Sive Morten
Special Consultant to the FPA
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Fundamentals
Gold shows relatively tight trading range this week but still was keeping bullish sentiment and it was just a question of time and price shape of upward continuation. We also have specified in our daily video updates to watch for precise patterns that accurately have been formed. Thus, we mostly were watching for tactical issues as well. Despite that overall performance stands good, gold still shows few signs that make us worry on upward perspective and confirms that it still stands fragile.
Market overview
Gold prices eased on Thursday after hitting a 4-1/2-month high in the previous session, hurt by an uptick in the U.S. dollar and bond yields, while investors awaited key economic readings out of the United States. Benchmark U.S. Treasury yields rose to 1.58%, increasing the opportunity cost of holding non-interest bearing gold.
On Wednesday, Fed vice chair for supervision Randal Quarles said he was prepared to open talks on reducing the central bank's emergency support measures, only to also stress the need to remain patient. Federal Reserve officials have downplayed rising price pressures and affirmed their support to keep monetary policy
accommodative for some time.
“The U.S. economy is on a solid trajectory for growth and the inflation argument has ebbed a bit because the Federal Reserve has had some success in convincing the marketplace that it is indeed just going to be transitory,” said Kitco Metals senior analyst Jim Wyckoff. So it’s just a pause from the recent uptrends. However, we shouldn’t be surprised to see some bargain hunters step in to buy the dip in prices later in the session.”
Data showed U.S. new jobless claims dropped more than expected, while economic growth accelerated in the first quarter.
On the physical front, gold imports into top consumer China from Hong Kong and Switzerland surged in April. Top producer Nornickel said a deficit in the palladium market could widen in 2021.
Gold has snuck back on to the radar screens of investors thanks to increased concern about inflation pressures, but the precious metal also appears to be getting a boost from renewed interest from the top two physical buyers, China and India.
Spot gold failed to hold levels above $1,900 an ounce during Wednesday's session, ending at $1,896.44, having traded as high as $1,912.50 during the session.
That was the highest price since Jan. 8 and the yellow metal has gained 13.1% since its year-to-date low of $1,676.10 an ounce, hit on March 8. While these gains look modest when compared to the darlings of the metals market such as copper and iron ore, gold is once again making a case for investor attention.
The market narrative for the recent rally has been mounting worries that inflation is poised to make a comeback in the global economy, as governments across the globe spend massive amounts to stimulate economies ravaged by lockdowns to combat the spread of the coronavirus. This supports gold on the basis that inflation will take root before the world's central banks raise interest rates to stamp it out, thus leaving the precious metal to fulfil its historical role as a hedge against rising prices.
While the increase in the SPDR's holdings may be a mildly bullish signal, it's worth noting that they are still well below the 41.115 million ounces in September last year, which was a 7 1/2-year high. A further factor that weighs on investor appetite for gold is the view that the current inflationary pressures are temporary and will fade in coming quarters once baseline effects from the economic hit from coronavirus lockdowns pass through.
However, there are some positive signs emerging for gold from India and China, where physical demand appears to be returning to what could be described as more normal levels. India's imports in April were nearly 70 tonnes, according to Refinitiv GFMS, which was down from March's 103 tonnes. However, the March figure was a two-year high and April's imports were the second-best month so far in 2020.
There are several other factors to consider with India, the main one being the current coronavirus outbreak, which is likely to have dampened gold demand in May, and likely into June and July as well. However, what the recent pattern of India's consumption has shown is that when the coronavirus outbreak is finally contained, there will be substantial pent-up gold demand. This means that at some point this year it's likely Indian physical buying will make a robust return.
In China, there are also signs of improving demand, with first quarter demand coming in at 191.1 tonnes, the highest quarterly total since 2015, according to data from the World Gold Council.
This was up a massive 212% from the first quarter of 2020, when demand was crushed by the coronavirus, but it was also some 4% above the first quarter of 2019, indicating some real strength in China's demand. Chinese buying may have continued, with net gold imports via Hong Kong surging in April to the highest since December 2019, according to official data from the Chinese territory’s government. Gold from Hong Kong is one of the main conduits for China's imports and serves as a useful indicator of Chinese demand.
