Gold GOLD PRO WEEKLY, May 30 - 03, 2022

[Sive Morten]

Fundamentals

Gold this week mostly was in the same stream as other markets, showing proper reaction on the bulk of the news, starting from Fed minutes, GDP data release and others. Yesterday, we've made in-depth analysis on the background of this performance, breaking the myth on situation changing. So, we suggest to read it because it also explains the performance of the gold market. Today we just briefly repeat it and take a look at some other fundamental moments.

Market overview

Gold prices slipped on Thursday as the U.S. Federal Reserve's aggressive monetary policy tightening plan dimmed the metal's appeal, with additional pressure from a rebound in equities. Minutes of the Fed's May 3-4 policy meeting released on Wednesday highlighted most participants favouring additional 50 basis point rate hikes at the June and July meetings, although it was no surprise to the market.

"The minutes didn't change anything. The market has started to realise the Fed will continue to take robust measures to control inflation," said Bart Melek, head of commodity strategies at TD Securities. The tightening story is not over by any stretch of the imagination, and it's probably a very safe bet to say that the interest rate environment will continue to get more restrictive."

Gold prices are pressured in part by the stabilization of the U.S. stock indexes this week, said Kitco senior analyst Jim Wycoff in a note.

Limiting the bullion's fall, the U.S. dollar hovered near one-month lows, while the U.S. 10-year Treasury yield also fell to lowest since April.

"Gold seems to falter when it hits anything like a technical resistance and then you get long liquidation and profit taking. So this is the key issue for gold at the moment," independent analyst Ross Norman said.

Morgan Stanley chief executive officer James Gorman told shareholders during the bank's annual general meeting on Thursday that he puts the chances of a U.S. recession at less than 50%. Asked about the likelihood of a U.S. recession, Gorman said he believes it is still below 50%. "I've said publicly I thought it was probably around 30%, or maybe a little higher than that now," he added.

All participants at the Fed's May 3-4 meeting backed a half-percentage-point rate increase - the first of that size in more than 20 years - and "most participants" judged that further hikes of that magnitude would "likely be appropriate" at the Fed's policy meetings in June and July, according to minutes from the meeting.

Analysts at Bank of America said the Fed could pause its tightening in September if the economy deteriorates.

Nicholas Colas, cofounder of DataTrek Research, said the U.S. markets, which have whipsawed in recent weeks, will bottom once the Fed indicates inflation has started to ease. The Fed is using stock prices as a primary tool in their fight against inflation," Colas wrote in a note Wednesday. "Lower stock prices tell companies to stop hiring so aggressively and feeding wage inflation. They also create a reverse wealth effect, which should curtail consumer spending."

New home sales in the United States fell 16.6% month-on-month in April, the largest decline in nine years, and new orders for U.S.-made capital goods rose less than expected in April.

U.S. and euro zone business activity slowed in May. S&P Global attributed the decline in its U.S. Composite PMI Output to "elevated inflationary pressures, a further deterioration in supplier delivery times and weaker demand growth."

The economy likely will slump as the Federal Reserve hikes interest rates to stamp out inflation, said David Petrosinelli, senior trader at InspereX. "It's really all about a hard landing and the Fed really being boxed in the corner with only demand-side tools to help," he said. "They really need to squash demand." (!!!)

In Europe, all major sectors posted broad declines, with luxury stocks and retailers taking the lead. European Central Bank Chief Christine Lagarde said she saw the ECB's deposit rate at zero or "slightly above" by the end of September, implying an increase of at least 50 basis points from its current level as the bank fights inflation.

"It has raised jitters in global markets about the possibility at least of a more aggressive move by the ECB," said Phil Shaw, chief economist at Investec in London. "There were reports overnight that some hawks on the governing council thought her comments yesterday seemed to rule out a 50-basis-point hike, but her remarks today appeared to leave that on the table," he said.

Lagarde's remarks should pressure the U.S. dollar in the short-term after its recent rally to the highest level in two decades, said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets. But "the broader macro backdrop still supports the risk-off take," Rai said. "The dollar still has more room to run over the medium term."

JPMorgan cut its forecast for second-quarter Chinese gross domestic product to a 5.4% contraction from a prior forecast for a 1.5% decline after disappointing data in April. On an annualized basis, its global forecast for the quarter is 0.6%, the weakest since the global financial crisis outside of 2020.

