Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
This week gold has got the deadly hit from Pfizer that announced its vaccine with effectivity around 90%. Although reaction was very short-term and last just for one session, gold was not able to come out of shock till the end of the week and spent time around the same levels of 1880's. The pressure has weaken a bit later as investors were gradually out of euphoria and try to focus on near-stand factors. As we've mentioned earlier, gold mostly is driven by stimulus expectations and level of real interest rates.
As usual, in our FX research we've covered all major topics, concerning US election, vaccine production and perspective of the US Dollar in nearest futures. Since these factors also have relation to the gold market, we discuss how they could impact on it.
Gold slumped more than 4% on Monday as news of the first successful late-stage COVID-19 vaccine trials prompted investors to dump safe-haven bullion and flock to riskier assets instead. Spot prices beat a sharp retreat from a near two-month peak of $1,965.33 hit earlier in the session amid a weaker dollar and hopes for more stimulus following Joe Biden’s victory in the U.S. elections.
“(The news) really exceeded everyone’s best-case scenarios. There was growing nervousness that we might not get a strong vaccine result, so this unleashed the risk-on trade and for gold, signalled a massive exodus of safe-haven plays,” said Edward Moya, senior market analyst at OANDA. However, he added “the economy is still in need of much support and only 50 million (vaccine) doses will be available, so we’re not in the clear with the virus and the calls for stimulus will be growing.”
This explains why sentiment start to change by the end of the week and euphoria was exhausting. 50 mln. doses is a drop in the sea for the World. Besides, Pfizer vaccine is difficult to transport and store as it needs "-70C" conditions. Now we definitely could say that market is overreacted on this news. Besides, there are more vaccines in the pipe that much by factor - price, storage conditions, production amount. Most desirable vaccine now is from AstraZeneca company - cheap, comfort to hold and transport and 3 Bln doses potentially could be produced.
With current orders from several developed countries already close to one billion, perhaps the most highly anticipated vaccine candidate is being produced by the University of Oxford and AstraZeneca. It too needs two doses and can be kept at a similar temperature to the Sinovac vaccine. However, estimates suggest that there is the capacity to make three billion doses at around $3 each – a tenth of the price currently offered by its Chinese competitor. Besides, developed countries prefer to trust only domestic made pills, and caution on any third side vaccines, either from China or any other country. To make effect on vaccination it should be started simultaneously across the Globe. Here we could discount Pfizer and Moderna pills as they are of too few amount and too special care conditions -20-70C degrees. AstraZeneca vaccine should be enough for EU, GP and US through the year and even some residual will be. Other countries, mostly emerging countries could use Chinese, maybe Russian vaccine in 2021 and any vaccine in 2022.
Despite particular way of vaccines using - this is great tailwind for global economy but it seems we will get the results closer to 2nd half of 2021 or even in Autumn 2021. It means that in nearest 6-8 month gold will be driven by different factors.
“If you think that you’re living in the best of all worlds, then you don’t need gold,” said Commerzbank analyst Daniel Briesemann. “However, this assessment seems to be premature. And we’ve often seen in the past that at prices below $1,900, buying interest will come into the market - we would expect that to happen again this time.”
But the breakthrough highlighted the logistical challenges of distributing hundreds of millions of doses once they become available.
“Given the reaction we’ve seen to vaccine news in recent days, the immediate downside risks for gold have undoubtedly increased,” OANDA analyst Craig Erlam said in a note. “The key area remains between $1,850-$1,860 and it’s looking very vulnerable in the near-term.” However, “the longer term prospects for gold are bullish, the road to recovery will take time and require more central bank and government support.”
Federal Reserve policymakers on Tuesday highlighted the need for more targeted fiscal support from the government.
Gold rose on Friday as increasing coronavirus infections globally re-ignited concerns about the economic toll from the pandemic, while scepticism over the reach of a potential COVID-19 vaccine further boosted the safe-haven metal.
“We have got COVID-19 raging in the U.S. and the uncertainty surrounding that and the potential for some more economic damage in the coming months; all that is working in favour of gold market bulls,” Kitco Metals senior analyst Jim Wyckoff said. “Everybody was excited about the vaccine, but then the grim realization sets in that it will probably not be available for general public consumption until late winter or spring and until then ... we’ve got to get through some very rough waters.”
