which happens later in the summer, which then would fundamentally booster the bullish sentiment on gold?
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Do I get it right, that after the tactical bullish bounce on lower timeframes, we can still move to weekly/daily analysis and look out for potential bearish continuation patterns there leading to XOP 1710? And only then look at/observe for the potentially discovering/acknowledging the seriousness of the situation by market participants (inflation, etc) which happens later in the summer, which then would fundamentally booster the bullish sentiment on gold?
Hi Peter, yes, this is our central scenario. It is dynamic and terms could change, because it mostly depends on the US economy and the speed of negative processes there. But at this moment I do not see yet signs that major reversal starts. The blow of stock market bubble just has started and only first money starts moving to US Treasuries. This process should become faster. Besides, we should get more negative statistics beyond the inflation. Its appearing already, but this is the initial stage of the process. So, the fruit should ripen. So, gold still remains under pressure by far.
 
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