The People’s Bank of China (PboC) cut its five-year loan prime rate (LPR) by 15bps last week to 4.45%, the largest monthly reduction since it became a key benchmark for policymakers in 2019. The move signals a somewhat greater urgency on behalf of the authorities to try to support the extremely weak housing market, as mortgages are linked to the five-year rate; the one-year rate was left unchanged. In the current easing cycle beginning late last year, the five-year rate had previously only been reduced by 5bps. The move follows a recent 20bps cut in the minimum mortgage rate financial institutions could charge first-time buyers, and will add to the various housing-related easing measures implemented by local governments. Nevertheless, housing activity continues to fall sharply and yet another property developer, Sunac China Holdings, has defaulted in the last two weeks. Further significant policy easing measures are likely to be needed to stabilise the sector.

Commodity super cycle

Years of under-investment in mining of metals essential to energy transition, supply shocks and high energy prices will continue to drive commodity prices higher, Eurasian Resources Group (ERG) Chief Executive Benedikt Sobotka said on Wednesday. Combined with COVID-related logistical issues and demand for transparency on sustainability these factors have brought together "all the ingredients for a perfect storm in commodity markets," he told the Reuters Global Markets Forum in Davos.

Sobotka said that a commodity super cycle has now begun and will carry on for the next 30 years, predicting a 20% rise in copper prices by the end of 2022. Luxembourg-based, privately-held ERG is a global supplier of copper and cobalt. It also supplies alumina and iron ore and is the only producer of high-grade aluminium in Kazakhstan. Sobotka believes a fossil fuel resurgence is temporary, and the transition to a lower carbon economy "cannot be stopped," which will require a projected $50 trillion in the next three decades.

"Anything between $200-$300 billion in investment per year will be required for the mining industry to satisfy demand for the energy transition," he said, with much of this invested into the mining of copper, nickel, cobalt and other metals.

In an environment of high prices and supply chain pressures, Sobotka expects companies and countries to stockpile strategic raw materials, including oil, copper, cobalt and other metals.

"If you get small supply disruptions, you are going to see big swings in prices," Sobotka said, adding that he expected to see an impact in the second half of 2022.
Major end-users such as the automotive industry are already trying to strike long-term off-take agreements to buy metals such as lithium and cobalt at current market prices, he said. It tells you how difficult it is to get your hands on material long term - and particularly material that is clean from an ESG (environmental, social and governance) point of view," he added.

Summer Gold perspective

As we've estimated yesterday, current pullback that we see on stock market, gold, and started weakness in the US dollar is just a Fed trick. In fact, although the QT programme was widely announced - Fed doesn't push the liquidity only in one direction, it mixes inflows with outflows. And QT programme starts not as officially said in June 2022, but in December 2021. For example, since the Dec 21 Fed dried out ~ $500 Bln out of the market, triggers 20% drop of S&P index. But in Feb-April period Fed pumped back approximately 200 Bln that has become a reason for the pullback.
Now picture repeats. In April-May Fed has dried out around 400 Bln, but in recent two weeks $180Bln was returned. This "tactical" return of some liquidity could be called as QE, as we see no difference. And, take a look - every time when Fed pumped back some liquidy - stock market was rising:

And everytime market behaves as the impenitent optimist, expecting the end of "bad times" and waiting that life should turn to the better. This was on first drop out from the ATH, the same thing we see right now. Nobody things about this purely technical issues that could impact on the market, but make far going fundamental conclusions instead. Now investors just thing that Fed should stop hiking around 1.75-2% and then sit on the hands and see how economy goes with new rate levels.
As economy slows, they expect that Fed hardly will lead rate to 3% terminal level. It lets them to make dovish suggestions and talk about recovery of the stock market:

"It's very clear that everyone at the Fed is on board for 50 basis-point (interest rate hikes) for the next two hiking meetings. But after that, it's unclear what they do, and if there is a sharp slowdown in growth, they may be able to wait a little bit," said Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy at Columbia Threadneedle Investments, who recently raised her allocation to equities.

Concerns over the impact of higher rates at a time when inflation may have peaked will likely mean the central bank will pause its tightening in September, leaving its benchmark overnight interest rate in a range of 1.75% to 2% if financial conditions worsen, BofA strategists said in a note.