“There is fear of a second wave with lockdowns and restrictions and the market has to work through (some) stimulus whether we’re in a lame duck situation or with a new president-elect,” said Eli Tesfaye, senior market strategist at RJO Futures. “So, the market at some point has to anticipate that cash and price in the potential inflation.”
As we can see, the timing is a key to gold performance - what even will come first and what will happen second. Vaccine positive impact definitely comes second, while stimulus pack should come first, despite who will become the President. At the same time, guys, as I've mentioned it yesterday - more and more information appears that D. Trump seriously aimed to contest results and intends struggle to the end. If his efforts start bringing fruits - markets will start to price out Biden's victory, which could add more pressure as more stimulus was priced-in already. Besides, any political uncertainty in biggest economy triggers demand for safe haven assets again. Recently we also have mentioned M. Pompeo comments and it is interesting that many world leaders do not hurry to congrats J. Biden with victory, V. Putin for instance
Maybe he knows a bit more... Anyway, despite how it turns, It is not crucial moment to us, but it could change the shape of price action in near-term so we have to mention it here. If you're interested with this subject - here is the article from Factcheck.
Meantime, gold sentiment is deteriorating, showing investors' out. This week we do not have COT report, but SPDR Fund data shows solid decrease of positions in recent 2-3 weeks for 40-45 tonnes:
Finally, it is interesting what the situation we have around interest rates as this is second primary factor. Yields on the 10-year Treasury, which move inversely to bond prices, rose to a seven-month high of 0.97% in the past week on hopes that breakthroughs in the search for a COVID-19 vaccine would eventually translate to a boost in economic growth.
That’s still low, by historical standards: yields are a full point below their levels at the start of January and below their 5-year average of 2.05%, according to Refinitiv data. The Federal Reserve has pledged to keep interest rates near historic lows for years to come in its bid to support growth, and past rallies in yields have faded in recent years.
Expectations that a vaccine against the coronavirus could fuel a broad economic revival, however, have also spurred bets that yields could continue edging higher.
“If growth turns out better than anybody thought, the bad news is that the Fed might not have as much control over the extended curve,” said Ralph Segall, chief investment officer at firm Segall, Bryant & Hamill. “That would probably cause stocks to pause.”
Analysts at Goldman Sachs this week forecast Treasury yields will hit 1.3% by the end of next year and 1.7% by 2022. They also raised their forecast for the S&P to 4,100 by the middle of next year, a roughly 16% gain from recent levels.
Rates moving above 1.5% “would suggest that growth was better than anybody thought”
An upward trend in rates will not likely be sustained until there are signs that the pandemic is being contained, either through falling infection rates or the widespread availability of vaccines, said Margie Patel, senior portfolio manager at Wells Fargo Asset Management.
We're mostly focus not in interest rates pre se but in real interest rate - difference between nominal rate and inflation. Simultaneous growth doesn't hurt the gold price, but when nominal rate rally ahead of inflation - this hurt the gold price. Fed will not act until inflation appears around 2+%, while nominal rate could boost on a background of stimulus pack. Also we expect consumption explosion in IIQ of 2021 as people hold more than $2.5 Trln in savings. Once situation starts to improve - these accumulated money will flow on the market.
This leads us to following thoughts. If this happens - it probably will happen in IIQ of 2021 when first effect of vaccine will appear, multiple stimulus flow to the market and people gradually start to consume and spend money more than now. Here we need to keep an eye on 1.5% of 10-year level. GS suggests yield of 1.3% by the end of 2021. Jump above 1.5% will show that inflation pressure is rising that could make negative impact on the gold. Until this moment, in nearest 6 months gold should have moderately positive sentiment on a background of new liquidity injections and potential US Presidency turmoil. Thus, fundamental picture mostly supports our technical view, that suggests 1800-1835 area as good support and attractive level for medium-term investment in gold.
Technicals
Monthly
This week price action was relatively quiet, so we do not have any impact on monthly chart this time. Gold keeps equal chances by far for short-term retracement and for upward continuation. Trend stands bullish here. The sequence of events that investors are watching is "elections - stimulus - CV19". Elections mostly are done, if we ignore hardly possible D. Trump rising. Next question is stimulus. Any delay, size reducing will press on the market holding it from further upward action. Providing at least some stimulus, despite how large they will be will help gold to move higher, although hardly it will set the new top.
