Gold GOLD PRO WEEKLY, October 02 - 06, 2023

Sive Morten

Special Consultant to the FPA
Messages
18,444
Fundamentals

It seems that suggested process is started. Gold now is under pressure, which was absolutely imminence. It is even possible to say that this was predefined. Raising rates and tightening of liquidity are the two major headwinds components. In the environment of massive demand for USD, it is not surprising that all assets are going down, and this is not about its wrong valuation (although I would argue about stocks), but just technical process - margins and collaterals are exhausting, marked-to-market bonds show operating loss and all this stuff has to be covered and compensated somehow. To do this, investors, banks, funds are selling assets to get more dollars. Now we stand in a hot stage of this process, but it will not last for too long. Supposedly it should be over until the end of the year by few reasons. Mostly because the Fed has limited margin safety of raising rate - 2-3 steps more and it will reach the limit. Otherwise country will fall in poverty. Fed has to struggle with inflation but not in the way of destroying everything together with it. Second, as we've mentioned yesterday, Fed plans to start QE in 2024, which we consider today with more details. Hardly the US economy will go out of the wood so fast, and together with crisis processes it will become additional boost for gold market. So, everything is going with our long term plan by far.

Market overview

Gold slipped as the dollar rallied and bond yields gained amid speculation that central banks will keep interest rates elevated for longer to rein in inflation. A gauge of greenback strength rose for a fourth day, soaring on Monday to the highest level this year, while a sell-off in the bond market saw 10-year Treasury yields hitting the highest level since October 2007. Meanwhile, Federal Reserve Bank of Chicago head Austan Goolsbee said in a CNBC interview that it’s still possible for the US to avoid a recession.

1696149831909.png



“The latest Fed speak has investors fearing the Fed might need to do more,” said Ed Moya, senior market analyst at Oanda. “Today Goolsbee has Wall Street worried that the Fed will keep rates higher-for-longer and that a November/December rate hike is clearly on the table.”

Gold in China dropped the most in three years after Beijing permitted more imports, all but closing the gap with international prices that’s persisted for weeks.
The precious metal fell 3.8% on the Shanghai Gold Exchange, with losses accelerating toward the end of the trading day. It follows a months-long rally in local prices, which created a record premium to gold outside of the country.

Just couple weeks ago the premium was around 6% to London level. Shanghai prices were about $10 an ounce above international prices at the close, according to calculations by Bloomberg. This month, premiums had risen to a record of over $120 an ounce.

“With the yuan falling, the property market slumping and capital controls keeping money from leaving the country, investors are buying gold,” Bloomberg economists David Qu and Chang Shu wrote in a report.

1696150496515.png


Factor in China’s protracted property crisis, loose monetary policy and tumbling bond yields, and it’s no mystery why demand for a haven like gold would soar.
Withdrawals from the Shanghai Gold Exchange in August jumped 40% from the previous month, while imports climbed 15%. Meanwhile, inflows into Chinese exchange-traded funds rose to their highest since July 2022. Gold is also finding support from China’s central bank, which has boosted purchases for 10 straight months as it diversifies its reserves.

A fresh round of quotas to import gold was recently issued by the authorities, easing tightness in the local market, according to traders familiar with the matter. The plunge is also “likely to reflect low levels of liquidity ahead of major holidays in China starting this weekend,” said Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney.

The unprecedented gap between local and international prices was driven by robust demand combining with constrained supply. The People’s Bank of China imposed imports curbs over the summer at a time when local bullion buying was boosted by the country’s economic malaise. The constraints on gold shipments — which reduce the need for local banks to buy dollars — is one of several measures Beijing had taken to defend the yuan. The currency has come under pressure from tighter monetary policy elsewhere in the world.

As analysts write - gold is about to face a massive test as prices approach vulnerable levels. The precious metal is finally starting to succumb to a surge in inflation-adjusted bond yields that tend to put pressure on non-interest bearing assets. Gains in the dollar are also pressuring bullion, which is priced in the currency. Prices are hanging on near the psychologically important $1,900 an ounce mark, but it could face a precipitous drop if buyers don’t emerge soon. Over the past 12 months, central bank purchases — driven by a need to find an alternative to the dollar — have underpinned the market even as investors sold up.