Expectations of Fed hawkishness have eased, with investors now pricing in a 35% probability that the Fed funds rate will be between 2.25% and 2.50% after its September meeting, down from a 50% probability a week ago, according to CME. The Fed has already raised rates by 75 basis points this year. Minutes from the central bank’s latest meeting showed officials grappling with how best to navigate the economy toward lower inflation without causing a recession or pushing the unemployment rate substantially higher.

This is just few comments, but headlines suggest that this is common opinion right now, but we can't accept it and has different view. There is another factor still, that could confuse markets even more, making to believe in stabilization. And this factor is big cash position of the US Treasury on Fed accounts. It stands around 0.9-1.0 Trln right now. Why it could disguise "bad signs" in the economy? Because US Treasury could finance bond repayment and other needs by its cash position.

Yesterday we've estimated the following numbers:

• Net selling of the US bonds stands around $100 Bln per month. With real interest rates of "-8%" - the interest of investors to toxic bonds is falling;
• Fed starts QT programme in June, suggesting more bonds supply for the market in amount of 190.5 Bln. from June 1 to August 31;
• The US has record budget deficit around $600Bln right now, that also has to be covered by something later in the year. More debt printing?
• There is no hope for foreign investors. EU has all-time record trading deficit of 28.5 Bln EUR. It never happens for the whole history of observations since 70's (of the core EU countries). Japan also stands in the similar situation when its trading balance is almost nullified. It is worthy to mentioned that EU previously provided ~80% of net foreign purchases in the US.
• Demand for HY (High-Yield, "junk") bonds slumps 5-times in Feb-Apr 2022 from ~$150 Bln last year to ~$30 Bln:
  
  

It means that the US should get net outflows from the bond market until the end of the year and then additionally has to cover record deficit. The liquidity gap will be closed by the US Treasury cash. Sad but true... But, as you understand this will make the visuality of things going right, keeping yields flat and supporting the stock market. Although the real fundamental picture will keep worsening. Public data just will not match to reality. The US Treasury cash balance drops two times, to ~ 40-500 Bln. to September.

But this "positive vision" will keep pressing on the gold market. Investors just will not worry yet about safe haven, as everything will be a good-looking. Besides, the summertime is seasonally bearish factor for the gold. And now we warn you in advance - to not frustrate if gold keep falling during summer.

That's being said, current "easing" in inflation accompanied with mentioned Fed strategy to finance liquidity gap by the US Treasury cash makes investors to calm down and improve sentiment, which will be the big mistake. We should use this situation for investments as gold should appear at sweet price levels by the end of this "trick of the century".

So, gold has outstanding perspectives in nearest 6-12 month. Just take a look by yourself - we have unique combination of rare, extremely negative factors of unprecedented scale, that act simultaneously with maximum intensity.

• The energy crisis, which has begun in Europe in November 2021, but has been intensified since March 2022. It is still here and spreading over new countries and regions. Gas prices in the United States have been at a historic low in real terms for considerable period of time, but since April they have turned to acceleration, reaching a 15-year high. The price factor is part of the problem. The insane actions of European officials to accelerate the rejection of Russian energy carriers will come on the surface closer to the end of the year (fall-winter);
  
• Food crisis. A combination of climatic, logistical and organizational factors that have led to the fact that the agricultural productivity can reach a minimum since 2010-2011 on a back of 18% increase in global consumption over 10 years. Lets add logistical problems for the export of wheat from Ukraine, export quotas, which are being set now in India, Vietnam and other countries. North Africa, the Middle East and Asia stand are mostly imposed to this. These problems become evident later, closer to the harvest time in August 2022. It could destabilize not only the economy, but politics, trigger massive unrests, as it was in the spring of 2021.
• Debt crisis. The cycle of monetary policy tightening begins after a 12-year period of monetary and fiscal madness, intensified several times (about 5 times) after the COVID crisis 2020. This has already led to record inflation in developed countries for 40 years and fundamental imbalances in debt markets and in the balance sheets of the agents. However, when QE is turned off and even with the intention of reducing, the question arises – who will pay for all this?
  