Extreme levels - reaching of 2160 butterfly target or downside reversal and drop to 1700 area are possible with either extremely positive or negative scenarios. For example, if Biden provides more than 2.2 Trln and made it fast, we could get acceleration, while unexpected Trump's successful contest and victory and following stimulus fizzle/reducing could trigger downside action to major support around 1700$
If everything goes with central, average way -Biden finally becomes the president and provides stimulus pack in January, gold should re-establish lost positions, recover after vaccine shock, but it is difficult to count on action in a excess of previous $2K top. This scenario also suggests smaller downside retracement, that is more in a row with closer standing support levels around $1800-1835.
Weekly
Trend stands bearish here. Market slightly has recovered through the week, blurring the shape of bearish engulfing pattern, but was able to stay outside the pennant pattern. Here, to be absolutely happy, I would like to get W&R of 1850 lows, when price hits 1836 Fib support and weekly oversold somehow with fast recovery above 1850. That would be just great for long-entry confirmation. But now we do not have it and have to keep an eye on daily/intraday price performance:
Daily
Daily chart shows nothing that could make us doubt on bearish context. MACD trend stands bearish, price is coiling around the bottom and doesn't show fast recovery. All these moments stands in favor of another, maybe minor, but downside leg. Besides, recall our initial AB-CD pattern - it's OP target still has not been hit. We do not have any clear patterns as well. It means that sentiment remains bearish, and it would be better to wait more with any bullish positions.
Intraday
So, both steps for our last week trading plan were completed accurately - deeper ab-cd action first and upside AB-CD retracement back to Fib level second. So, now we have "222" Sell pattern in place. Market stands at potential level where downside continuation could start. Those who already sold at OP now could move stops to breakeven.
Is it possible that price goes to XOP, forming wider "222" Sell pattern? Yes, and this is also not break the scenario of downside continuation. To control this we have to drop time frame more and watch what will happen around 1900 area first, what patterns start forming etc. If it will be broken, we will have to shift to 1922 as well. Currently it is difficult to suggest what factors could push gold higher immediately, maybe some official news (in favor of D. Trump) on US elections only. In this case situation starts to smell with scandal and massive unrest.
This week gold has got the deadly hit from Pfizer that announced its vaccine with effectivity around 90%. Although reaction was very short-term and last just for one session, gold was not able to come out of shock till the end of the week and spent time around the same levels of 1880's. The pressure has weaken a bit later as investors were gradually out of euphoria and try to focus on near-stand factors. As we've mentioned earlier, gold mostly is driven by stimulus expectations and level of real interest rates.
As usual, in our FX research we've covered all major topics, concerning US election, vaccine production and perspective of the US Dollar in nearest futures. Since these factors also have relation to the gold market, we discuss how they could impact on it.
Gold slumped more than 4% on Monday as news of the first successful late-stage COVID-19 vaccine trials prompted investors to dump safe-haven bullion and flock to riskier assets instead. Spot prices beat a sharp retreat from a near two-month peak of $1,965.33 hit earlier in the session amid a weaker dollar and hopes for more stimulus following Joe Biden’s victory in the U.S. elections.
“(The news) really exceeded everyone’s best-case scenarios. There was growing nervousness that we might not get a strong vaccine result, so this unleashed the risk-on trade and for gold, signalled a massive exodus of safe-haven plays,” said Edward Moya, senior market analyst at OANDA. However, he added “the economy is still in need of much support and only 50 million (vaccine) doses will be available, so we’re not in the clear with the virus and the calls for stimulus will be growing.”
This explains why sentiment start to change by the end of the week and euphoria was exhausting. 50 mln. doses is a drop in the sea for the World. Besides, Pfizer vaccine is difficult to transport and store as it needs "-70C" conditions. Now we definitely could say that market is overreacted on this news. Besides, there are more vaccines in the pipe that much by factor - price, storage conditions, production amount. Most desirable vaccine now is from AstraZeneca company - cheap, comfort to hold and transport and 3 Bln doses potentially could be produced.