The latest data indicates that consumption has slowed in recent months. It’s hard to know whether that’s because of high prices or lower appetite from central banks. The stakes are big with bullion overvalued compared with bonds. The market’s focus will now shift to holdings data from bullion-backed exchange-traded funds, which provides a useful proxy for investor demand. ETFs have consistently shed gold since May, albeit at a slow rate that provides only a mild headwind to prices. If investors become spooked by the metal’s decline and outflows accelerate, the drop could rapidly become self-fulfilling and lead to a crash.

Gold has had a relatively dull 2023. It’s up around 16% compared to this time last year, but only around 4% year-to-date. What looks surprising, if anything, is the fact that gold is still up for 2023 at all. It’s become conventional wisdom (mainly because it’s been true for a long time) that gold is primarily driven by real interest rates. That is, interest rates once you take account of inflation.

Gold is seen as holding its value over the very long run (by which we’re often talking hundreds or even thousands of years). But in the short run, it doesn’t pay you anything and in fact, it costs you to own it. However, the two have decoupled from one another over the past year or so. Real yields on US 10-year Treasuries have headed higher this year and are now at levels last seen in 2009.
1696153925101.png


Hardly it relates to gold’s current strength. Instead, it’s probably got more to do with China’s current economic turmoil. “soaring demand for gold is the latest sign of economic anxiety in China.” Domestic sales of gold bars and coins rose by 30% on the year in the first half of 2023. Given that the Chinese currency, the yuan, has weakened sharply during 2023, and that a weak property market means that housing is no longer the go-to asset for sheltering wealth, this “capital flight” argument makes sense . From a Chinese investor’s point of view, the nice thing about gold is that it’s “an effective way to get wealth ‘out of the country’ while still being in the country.”
Certainly it’s hard to see China’s economy enjoying a miraculous recovery any time soon. And given the longer-term desire to reduce reliance on the US dollar, there is a logic to the idea that China will want to build its gold reserves over the longer run. Real US interest rates are undoubtedly a headwind for gold. However, there’s also no guarantee that they will continue to rise.

Inflation is now going to be a more persistent thorn in the economy’s side, then a great deal depends on the vigour with which the Federal Reserve tries to squeeze it out of the system. The jury is out on that one for now, though I suspect that the Fed’s bark will be worse than its bite once it comes to a choice between inflation tolerance and nasty recession.

I think it’s worth having gold as a (small) part of your asset allocation as portfolio insurance either way — it does tend to rise in periods of panic. That said, it doesn’t strike me as particularly cheap right now either. What could give higher conviction? Seeing a turn in the US dollar or US real rates would help. But we probably won’t be in a more bullish environment for gold until it becomes clearer that inflation will be an ongoing issue.

TO SOME INTERESTING STUFF NOW

So, indeed, Central banks reduce the pace of gold buying. If central banks wouldn't buy so much gold, we probably would have lower levels now. Together with other headwinds that we've mentioned above it makes solid pressure on gold prices now.
1696154661783.png


Some analysts argue that instead of falling, the price will rise if the yield or the dollar rate falls again. $2,100 per ounce due to the slowdown in the US economy is the first target. As evidence, the behavior of gold in March of this year, when real yields and the dollar fell due to the banking crisis, which caused a new influx into gold exchange-traded funds.

The questions asked by colleagues in gold are absolutely legitimate. When is the rocket already? - the buyers ask nervously. The rocket will not be until the completion of the separation in the financial markets. That is, when China withdraws everything it can from the United States, and the United States, respectively, from China, then it will bang. But it also smells peculiar.

The gold/oil ratio will be 30 (now it is walking in the range of 20-23) and oil will be in the Chinese half of the world in yuan or in the BRICS currency, if something worthwhile comes out of this venture. And what will happen in another part of the world is as God willing. China, India and Russia have been morally ready to return to the gold standard, but with the dollar not overthrown, this is impossible. So the evident stage of this process hardly happens until 2025 - it will definitely not work earlier. But, some early signs might be visible in 2024 on a background of the US elections.

I would like to add to my colleague that gold will goup when the acute phase of the crisis passes, which will be a consequence of the current phase of disengagement.
Previously, this will not happen simply because the price of gold is now primarily the result of speculative forces, and not of real physical purchases of gold.

The problem is that both now and in the acute phase of the crisis, the position of a conditional investor in gold acts as a source for closing holes in the liquidity of one’s own portfolio. Have the bonds sank and do you need to top up your broker/collateral bank? Close your gold position. And the collapse has not yet begun. When it starts, we will see a downward dive in the price of gold, and maybe like in 2008-2009.