Given China's relative success in curbing the spread of the coronavirus and its subsequent economic recovery, the chances are that gold demand will remain strong over the rest of 2021. If physical demand in China and India continues to recover over the rest of 2021, coupled with some investor concern about inflation, the backdrop for gold is turning more positive.
Precious metal funds saw net purchases worth $1.37 billion, the biggest in 16 weeks, as gold prices surged to a 4-1/2-month high this week.
Gold reversed course and turned positive on Friday, popping above the key $1,900 level, after data showed U.S. consumer prices surged in April and boosted bullion’s appeal as an inflation hedge. U.S. consumer prices accelerated in the year to April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target.
The dollar index pared gains, making gold less expensive for other currency holders, while U.S. yields edged lower, translating into reduced opportunity cost of holding bullion. The White House unveiled a $6 trillion budget proposal that would ramp up spending on infrastructure, education and combating climate change.
The technicals are supportive, so any weakness in the prices will be looked at as a buying opportunity, Eli Tesfaye, senior market strategist at RJO Futures said. If the U.S. economy recovers quickly and inflation continues to heat up, gold will be in ample demand, he added.
As we've mentioned in our Bitcoin fundamental update, after cryptocurrency crush, many institutional investors are turning back to gold, disappointing due BTC volatility, price collapse and unveiling the myths on BTC protection against inflation. JP Morgan also suggests that long-term gold trend is still intact:
Institutional investors are dumping bitcoin in favor of gold, reversing a recent trend that’s played out over the last two quarters, according to a new report from JPMorgan.
Based on open interest in CME bitcoin futures contracts, the firm said large investors are shifting away from bitcoin after favoring the digital currency over gold beginning last fall.
Gold’s 20% discount to its 2020 record high is sufficient for a resumption of a bull market for the metal, as we see it, but store-of-value newcomer Bitcoin is likely to remain a headwind to its upside.
So, at first glance everything looks just perfect, but here is minor a spoon of tar in a honey barrel... recent CFTC data and SPDR Fund statistics.
COT Report
If you take a look at speculative positions chart - you see nothing wrong, excellent picture of upward acceleration:
Source: cftc.gov
Charting by Investing.com
But we have to take a look at the table below. Indeed, speculative positions have increased as traders have opened 5.6K new longs and closed 13K shorts, that leads to strong almost 20K net long speculative position increase. And this is what you see on the chart above. But.. take a look that these chances have happened on a background of massive run out of the gold as open interest has dropped for 50K+ and longer-term traders, hedgers in particular have closed huge positions. Another big closing has come from spreading ones. It means only one thing - current rally is very fragile and unstable, its foundation is doubtful and this is more the retracement in longer-term downside action, rather than new upward trend.
Another confirmation you could see from SPDR Fund statistics. Take a look at recovery speed of fund reserves and the gold. Reserves shows very slow recovery while gold plays back more than 50% of the drop. Now compare this with previous periods of recovery - they are different:
Despite the rally - there are no big purchasing from investors. This is the worrying sign.
Previously we already have appealed to BlackRock fund and provided the link when they talked on gold's role in protection against inflation. The common opinion is that gold provides great protection when inflation is accelerating. And as we could see from the comments of different traders above - market believes it. But this is wrong statement. This protection works on very long-term period, for decades, when we're dealing with fiscal inflation but not with cycle inflation that is triggered by rising demand for commodities due starting of global economy growth. With this 2nd time of inflation gold plays poor role of protection, and you could just compare what happens previously, in 2012-2015 growth cycle after long-term 2-stage subprime crisis in 2008. Gold was falling.