With current orders from several developed countries already close to one billion, perhaps the most highly anticipated vaccine candidate is being produced by the University of Oxford and AstraZeneca. It too needs two doses and can be kept at a similar temperature to the Sinovac vaccine. However, estimates suggest that there is the capacity to make three billion doses at around $3 each – a tenth of the price currently offered by its Chinese competitor. Besides, developed countries prefer to trust only domestic made pills, and caution on any third side vaccines, either from China or any other country. To make effect on vaccination it should be started simultaneously across the Globe. Here we could discount Pfizer and Moderna pills as they are of too few amount and too special care conditions -20-70C degrees. AstraZeneca vaccine should be enough for EU, GP and US through the year and even some residual will be. Other countries, mostly emerging countries could use Chinese, maybe Russian vaccine in 2021 and any vaccine in 2022.
Despite particular way of vaccines using - this is great tailwind for global economy but it seems we will get the results closer to 2nd half of 2021 or even in Autumn 2021. It means that in nearest 6-8 month gold will be driven by different factors.
“If you think that you’re living in the best of all worlds, then you don’t need gold,” said Commerzbank analyst Daniel Briesemann. “However, this assessment seems to be premature. And we’ve often seen in the past that at prices below $1,900, buying interest will come into the market - we would expect that to happen again this time.”
But the breakthrough highlighted the logistical challenges of distributing hundreds of millions of doses once they become available.
“Given the reaction we’ve seen to vaccine news in recent days, the immediate downside risks for gold have undoubtedly increased,” OANDA analyst Craig Erlam said in a note. “The key area remains between $1,850-$1,860 and it’s looking very vulnerable in the near-term.” However, “the longer term prospects for gold are bullish, the road to recovery will take time and require more central bank and government support.”
Federal Reserve policymakers on Tuesday highlighted the need for more targeted fiscal support from the government.
Gold rose on Friday as increasing coronavirus infections globally re-ignited concerns about the economic toll from the pandemic, while scepticism over the reach of a potential COVID-19 vaccine further boosted the safe-haven metal.
“We have got COVID-19 raging in the U.S. and the uncertainty surrounding that and the potential for some more economic damage in the coming months; all that is working in favour of gold market bulls,” Kitco Metals senior analyst Jim Wyckoff said. “Everybody was excited about the vaccine, but then the grim realization sets in that it will probably not be available for general public consumption until late winter or spring and until then ... we’ve got to get through some very rough waters.”
“There is fear of a second wave with lockdowns and restrictions and the market has to work through (some) stimulus whether we’re in a lame duck situation or with a new president-elect,” said Eli Tesfaye, senior market strategist at RJO Futures. “So, the market at some point has to anticipate that cash and price in the potential inflation.”
As we can see, the timing is a key to gold performance - what even will come first and what will happen second. Vaccine positive impact definitely comes second, while stimulus pack should come first, despite who will become the President. At the same time, guys, as I've mentioned it yesterday - more and more information appears that D. Trump seriously aimed to contest results and intends struggle to the end. If his efforts start bringing fruits - markets will start to price out Biden's victory, which could add more pressure as more stimulus was priced-in already. Besides, any political uncertainty in biggest economy triggers demand for safe haven assets again. Recently we also have mentioned M. Pompeo comments and it is interesting that many world leaders do not hurry to congrats J. Biden with victory, V. Putin for instance
Maybe he knows a bit more... Anyway, despite how it turns, It is not crucial moment to us, but it could change the shape of price action in near-term so we have to mention it here. If you're interested with this subject - here is the article from Factcheck.Meantime, gold sentiment is deteriorating, showing investors' out. This week we do not have COT report, but SPDR Fund data shows solid decrease of positions in recent 2-3 weeks for 40-45 tonnes:
Finally, it is interesting what the situation we have around interest rates as this is second primary factor. Yields on the 10-year Treasury, which move inversely to bond prices, rose to a seven-month high of 0.97% in the past week on hopes that breakthroughs in the search for a COVID-19 vaccine would eventually translate to a boost in economic growth.
That’s still low, by historical standards: yields are a full point below their levels at the start of January and below their 5-year average of 2.05%, according to Refinitiv data. The Federal Reserve has pledged to keep interest rates near historic lows for years to come in its bid to support growth, and past rallies in yields have faded in recent years.
Expectations that a vaccine against the coronavirus could fuel a broad economic revival, however, have also spurred bets that yields could continue edging higher.
“If growth turns out better than anybody thought, the bad news is that the Fed might not have as much control over the extended curve,” said Ralph Segall, chief investment officer at firm Segall, Bryant & Hamill. “That would probably cause stocks to pause.”