And only then, when a tailwind appears, the price will begin to rise. Now only cautious investors are forming a long-term position in gold. The broad market, as we saw, invested in the FAANG and accelerated the AI hype. That is, the broad market does not see any need for gold in its portfolio at all; everything is fine with it. Its AI will increase productivity by an order of magnitude. It has a soft landing or no landing.

And when the broad market turns towards reserve assets, then gold will begin to rise. Well, this does not take into account the fact that in any case, as a consequence of the crisis, there will be a revaluation of the relationship between the dollar and gold as such. In short, what is obvious to those who buy gold now is not obvious to the vast majority of players, that's all. Well, or obviously, but for now everyone is playing with the bubbles blowing.

For the Central Bank, the flight into gold is a move away from unsatisfactory real interest rates in government bonds of other countries. While the treasuries bring a real minus, everyone is accumulating reserves in gold. That is, for them it is not a bet against risk. But the Central Bank is like a drop in the ocean of private investors’ money, and that’s exactly what they run into gold when they want to escape from risks. Moreover, the risks of the same treasuries, including the risks of debt in a broad sense, and the risks of shares.

The combination of recession, stock market decline, financial crisis, low (if not zero and negative) rates below inflation (are we expecting a second wave?) is the best combination for flows into reserve assets like gold. And this, by and large, is a combination comparable to 1973, when the dollar was delinked from gold.

Only this time, the rule (arrangement) of positive real rates was in effect for 50 years. All these clever words about the petrodollar and the consumer dollar are actually about this. The essence of the agreement is not that the Saudis or the Chinese receive investments and invest them in public debt. The point is that the US receive a specific resource that works for them, and in return they give dollars, the value/cost of which can be saved at a rate higher than inflation.

And that is why the Fed, under the pressure of the financial crisis, will keep the rate high/compensating for inflation (implying a second or maybe even a third wave of inflation) as long as it can. And this will hurt all economies and financial systems in the world (which, in principle, can also be one of the goals). But as soon as they lower rates below the inflation rate and begin to fill the problems with money, then the second agreement will cease to operate and everyone will run to the same gold to protect themselves from inflation. Let me remind you that 50 years ago gold jumped almost 20 times in a few years.

FEW POLITICAL ISSUES

Now the real big game is started in the US as country is entering Election race year. And this is not about Government shutdown. Game is really interesting and it starts with economical news - US Treasury announced bonds buyback in 2024. This news is presented just as a tool of "stabilizing of liquidity", but in fact, this is QE. We do not know the size and tempo of possible buybacks, but we could suggest that the US economy is counted to hold current interest rates pressure no longer than 1-2 years. Yesterday we've considered some speeches from J. Dimon, L. Fink, who were talking about 5-7% rates, which is also achievable within 1-2 years. So, taking it together, it seems that the US economy could exist in current environment of high rates for ~12 months.

But here is the tricky moment - Democrats, to keep chances in President run, can't announce the recession, it just should not happen in a time of their government. That's why, all statistics that we're getting right now doesn't show the recession. Although as we know the so-called recession has started in the end of 2021. The Fed is catastrophically loosing faith of investors. Just on Thursday, J. Powell were speaking again, this time to economics teachers at the Washington City Hall.

"The ability of the Federal Reserve System to influence the economy depends on whether people understand what we are saying," the Fed chairman said, emphasizing the importance of the work done by economic educators. When Fed officials publish their forecasts for interest rates and the economy, “one of our goals is to influence spending and investment decisions today and in the coming months,” he said.

The translation from the Fed language it means - "please, keep trusting me". But for the market is more and more difficult to do this. CPI index has grown quite significantly month-on-month (August to July) from 0.2% to 0.4%. If we consider the indicators year-on-year, then from August to September it increased from 3.4% to 3.5%. Note that these indicators were already known to Powell last week (at least in a preliminary version). This was one of the reasons why he was nervous: everyone hoped that everything had already gone well, and he knew for sure that inflation could jump up!

Note, by the way, that the data on US GDP has not changed much, but the GDP deflator in the second quarter fell to 1.7% from 3.4% in the first. However, taking into account the wild deflation in the industrial sector (-9.5% in June) this is not surprising. In general, taking into account the constant distortion of GDP statistics (it is impossible to show a decline!), it is impossible to rely on this indicator. Because of its very simple feature: if you reduce the GDP deflator by x%, then GDP will grow by the same x%. Suddenly, BIS reports on real households savings are much lower than it has been thought. $2.6 Trln just has been lost.