It means that gold is rising only when interest rates stand flat but inflation is growing. This is particularly the situation that we have right now. This, in turn, means that gold rally is fragile as it totally depends on Fed policy and could last only until Fed keeps it "accommodative policy". Once rhetoric changes - gold drops. This is why we treat as gold rally as fragile and not reliable in long-term. Recent market sentiment statistics suggests that this is "swan song" for the gold, as we called it previously and it lasts only thanks to Fed stubborn. This again affirms us in our view that we stand just in upward bounce of started new long term downside trend on the gold market. Although upward action could last for few months, until Fed keeps its policy without changing.
Technicals
Monthly
Monthly picture fits well to our long term view. Despite great May performance, trend here still stands bearish, suggesting that it is more propriate to treat this move as a retracement.
Since price was able to pass through 1850$ resistance area and hits 1875$ daily AB-CD target as well, it is logical to suggest that next target is 5/8 major Fib resistance here that stand around 1925$ area. It is very interesting what will happen around major 5/8 Fib resistance area:
Weekly
Here we have another step to 1925 area. Weekly context is bullish - MACD trend is up, price is above monthly pivot. With upward breakout of K-resistance area, here we do not see strong barriers for upside continuation, as overbought level stands rather far from here. So, mostly weekly picture confirms ability to hit 1922-1925$ area.
Daily
Since the price action was relatively quiet last week, our major time frames were daily and below. And, on daily chart we've got the pattern that is very important to us and decision making. Bullish grabber has been formed. This is very important for short-term trading. First is because we know invalidation point, which is grabber's bottom. Second is, now we could consider intraday support levels for position taking, if you haven't taken it last week.
Market was able to hold our initial condition as well - stay outside of broken high wave pattern. Now we could say that context stands bullish and market is ready for upward continuation:
Intraday
Here is involving of 1881 OP target was correct as market barely has touched it and turned up. As on EUR currency - this gold reaction to PCE numbers that actually were strong and dollar supportive, suggests that gold is aimed to go higher. Now we do not need this AB-CD pattern - it has been erased as price is jumped above "C" point and market has formed bullish reversal swing.
Now we could focus only on most recent swing and its Fib levels for position taking. Invalidation point is daily grabber's lows - 1882$. More probable is just minor pullback to 1896, because 1890$ already has been tested on Friday.
Gold shows relatively tight trading range this week but still was keeping bullish sentiment and it was just a question of time and price shape of upward continuation. We also have specified in our daily video updates to watch for precise patterns that accurately have been formed. Thus, we mostly were watching for tactical issues as well. Despite that overall performance stands good, gold still shows few signs that make us worry on upward perspective and confirms that it still stands fragile.
Market overview
Gold prices eased on Thursday after hitting a 4-1/2-month high in the previous session, hurt by an uptick in the U.S. dollar and bond yields, while investors awaited key economic readings out of the United States. Benchmark U.S. Treasury yields rose to 1.58%, increasing the opportunity cost of holding non-interest bearing gold.
On Wednesday, Fed vice chair for supervision Randal Quarles said he was prepared to open talks on reducing the central bank's emergency support measures, only to also stress the need to remain patient. Federal Reserve officials have downplayed rising price pressures and affirmed their support to keep monetary policy
accommodative for some time.
“The U.S. economy is on a solid trajectory for growth and the inflation argument has ebbed a bit because the Federal Reserve has had some success in convincing the marketplace that it is indeed just going to be transitory,” said Kitco Metals senior analyst Jim Wyckoff. So it’s just a pause from the recent uptrends. However, we shouldn’t be surprised to see some bargain hunters step in to buy the dip in prices later in the session.”
Data showed U.S. new jobless claims dropped more than expected, while economic growth accelerated in the first quarter.
On the physical front, gold imports into top consumer China from Hong Kong and Switzerland surged in April. Top producer Nornickel said a deficit in the palladium market could widen in 2021.
Gold has snuck back on to the radar screens of investors thanks to increased concern about inflation pressures, but the precious metal also appears to be getting a boost from renewed interest from the top two physical buyers, China and India.
Spot gold failed to hold levels above $1,900 an ounce during Wednesday's session, ending at $1,896.44, having traded as high as $1,912.50 during the session.