  Debt markets cannot exist at persistently negative rates, because buying bonds is equivalent to receiving an automatic loss immediately upon entry. Consequently, there will be no demand for debt, which will lead to fundamental problems in the functioning of the economy, debt servicing, undermining the stability of debt markets. A large-scale crisis will not begin with the collapse of bubbles in the crypt, real estate and the stock market. The crisis will begin with the debt market.
  
  Thus, just taking "2+2" it is easy to conclude that Fed is in dead way position. It can't rise rates more because it starts making negative process on economy and drastically increasing the cost of national debt serving as well, as Fed already has 330 Bln loss. But, if they keep rates at current levels - nobody keep buying the US bonds, and with record high deficit, it will be impossible to cover it with new debt issues. Besides, China and other countries could start burning their dollar reserves as they have inner economy problems as well. Both ways are bad, but the way with crushing demand, as mentioned above, which is so-called "hard landing" seems the lesser of the two evils, because it leads economy directly the the final point of the crisis, whatever it will be. Yes, it will be poverty of households, crush of the economy, but it provides economical health.
  
  The 2nd way is easier to follow and smoother but consequences will be worse, if Fed stops rising rates and secretly starts the printing machine again to finance the deficit. This is ZImbabwe way with two- three digits inflation ahead. But the end will be the same anyway:

Zimbabwean worker's monthly wage - just few US dollars

Situation stands so bad that the US starts robbing the Iranian crude oil (The United States later confiscated the Iranian oil cargo held onboard and plans to send it to the United States on another vessel, Reuters reported on Thursday.). And this is understandable, just take a look at strategic US reserves dynamic. They have dropped to the levels of late 80's. Iraq and Kuwait campagnes have resolved these problems for few decades, but now time is over...

Thus, everything stands in a row with our long-term view and period of artificial gold weakness is lasting and should last few months more. But it is not needed to be the prophet to suggest major trend reversal within 3-6 months. With most humble assessment, gold should rise two times in value.

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 remains as we have now, i.e. no grabber and close under YPP - 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.

Despite how inspiring the idea of getting grabber looks, fundamentals stand more in favor of more drop. Except the scenario, maybe, if bad processes move out of the control faster. But in general that market stands above the pivot shows that gold keeps the bullish sentiment. Now we should be extremely sensitive to fundamental data, as it could indicate earlier upside reversal on the gold market.

Weekly

Weekly chart shows nothing new this week as the trading range was small and made now impact on the chart. Trend stands bearish and 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 and actually we already see the first fruits.

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 big 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. In fact, with the "222" Buy pattern, 1895$ target seems as most probable now. THe NFP report on the next week might be vital for the short-term price performance. On Monday market might be relatively thin because of the US Memorial Day holiday.

Daily

On the daily chart we have no changes, as price still stands around the K-area. Trend stands bullish. The only hint that we have is flirting with the resistance. Since price doesn't turn to drop, forming consolidation around K-level, this probably should be treated as bullish sign. On daily US 10-year yield we have H&S pattern in progress, which also supports idea of further gold upside action later in the week, after right arm will be formed:

Intraday

Thus, taking it all together, it seems that we could focus on the following scenario. This is just the shape guys, price levels might be a bit different as some swings might be greater or smaller. On the first stage we consider minor downside retracement, in a shape of AB-CD pattern to 1933-1937 support (which is K-area on 1H chart), and then upside extension, if everything will be OK with 10-year H&S pattern. Here it would be better to focus on XOP nearest target, as most realistic. The "#2" we consider as optimistic scenario and it agrees with daily 5/8 $1917 major Fib resistance level.

 

[Ugyen Penjore]

Besides, China and other countries could start burning their dollar reserves as they have inner economy problems as well.

Hello Sive Sir,

As mentioned above, if rest of the economies burn usd reserves, printing more usd by fed balance out the process we are talking here?

 

[Sive Morten]

Hello Sive Sir,

As mentioned above, if rest of the economies burn usd reserves, printing more usd by fed balance out the process we are talking here?

Hi, to be honest - I do not know how Fed will deal with this problem. Japan hardly does something as it is totally controlled by the US, but China could start selling US Treasuries to support own economy. The amount of selling also important. This might be just another break of the wall of big problems and monthly supply extends for another $100-200 Bln per month.
But what we definitely could say - this is negative. If Fed starts printing to finance this gap - it immediately impacts the economy and inflation rises more. Because it becomes absolutely evident to everybody and could trigger massive sell-offs and panic. So, I would consider printing as less probable in current situation, at least until the 2022.