Analysts at Goldman Sachs this week forecast Treasury yields will hit 1.3% by the end of next year and 1.7% by 2022. They also raised their forecast for the S&P to 4,100 by the middle of next year, a roughly 16% gain from recent levels.
Rates moving above 1.5% “would suggest that growth was better than anybody thought”
An upward trend in rates will not likely be sustained until there are signs that the pandemic is being contained, either through falling infection rates or the widespread availability of vaccines, said Margie Patel, senior portfolio manager at Wells Fargo Asset Management.
We're mostly focus not in interest rates pre se but in real interest rate - difference between nominal rate and inflation. Simultaneous growth doesn't hurt the gold price, but when nominal rate rally ahead of inflation - this hurt the gold price. Fed will not act until inflation appears around 2+%, while nominal rate could boost on a background of stimulus pack. Also we expect consumption explosion in IIQ of 2021 as people hold more than $2.5 Trln in savings. Once situation starts to improve - these accumulated money will flow on the market.
This leads us to following thoughts. If this happens - it probably will happen in IIQ of 2021 when first effect of vaccine will appear, multiple stimulus flow to the market and people gradually start to consume and spend money more than now. Here we need to keep an eye on 1.5% of 10-year level. GS suggests yield of 1.3% by the end of 2021. Jump above 1.5% will show that inflation pressure is rising that could make negative impact on the gold. Until this moment, in nearest 6 months gold should have moderately positive sentiment on a background of new liquidity injections and potential US Presidency turmoil. Thus, fundamental picture mostly supports our technical view, that suggests 1800-1835 area as good support and attractive level for medium-term investment in gold.
Technicals
Monthly
This week price action was relatively quiet, so we do not have any impact on monthly chart this time. Gold keeps equal chances by far for short-term retracement and for upward continuation. Trend stands bullish here. The sequence of events that investors are watching is "elections - stimulus - CV19". Elections mostly are done, if we ignore hardly possible D. Trump rising. Next question is stimulus. Any delay, size reducing will press on the market holding it from further upward action. Providing at least some stimulus, despite how large they will be will help gold to move higher, although hardly it will set the new top.
Extreme levels - reaching of 2160 butterfly target or downside reversal and drop to 1700 area are possible with either extremely positive or negative scenarios. For example, if Biden provides more than 2.2 Trln and made it fast, we could get acceleration, while unexpected Trump's successful contest and victory and following stimulus fizzle/reducing could trigger downside action to major support around 1700$
If everything goes with central, average way -Biden finally becomes the president and provides stimulus pack in January, gold should re-establish lost positions, recover after vaccine shock, but it is difficult to count on action in a excess of previous $2K top. This scenario also suggests smaller downside retracement, that is more in a row with closer standing support levels around $1800-1835.
Weekly
Trend stands bearish here. Market slightly has recovered through the week, blurring the shape of bearish engulfing pattern, but was able to stay outside the pennant pattern. Here, to be absolutely happy, I would like to get W&R of 1850 lows, when price hits 1836 Fib support and weekly oversold somehow with fast recovery above 1850. That would be just great for long-entry confirmation. But now we do not have it and have to keep an eye on daily/intraday price performance:
Daily
Daily chart shows nothing that could make us doubt on bearish context. MACD trend stands bearish, price is coiling around the bottom and doesn't show fast recovery. All these moments stands in favor of another, maybe minor, but downside leg. Besides, recall our initial AB-CD pattern - it's OP target still has not been hit. We do not have any clear patterns as well. It means that sentiment remains bearish, and it would be better to wait more with any bullish positions.
Intraday
So, both steps for our last week trading plan were completed accurately - deeper ab-cd action first and upside AB-CD retracement back to Fib level second. So, now we have "222" Sell pattern in place. Market stands at potential level where downside continuation could start. Those who already sold at OP now could move stops to breakeven.
Is it possible that price goes to XOP, forming wider "222" Sell pattern? Yes, and this is also not break the scenario of downside continuation. To control this we have to drop time frame more and watch what will happen around 1900 area first, what patterns start forming etc. If it will be broken, we will have to shift to 1922 as well. Currently it is difficult to suggest what factors could push gold higher immediately, maybe some official news (in favor of D. Trump) on US elections only. In this case situation starts to smell with scandal and massive unrest.