That was the highest price since Jan. 8 and the yellow metal has gained 13.1% since its year-to-date low of $1,676.10 an ounce, hit on March 8. While these gains look modest when compared to the darlings of the metals market such as copper and iron ore, gold is once again making a case for investor attention.
The market narrative for the recent rally has been mounting worries that inflation is poised to make a comeback in the global economy, as governments across the globe spend massive amounts to stimulate economies ravaged by lockdowns to combat the spread of the coronavirus. This supports gold on the basis that inflation will take root before the world's central banks raise interest rates to stamp it out, thus leaving the precious metal to fulfil its historical role as a hedge against rising prices.
While the increase in the SPDR's holdings may be a mildly bullish signal, it's worth noting that they are still well below the 41.115 million ounces in September last year, which was a 7 1/2-year high. A further factor that weighs on investor appetite for gold is the view that the current inflationary pressures are temporary and will fade in coming quarters once baseline effects from the economic hit from coronavirus lockdowns pass through.
However, there are some positive signs emerging for gold from India and China, where physical demand appears to be returning to what could be described as more normal levels. India's imports in April were nearly 70 tonnes, according to Refinitiv GFMS, which was down from March's 103 tonnes. However, the March figure was a two-year high and April's imports were the second-best month so far in 2020.
There are several other factors to consider with India, the main one being the current coronavirus outbreak, which is likely to have dampened gold demand in May, and likely into June and July as well. However, what the recent pattern of India's consumption has shown is that when the coronavirus outbreak is finally contained, there will be substantial pent-up gold demand. This means that at some point this year it's likely Indian physical buying will make a robust return.
In China, there are also signs of improving demand, with first quarter demand coming in at 191.1 tonnes, the highest quarterly total since 2015, according to data from the World Gold Council.
This was up a massive 212% from the first quarter of 2020, when demand was crushed by the coronavirus, but it was also some 4% above the first quarter of 2019, indicating some real strength in China's demand. Chinese buying may have continued, with net gold imports via Hong Kong surging in April to the highest since December 2019, according to official data from the Chinese territory’s government. Gold from Hong Kong is one of the main conduits for China's imports and serves as a useful indicator of Chinese demand.
Given China's relative success in curbing the spread of the coronavirus and its subsequent economic recovery, the chances are that gold demand will remain strong over the rest of 2021. If physical demand in China and India continues to recover over the rest of 2021, coupled with some investor concern about inflation, the backdrop for gold is turning more positive.
Precious metal funds saw net purchases worth $1.37 billion, the biggest in 16 weeks, as gold prices surged to a 4-1/2-month high this week.
Gold reversed course and turned positive on Friday, popping above the key $1,900 level, after data showed U.S. consumer prices surged in April and boosted bullion’s appeal as an inflation hedge. U.S. consumer prices accelerated in the year to April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target.
The dollar index pared gains, making gold less expensive for other currency holders, while U.S. yields edged lower, translating into reduced opportunity cost of holding bullion. The White House unveiled a $6 trillion budget proposal that would ramp up spending on infrastructure, education and combating climate change.
The technicals are supportive, so any weakness in the prices will be looked at as a buying opportunity, Eli Tesfaye, senior market strategist at RJO Futures said. If the U.S. economy recovers quickly and inflation continues to heat up, gold will be in ample demand, he added.
As we've mentioned in our Bitcoin fundamental update, after cryptocurrency crush, many institutional investors are turning back to gold, disappointing due BTC volatility, price collapse and unveiling the myths on BTC protection against inflation. JP Morgan also suggests that long-term gold trend is still intact:
Institutional investors are dumping bitcoin in favor of gold, reversing a recent trend that’s played out over the last two quarters, according to a new report from JPMorgan.
Based on open interest in CME bitcoin futures contracts, the firm said large investors are shifting away from bitcoin after favoring the digital currency over gold beginning last fall.
Gold’s 20% discount to its 2020 record high is sufficient for a resumption of a bull market for the metal, as we see it, but store-of-value newcomer Bitcoin is likely to remain a headwind to its upside.
So, at first glance everything looks just perfect, but here is minor a spoon of tar in a honey barrel... recent CFTC data and SPDR Fund statistics.
COT Report
If you take a look at speculative positions chart - you see nothing wrong, excellent picture of upward acceleration:
Source: cftc.gov
Charting by Investing.com
But we have to take a look at the table below. Indeed, speculative positions have increased as traders have opened 5.6K new longs and closed 13K shorts, that leads to strong almost 20K net long speculative position increase. And this is what you see on the chart above. But.. take a look that these chances have happened on a background of massive run out of the gold as open interest has dropped for 50K+ and longer-term traders, hedgers in particular have closed huge positions. Another big closing has come from spreading ones. It means only one thing - current rally is very fragile and unstable, its foundation is doubtful and this is more the retracement in longer-term downside action, rather than new upward trend.
Another confirmation you could see from SPDR Fund statistics. Take a look at recovery speed of fund reserves and the gold. Reserves shows very slow recovery while gold plays back more than 50% of the drop. Now compare this with previous periods of recovery - they are different:
Despite the rally - there are no big purchasing from investors. This is the worrying sign.
Previously we already have appealed to BlackRock fund and provided the link when they talked on gold's role in protection against inflation. The common opinion is that gold provides great protection when inflation is accelerating. And as we could see from the comments of different traders above - market believes it. But this is wrong statement. This protection works on very long-term period, for decades, when we're dealing with fiscal inflation but not with cycle inflation that is triggered by rising demand for commodities due starting of global economy growth. With this 2nd time of inflation gold plays poor role of protection, and you could just compare what happens previously, in 2012-2015 growth cycle after long-term 2-stage subprime crisis in 2008. Gold was falling.
It means that gold is rising only when interest rates stand flat but inflation is growing. This is particularly the situation that we have right now. This, in turn, means that gold rally is fragile as it totally depends on Fed policy and could last only until Fed keeps it "accommodative policy". Once rhetoric changes - gold drops. This is why we treat as gold rally as fragile and not reliable in long-term. Recent market sentiment statistics suggests that this is "swan song" for the gold, as we called it previously and it lasts only thanks to Fed stubborn. This again affirms us in our view that we stand just in upward bounce of started new long term downside trend on the gold market. Although upward action could last for few months, until Fed keeps its policy without changing.
Technicals
Monthly
Monthly picture fits well to our long term view. Despite great May performance, trend here still stands bearish, suggesting that it is more propriate to treat this move as a retracement.
Since price was able to pass through 1850$ resistance area and hits 1875$ daily AB-CD target as well, it is logical to suggest that next target is 5/8 major Fib resistance here that stand around 1925$ area. It is very interesting what will happen around major 5/8 Fib resistance area:
Weekly
Here we have another step to 1925 area. Weekly context is bullish - MACD trend is up, price is above monthly pivot. With upward breakout of K-resistance area, here we do not see strong barriers for upside continuation, as overbought level stands rather far from here. So, mostly weekly picture confirms ability to hit 1922-1925$ area.
Daily
Since the price action was relatively quiet last week, our major time frames were daily and below. And, on daily chart we've got the pattern that is very important to us and decision making. Bullish grabber has been formed. This is very important for short-term trading. First is because we know invalidation point, which is grabber's bottom. Second is, now we could consider intraday support levels for position taking, if you haven't taken it last week.
Market was able to hold our initial condition as well - stay outside of broken high wave pattern. Now we could say that context stands bullish and market is ready for upward continuation:
Intraday
Here is involving of 1881 OP target was correct as market barely has touched it and turned up. As on EUR currency - this gold reaction to PCE numbers that actually were strong and dollar supportive, suggests that gold is aimed to go higher. Now we do not need this AB-CD pattern - it has been erased as price is jumped above "C" point and market has formed bullish reversal swing.
Now we could focus only on most recent swing and its Fib levels for position taking. Invalidation point is daily grabber's lows - 1882$. More probable is just minor pullback to 1896, because 1890$ already has been tested on Friday.