 

[sveckar22]

If Silver completes the abc XOP and second AB=CD down to $18 in confluence with 0.618 FIB I think it will be a great long-term buying opportunity.

 

[Sive Morten]

If Silver completes the abc XOP and second AB=CD down to $18 in confluence with 0.618 FIB I think it will be a great long-term buying opportunity.

Yes, and on the Gold we have similar pattern, leading to $1708... it would be nice if we get it as well.

 

[Sive Morten]

Greetings everybody,

So, gold shows indecision action. Although we have some bearish moments, such as starting QT tomorrow in the US and and stop of ECB QE programme as well, rising of interest rates, but at the same time market shows tight consolidation around major daily resistance, which we treat as bullish sign. So, the chances for downside pullback stands 50/50, although on FX market - EUR, GBP picture is more clear with it:

Despite mentioned bullish signs, we still think that it would be better to not ignore possible AB=CD pattern to 1833 K-support area. At least, let treat it as conservative and most protected scenario for the long entry.

at the same time it is becoming obvious that gold is forming wide triangle here, that makes chances on direct upside action higher. Thus, you have the homework - to resolve the riddle of entry on the long side. Because we could get, say, upside butterfly, and you need to answer on the question whether you wait for 1835 major area, or enter earlier partially, or maybe use Stop "Buy" order for "C" point top upside breakout, or maybe use some different method.

For scalp short position everything stands more simple. Invalidation point is the "C" top, as downside action is based on potential AB-CD pattern. Also you could monitor early downside reversal inside the triangle - this is bearish sign, if it happens.

No clarity by far, whatever direction we choose, we deal with absence of strong signal, because market keeps both doors open by far.

 

[Sive Morten]

Greetings everybody,

Gold shows a bit brighter downside performance than EUR, and actually has reached the predefined K-support area on 4H chart. But currently it is not guaranteed that it can't move slightly lower. The reason for that is 10year yield H&S pattern. The right arm is not done yet, which should be slightly higher, around 2.95% area. This potentially lets gold to move lower:

On 4H chart current support looks very attractive, but market forms nothing bullish around it by far. Thus, we can't exclude action to 1818$ XOP Agreement area:

On 1H chart as well - nothing bullish around support by far:

Although strong support is a great stuff, but this is only the half of context. With the performance of interest rates, to consider long position taking around 1833-1840 area we need to get clear bullish reversal patterns around, that we do not see yet.

The more simple approach is to split position and take 25-30% size at K-support, with the holding th bulk until 1818 XOP Agreement area.

Also keep an eye H&S pattern on 10-year yield. It is clear pattern, which is good, but if it starts failing and yields moving above 2.95% - gold also could keep going lower.

 

[Sive Morten]

Greetings everybody,

Fortunately, gold was able to stay above 1830 support area, despite that we were worrying of deeper retracement to XOP. Here is, by the way the reason why I always recommend to split position to enter when you sure on direction but not confident enough at what level to enter...
On daily chart the major thing to watch is possible bullish grabber, as 10-year yields H&S pattern is also almost ready to go:

On 4H chart we have "222" Buy. Although with the help of external drivers, but gold was able to jump up. If you haven't taken long position but intends to - consider 1H chart and use DiNapoli Minesweeper "B" entry tactics:

Minesweeper suggests taking position on minor pullback to one of the Fib levels, with the preferrable one of K-support at $1843.80:

 

[Sive Morten]

Greetings everybody,

So, gold shows nice upward performance as ADP report has not pleased markets. According to our weekly analysis, we suggest that gold upward bounce could have AB=CD shape, which makes us consider 1900 area as potential final destination.

Meantime, nearest standing target is COP at 1978$, which easily might be reached today, if NFP will be bad as well:

As market is not at overbought and COP is still ahead, there is no reason for deep retracement on gold. Most probable level is 1856$ - nearest support, if meaningful pullback happens at all:

On 1H chart short position taking looks a bit dangerous because of uncompleted COP. Scalp traders better to consider possible B&B "Buy" around 1862$ as it could lead price to $1978 target which is two times better than common B&B target. We also could consider using B&B for entry for longer perspective, as it provides good chance to move stops to breakeven and minimize risk, if even later gold turns to deeper retracement: