Sive Morten
Special Consultant to the FPA
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Fundamentals
In general gold was showing logical price action through the week, healthy and adequately reacted on major events. With real interest rates are start rising, this is additional headwind to the gold. Long term situation mostly stands the same but the one thing that is worthy to mention here - bullish sentiment unexpectedly jumps this week.
Market overview
Gold prices fell on Tuesday after a five-session rally, as the dollar steadied and investors awaited key central bank meetings for clues about rate hikes amid rising inflation concerns.
Gold is often considered an inflation hedge, though reduced stimulus and interest rate hikes push government bond yields up, increasing non-interest bearing bullion’s opportunity cost.
Fed Chairman Jerome Powell recently said the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch the interest rate dial.
On the technical front, spot gold looks neutral in a range of $1,783 to $1,795 per ounce, and an escape could suggest a direction, Reuters technical analyst Wang Tao said.
Gold prices edged higher in seesaw trading on Wednesday, buoyed by a fall in U.S. bond yields and a softer dollar, although strong risk appetite in equity markets kept bullion’s gains in check.
StoneX analyst Rhona O’Connell said interest in silver is building in the professional market and that bodes well for gold.
U.S. Fed officials face a ticking clock in their ability to ignore high inflation and are now navigating between their own senses of patience and risk, and a U.S. economy stymied by tangled supply chains, slow hiring and strong consumer demand. Central banks reducing emergency stimulus too quickly and further supply chain disruption are among the top risks to the world economy next year as the COVID-19 pandemic lingers, according to economists in a global Reuters poll.
Still, PIMCO expects the supply bottlenecks disappear by the year end.
Overall, Asian production has recovered better than other regions (see Figure 1). In East Asia, where the pandemic has been relatively well-contained and most factories have remained open, industrial production has picked up quickly since the second half of 2020. China’s industrial production had already rebounded and exceeded pre-pandemic levels by last June, and has remained solid since then, supported by strong exports and domestic investment. While global Purchasing Managers’ Index data in May generally showed lengthier delivery times compared with 1Q, Asian economies have fared better.
Inflation has scope to be elevated in the months ahead and to stay bumpy given some of these bottlenecks and disruptions. However, with production resuming and growth moderating into 2022, we expect inflation in developed markets will peak in coming months and moderate in the second half of 2021.
Gold prices consolidated slightly above the key $1,800 level on Thursday, supported by softer U.S. bond yields as investors focused on how central banks respond to rising price pressures.
Demand for gold fell in the third quarter to its lowest since the last quarter of 2020, the World Gold Council (WGC) said. India's gold demand could strengthen significantly in the fourth quarter, the World Gold Council (WGC) said on Thursday, with a drop in global prices and the release of pent-up demand expected to lift jewellery sales during the peak festive season. Higher demand from the world's second-biggest gold consumer could help support spot prices after a near 5% correction so far this year, but a rise in imports of the metal would widen India's trade deficit and weigh on the rupee .
Demand for the precious metal usually spikes towards the end of the year in India, as buying gold for weddings and major festivals such as Diwali and Dussehra is considered auspicious. Indians celebrated Dussehra earlier this month and anecdotal feedback from manufacturers indicated strong sales, he said. The pick-up in retail demand gave confidence to manufacturers, and imports in the September quarter jumped 187% from a year ago to 255.6 tonnes, he said. In a report published on Thursday, the WGC said gold demand jumped 47% in the third quarter from a year earlier to 139.1 tonnes as jewellery demand surged 58% to 96.2 tonnes.
The ECB left policy unchanged, holding fire before a set of crucial decisions in December on ending pandemic emergency stimulus and returning policy to a more normal setting.
Analysts also said the U.S. Federal Reserve’s meeting on Nov. 2-3 would be more crucial for gold after chief Jerome Powell’s recent comments on tapering asset purchases.
Investors are gauging what a furious flattening of the U.S. yield curve suggests about expectations for growth and how aggressively the U.S. Federal Reserve may tighten monetary policy in the face of surging inflation.
The U.S. economy grew at its slowest pace in more than a year in the third quarter, data on Thursday showed. Analysts have trimmed their gold price forecasts for the rest of this year and next, a Reuters poll showed on Thursday. In another poll, forecasts for palladium and platinum prices were also lowered with a chip shortage forcing auto makers to cut production of vehicles containing the metals.
Gold prices fell to their lowest level in more than a week on Friday, weighed down by a stronger dollar after U.S. data showing inflation stayed hot last month put the focus back on the Federal Reserve’s policy meeting next week.
The consumer spending data fueled worries about aggressive monetary policy action from the Fed to combat a surge in prices, sending yields on the U.S. 10-year note up as high as 1.6190%, and the dollar surging 0.8%.
Overall, worries about rising prices kept both gold and silver on track for monthly gains of over 1% and 7%, respectively.
China’s factory activity contracted more than expected in October, shrinking for the second straight month, as high raw material prices and power disruptions pressured manufacturers in the world’s second-largest economy.
The official manufacturing Purchasing Manager’s Index (PMI) was at 49.2 in October, down from 49.6 in September, data from the National Bureau of Statistics (NBS) showed on Sunday. The 50-point mark separates growth from contraction. Analysts had expected it to come in at 49.7.
In line with the softer headline PMI, a subindex for production slipped to 48.4 in October from 49.5 in September. A subindex for new orders also contracted for a third month, coming in at 48.8.
More worryingly, a subindex for output prices rose to 61.1, the highest since 2016 when the statistics bureau started publishing the indicator, suggesting rising inflationary pressures while broader economic growth slows.
Factory gate inflation rose to a record last month on soaring commodity prices but weak demand capped consumer inflation, forcing policymakers to walk a tightrope between supporting the economy and further stoking producer prices. Analysts polled by Reuters expect the People's Bank of China to refrain from attempts to stimulate the economy by reducing the amount of cash banks must hold in reserve until the first quarter of 2022.
Looming rate rises to keep a lid on gold prices: Reuters poll
Analysts have trimmed their gold price forecasts for the rest of this year and next, expecting the precious metal to hover around current levels in the fourth quarter before edging lower in 2022, a Reuters poll released on Thursday showed. Typically seen as a safe investment, gold performs well when investors are anxious and when returns on other assets like bonds are low. Prices leaped to record highs above $2,000 an ounce last year as the coronavirus spread, but fell as economic growth recovered and central banks began to signal interest rate rises that would push up bond yields.
A poll of 37 analysts and traders this month returned a median forecast for gold to average $1,795 an ounce in the fourth quarter of 2021, in line with current prices and up from its average of $1,770 in the third quarter. The poll forecast an average price of $1,750 an ounce in 2022. A similar survey in July predicted averages of $1,841 an ounce in the fourth quarter and $1,785 in 2022.
Bullish analysts pointed to solid demand for gold from retail investors, jewellers and central banks. They said prices could increase if rising inflation fuels demand for gold as a hedge.
But gold is unlikely to rise much while investors expect the U.S. Federal Reserve to reduce its asset purchases and raise rates, “both of which are events that traditionally see gold prices put under pressure”, said Mooris Tjioe at Phillip Futures.
For silver, the poll forecast average prices of $24 an ounce in the fourth quarter - roughly in line with current levels - and $23.95 in 2022. The poll three months ago predicted averages of $26.13 for the fourth quarter and $25 for 2022. Silver is a ‘safe-haven’ asset like gold but is also used by industry.
COT Report
This week gold surprises with big jump in open interest on COMEX exchange, while SPDR Fund doesn't show yet big change in storage. CFTC data shows around 57K+ contracts were opened this week, counting around 8% of total trading volume. This is huge jump for just single week. Changes are mostly bullish. Speculators have taken 25K net, while hedgers have increased positions against gold's jump for 33.7K contracts. Data stands for Wed and doesn't include recent reaction on US consumer spending jump.
This kind of changes can't happen occasionally and it definitely cares some secret. To what investors are preparing? If this is Fed statement then it means that market expects more dovish comments from it. Currently it is unclear and bring confusion to common view of weak market.
Source: SPDR Fund, FPA
As a result net long position jumps back above 200K and stands near upper border of consolidation that lasts for the few months already:
Source: cftc.gov, charting by Investing.com
To be continued in the next post
In general gold was showing logical price action through the week, healthy and adequately reacted on major events. With real interest rates are start rising, this is additional headwind to the gold. Long term situation mostly stands the same but the one thing that is worthy to mention here - bullish sentiment unexpectedly jumps this week.
Market overview
Gold prices fell on Tuesday after a five-session rally, as the dollar steadied and investors awaited key central bank meetings for clues about rate hikes amid rising inflation concerns.
“There is a slight recovery in the dollar and this is not the best factor for gold. However, prices are not expected to fall sharply as investors have realized that risks are still just behind the corner,” said Carlo Alberto De Casa, external analyst at Kinesis Money. Gold, therefore, has not much room in the short term, said De Casa, adding: “Only a dovish Fed or a slowdown of USD could lift up gold to $1,900, otherwise it only has space for a moderate appreciation to $1,820-1,830.”
Gold is often considered an inflation hedge, though reduced stimulus and interest rate hikes push government bond yields up, increasing non-interest bearing bullion’s opportunity cost.
“Despite a firmer U.S. dollar, higher bond yields at times and firm stock markets, gold is holding its own above the psychologically important $1,800 per troy ounce mark,” Commerzbank analyst Daniel Briesemann said in a note, adding, bullion appears to be finding support from the ongoing inflation debate.
Fed Chairman Jerome Powell recently said the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch the interest rate dial.
“It is almost certain that the FOMC will announce the start of tapering and U.S. yields and greenback should start to move higher. Gold will struggle to hold near $1,800 in this environment,” Jeffrey Halley, senior market analyst for Asia-Pacific at OANDA said. “The capacity for a surprise from the Fed is high,” Halley said, citing the possibility of a more aggressive or accelerated pace of stimulus tapering, which could weigh on gold further.
On the technical front, spot gold looks neutral in a range of $1,783 to $1,795 per ounce, and an escape could suggest a direction, Reuters technical analyst Wang Tao said.
Gold prices edged higher in seesaw trading on Wednesday, buoyed by a fall in U.S. bond yields and a softer dollar, although strong risk appetite in equity markets kept bullion’s gains in check.
“We are in a consolidation period for gold, but I think that eventually the policy tightening and inflation concerns should be positive for the metal,” said Edward Moya, senior market analyst at brokerage OANDA. “Earnings have been fairly impressive, and that is surprising a lot of people... U.S. tech stocks are a favorite place to go for many investors, which is dampening the demand for a safe haven right now.”
StoneX analyst Rhona O’Connell said interest in silver is building in the professional market and that bodes well for gold.
U.S. Fed officials face a ticking clock in their ability to ignore high inflation and are now navigating between their own senses of patience and risk, and a U.S. economy stymied by tangled supply chains, slow hiring and strong consumer demand. Central banks reducing emergency stimulus too quickly and further supply chain disruption are among the top risks to the world economy next year as the COVID-19 pandemic lingers, according to economists in a global Reuters poll.
Still, PIMCO expects the supply bottlenecks disappear by the year end.
We expect the supply bottlenecks to ease towards year-end, as production increases, shipping congestion clears, developed market demand for goods declines, and consumers in advanced economies shift spending to services (assuming no further disruptions from the pandemic).
Overall, Asian production has recovered better than other regions (see Figure 1). In East Asia, where the pandemic has been relatively well-contained and most factories have remained open, industrial production has picked up quickly since the second half of 2020. China’s industrial production had already rebounded and exceeded pre-pandemic levels by last June, and has remained solid since then, supported by strong exports and domestic investment. While global Purchasing Managers’ Index data in May generally showed lengthier delivery times compared with 1Q, Asian economies have fared better.
Overall, we expect the supply-demand imbalance to ease toward the end of the year after demand for consumer goods peaks in developed markets and service-sector spending – which is less import-intensive – increases (assuming no further disruptions from the pandemic). In addition, production is likely to catch up and adjust to the demand recovery, while logistical bottlenecks should clear in 2022 as capacity ramps up and freight costs should gradually normalize by next year.
Inflation has scope to be elevated in the months ahead and to stay bumpy given some of these bottlenecks and disruptions. However, with production resuming and growth moderating into 2022, we expect inflation in developed markets will peak in coming months and moderate in the second half of 2021.
Gold prices consolidated slightly above the key $1,800 level on Thursday, supported by softer U.S. bond yields as investors focused on how central banks respond to rising price pressures.
“Negative real yield and inflation risks will help gold prices to move to $1,850/oz before retreating next year and beyond,” ANZ analysts said in a note, cautioning that an expected Fed taper announcement in November weighed on gold’s outlook.
Demand for gold fell in the third quarter to its lowest since the last quarter of 2020, the World Gold Council (WGC) said. India's gold demand could strengthen significantly in the fourth quarter, the World Gold Council (WGC) said on Thursday, with a drop in global prices and the release of pent-up demand expected to lift jewellery sales during the peak festive season. Higher demand from the world's second-biggest gold consumer could help support spot prices after a near 5% correction so far this year, but a rise in imports of the metal would widen India's trade deficit and weigh on the rupee .
"The fourth quarter is likely to be one of the best quarters in recent years. Pent-up demand, softening of gold prices and weddings will drive the demand," Somasundaram PR, regional chief executive officer of WGC's Indian operations, told Reuters.
Demand for the precious metal usually spikes towards the end of the year in India, as buying gold for weddings and major festivals such as Diwali and Dussehra is considered auspicious. Indians celebrated Dussehra earlier this month and anecdotal feedback from manufacturers indicated strong sales, he said. The pick-up in retail demand gave confidence to manufacturers, and imports in the September quarter jumped 187% from a year ago to 255.6 tonnes, he said. In a report published on Thursday, the WGC said gold demand jumped 47% in the third quarter from a year earlier to 139.1 tonnes as jewellery demand surged 58% to 96.2 tonnes.
The ECB left policy unchanged, holding fire before a set of crucial decisions in December on ending pandemic emergency stimulus and returning policy to a more normal setting.
“ECB’s actions will keep Eurozone bond yields under pressure because they’ll be buying bonds” and that should reduce the opportunity cost of holding gold, said Fawad Razaqzada, analyst with ThinkMarkets, adding that, even though the decision was mostly expected, it should be supportive for the metal. It seems major central banks are not likely to tighten monetary policy too aggressively even if inflation remains elevated, Razaqzada added.
Analysts also said the U.S. Federal Reserve’s meeting on Nov. 2-3 would be more crucial for gold after chief Jerome Powell’s recent comments on tapering asset purchases.
“Fed tapering should already be well and truly discounted, although there is bound to be a short-lived knee-jerk reaction to the Fed’s statement next Wednesday – there always is!” StoneX analyst Rhona O’Connell said.
Investors are gauging what a furious flattening of the U.S. yield curve suggests about expectations for growth and how aggressively the U.S. Federal Reserve may tighten monetary policy in the face of surging inflation.
The U.S. economy grew at its slowest pace in more than a year in the third quarter, data on Thursday showed. Analysts have trimmed their gold price forecasts for the rest of this year and next, a Reuters poll showed on Thursday. In another poll, forecasts for palladium and platinum prices were also lowered with a chip shortage forcing auto makers to cut production of vehicles containing the metals.
Gold prices fell to their lowest level in more than a week on Friday, weighed down by a stronger dollar after U.S. data showing inflation stayed hot last month put the focus back on the Federal Reserve’s policy meeting next week.
The consumer spending data fueled worries about aggressive monetary policy action from the Fed to combat a surge in prices, sending yields on the U.S. 10-year note up as high as 1.6190%, and the dollar surging 0.8%.
“Traders across global markets have aggressively raised their outlook for policy tightening, as an energy crunch and snarled supply chains drive inflation higher, leading market participants to price the risk of a faster exit,” analysts at TD Securities said in a note.
“There isn’t anything that can stop gold’s decline right now,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago, adding that funds become active sellers each time gold crosses the key $1,800 per ounce level.
Overall, worries about rising prices kept both gold and silver on track for monthly gains of over 1% and 7%, respectively.
China’s factory activity contracted more than expected in October, shrinking for the second straight month, as high raw material prices and power disruptions pressured manufacturers in the world’s second-largest economy.
The official manufacturing Purchasing Manager’s Index (PMI) was at 49.2 in October, down from 49.6 in September, data from the National Bureau of Statistics (NBS) showed on Sunday. The 50-point mark separates growth from contraction. Analysts had expected it to come in at 49.7.
In line with the softer headline PMI, a subindex for production slipped to 48.4 in October from 49.5 in September. A subindex for new orders also contracted for a third month, coming in at 48.8.
"About one-third of the surveyed companies listed insufficient demand as their biggest difficulty, indicating inadequate demand had restricted their production," said Zhang Liqun, an analyst at the China Logistics Information Center.
More worryingly, a subindex for output prices rose to 61.1, the highest since 2016 when the statistics bureau started publishing the indicator, suggesting rising inflationary pressures while broader economic growth slows.
"The production index has dropped to the lowest level since it was published in 2005, excluding the global financial crisis period in 2008/09 and the COVID outbreak in February 2020," said Zhiwei Zhang, chief economist at Pinpoint Asset Management. "The output price index rose to the highest level since it was published in 2016. These signals confirm that China's economy is likely already going through stagflation."
Factory gate inflation rose to a record last month on soaring commodity prices but weak demand capped consumer inflation, forcing policymakers to walk a tightrope between supporting the economy and further stoking producer prices. Analysts polled by Reuters expect the People's Bank of China to refrain from attempts to stimulate the economy by reducing the amount of cash banks must hold in reserve until the first quarter of 2022.
"Production remains weak, indicating the demand problem may be relatively large, and some easing of policy is still needed," said Zhou Hao, senior economist at Commerzbank.
Looming rate rises to keep a lid on gold prices: Reuters poll
Analysts have trimmed their gold price forecasts for the rest of this year and next, expecting the precious metal to hover around current levels in the fourth quarter before edging lower in 2022, a Reuters poll released on Thursday showed. Typically seen as a safe investment, gold performs well when investors are anxious and when returns on other assets like bonds are low. Prices leaped to record highs above $2,000 an ounce last year as the coronavirus spread, but fell as economic growth recovered and central banks began to signal interest rate rises that would push up bond yields.
A poll of 37 analysts and traders this month returned a median forecast for gold to average $1,795 an ounce in the fourth quarter of 2021, in line with current prices and up from its average of $1,770 in the third quarter. The poll forecast an average price of $1,750 an ounce in 2022. A similar survey in July predicted averages of $1,841 an ounce in the fourth quarter and $1,785 in 2022.
Bullish analysts pointed to solid demand for gold from retail investors, jewellers and central banks. They said prices could increase if rising inflation fuels demand for gold as a hedge.
But gold is unlikely to rise much while investors expect the U.S. Federal Reserve to reduce its asset purchases and raise rates, “both of which are events that traditionally see gold prices put under pressure”, said Mooris Tjioe at Phillip Futures.
For silver, the poll forecast average prices of $24 an ounce in the fourth quarter - roughly in line with current levels - and $23.95 in 2022. The poll three months ago predicted averages of $26.13 for the fourth quarter and $25 for 2022. Silver is a ‘safe-haven’ asset like gold but is also used by industry.
“Silver remains under pressure from its industrial exposure and the impact of the ongoing semiconductor shortage, which is limiting output of a range of silver-containing electrical items including cars, smartphones, and televisions,” said independent consultant Robin Bhar. “It should continue to underperform,” he said.
COT Report
This week gold surprises with big jump in open interest on COMEX exchange, while SPDR Fund doesn't show yet big change in storage. CFTC data shows around 57K+ contracts were opened this week, counting around 8% of total trading volume. This is huge jump for just single week. Changes are mostly bullish. Speculators have taken 25K net, while hedgers have increased positions against gold's jump for 33.7K contracts. Data stands for Wed and doesn't include recent reaction on US consumer spending jump.
This kind of changes can't happen occasionally and it definitely cares some secret. To what investors are preparing? If this is Fed statement then it means that market expects more dovish comments from it. Currently it is unclear and bring confusion to common view of weak market.
Source: SPDR Fund, FPA
As a result net long position jumps back above 200K and stands near upper border of consolidation that lasts for the few months already:
Source: cftc.gov, charting by Investing.com
To be continued in the next post