Lost $2.6 trillion in national savings in the US after one of the largest revisions of macroeconomic statistics at the Bureau of Economic Analysis (BEA). Historical series have been revised since 1981 (!), and the most intensive accumulation of errors began to occur from 2013 to 2021, which accounted for almost 80% of the entire revision. New release and old release in the column "Equals: Personal saving.

This leads to some modification of previous conclusions and a distortion in the perception of statistics. In any case, you need to be very vigilant for cheaters at the card table, they can fool you. What else did they do there? Still to be assessed, but this is another reminder that statistics cannot be constant, and things can change quite dramatically. All this means an extremely likely crisis in the market for credit cards, student loans and car loans. It’s clear why Biden is running around with his idea of forgiving everyone’s student debt. Of course, they will forgive from under the printing press. And here, even without it, inflation does not want to fall.

It means that statistics now is not representatives and mostly a political tool in the hands of government party, i.e. Democrats. They will try to endure this process as long as they could. Now it seems that it should last until the end of 2024. But there are few additional problems are coming. First is the tensions with China are raising. Despite all talking about normalization and negotiations - China takes back all pandas from UK and US zoos. This is the bad sign and usually happens when China breaks political relations. As you know all pandas are belong to China and stand only in a rent. This is important political sign.

Even Biden in recent statement said that he had reduced the US national debt by $1.7 trillion, but in fact increased it by $3.4 trillion. But the devil, as they say, is in the details. In terms of percentage of GDP, it actually decreased relative to 2020 and the record print by 8% or $1.7 trillion. ;)

Second, the US SPR level. This is definitely some political bargain stands. Crude oil inventories at the largest US storage facility, Cushing, the delivery and execution point for NYMEX crude oil futures, fell by 943,000 barrels in a week. This is the lowest level since July 2022. They are dropping 7 weeks in a row and are coming to some historical low levels already. if the Americans have decided not to try to replenish the SPR, it means they no longer believe that oil prices, and therefore inflation in general, can fall further.

Now we have seen this trend reflected in inflation indicators.
1696162647233.png


Meantime, the average amount of corporate bankruptcies in the US economy over the past four weeks has reached a level that corresponds to the values of the global financial crisis of 2008-2009 and the beginning of the COVID-19 pandemic in 2020.

1696162772866.png



Americans are finally starting to feel the damage from the Fed rate hike. Those who are forced to take out loans now get much less for their money:
1696162848585.png
1696162854654.png


The United States has a record for the number of strikes in the current century. The similar 1970s, when there was stagflation, were also marked by a huge movement of all kinds of strikes.
1696162947703.png


The reason for this is very simple: when you allow a sharp jump in commodity inflation in the main reserve currency, then under no circumstances should you allow a subsequent increase in wages. Since the product will give a 15-20% boost (it happened), but salaries will catch up with the overall inflation rate to 40-50%.

If in 3 years you lose half of your capital in the reserve currency at a rate of 2-3%, then the reserve currency simply loses its status and everyone is trying to find at least some alternatives. There they immediately begin to talk about the return of the gold standard or about contracts where prices, for example, are tied to the average price of wheat, oil, gas, and anything else with a large market. Essentially a quasi-barter.

When Powell realized that everything was heading towards a spiral of wage inflation, he began to furiously increase the rate, but it seemed that it was too late. Prices in stores and at gas stations have increased and are not falling, but wages have practically not increased at all. Hence such a disturbing factor of the working class and trade unions. And the funny thing is that in these conditions, the Americans want to carry out re-industrialization with the involvement of huge masses of the working class of very average qualifications. Reagan, while fighting wage inflation in the 1980s, hastily moved production to Asia. But, it is nowhere to move production now...

The SPR will be empty, inflation will rise, OPEC+ and China will begin to openly manipulate the states, the economy will be strangled by high rates combined with colossal annual budget deficits. Now it is a big bargain around Ukraine. Based on recent bill that was accepted by Congress - starting tomorrow, Ukraine will be without US funding. How long and what amount will ultimately be agreed upon is unknown.

Hungary also continues to block EU aid. Now, elections in Slovakia are resulted with victory of Fico party, who is oriented on national interest and in fact a political copy of V. Orban. Nothing is known about new tranches from Great Britain, Australia, Zealand or Japan and Korea. But they have never been noticeable donors.

SPR was filled in August-September, contracts signed in May for 6 million barrels. And then suddenly the volume began to decrease!
1696163971948.png
 
...It is difficult decision now - start searching compromise with Russia on Ukraine to decrease oil prices, or put under risk big domestic political game. Both scenarios are bad - because it will be big political loss either on foreign or domestic political arena. Here is Zelensky figure might become an indicator on what to expect. If more negative publications will start to appear in western media, it will mean that Democrats are focusing on domestic political struggle. They actually already starts to appear. US Secretary of State Blinken on the possibility of Biden meeting with Putin: “ Never say never ”.

Keep it simple - Russia and Saudi totally control crude oil market, the US SPR are near the lows. They can't restore them with the price of 100+ per barrel. Besides, even without SPR, this crude oil price in 1-2 months will appear in CPI and PCE indexes and just crash the reputation of Democrats, graving their chances on victory in elections. They already try to keep statistics as good as possible and postpone QE to get either another 4 years at least or put all this "s'''t on D. Trump. Make him dig it.

If the US economy doesn't hold additional oil prices pressure, the dynamic on gold market could change sooner. So, here we have very dynamic background that could change very fast and nothing is predefined or static. Current situation is a good chance for accumulation of physical gold, but for the trading purposes it looks bearish by far as gold still under pressure, as we've suggested, and now nobody could say when it will be over.
 
Technicals
Monthly

So, Gold has turned to more active performance and now price is challenging important support area - YPP and first 3/8 Fib support. Both stand around 1835$ area. At the same time, price is flirting around MACD. As we've said previously, despite that fundamental background doesn't support it, but, still, if we get the grabber around support level - this might change everything.

Meantime, technical picture suggests reasonable upside bounce because of monthly support level:
gold_m_02_10_23.png


Weekly

So, the breakout of "indecision doji" of last week was fatal. Gold has collapsed through K-support area. Now it is not at oversold and has a free space until 1800 area. But we should keep in mind monthly $1835 level as well, where gold stands now. But the point is the 20$ difference is very small fluctuation for monthly time frame, so market could flirt around it.

Obviously, if any reaction on monthly levels starts - it should take some shape on daily time frame and we should see it.

gold_w_02_10_23.png

Daily

But, for now we just see that market is on the way to 1.618 butterfly target around $1842 and deeply oversold:
gold_d_02_10_23.png


Intraday

So, taking in consideration all these moments, we could consider new short entry on any bounce up, when daily chart will go out of oversold condition and care about any bullish patterns - mostly on daily and 4H. Because they could mean upside reaction on monthly 1835$ support area. For example, we need to care about possible reverse H&S on 1H chart, also some patterns might be on daily, because it shows perfect downside thrust.
gold_1h_02_10_23.png


Unfortunately, currently we can't take longer-term positions, because of daily oversold and monthly support area.
 
Last edited:
Greetings everybody,

Gold market is falling miserably, no technical reasons could help when market is driven by big capital flows from one assets to another and fundamental factors. As we've said, we have to increase the scale of analysis because of too large swings.

So, today on daily chart, we, in fact, consider weekly picture. Market stands few dollars above very strong support area that includes OP target, weekly 5/8 1792 area and weekly oversold.
gold_d_03_10_23.png


To say the truth, currently market position is bad for any position taking. For long it is too early and we have to be sure that bounce up from mentioned support happens, especially in current fundamental background. For the bearish position it is also bad combination of daily oversold and near standing level.

As bulls as bears should get much better chances when gold starts reaction on 1800$ level. Only scalp traders could consider something on lower time frames. I have really big doubts that gold will show the pullback prior it touches the level, but still you could keep an eye on the thrust on 1H chart and watch whether any patterns will be formed around:
gold_1h_03_10_23.png
 
Greetings everybody,

On Gold market we have no big changes and our plan is the same - wait until 1792-1800 and then start watching for the patterns, depending on direction that you prefer to trade. While gold is hanging just few bucks about it, hardly it will show any moderate pullback. Besides, 10-year yields are going crazy and hits 4.9% already. WIth such an environment, to show something, gold vitally needs support, at least technical one:
gold_d_04_10_23.png


As on EUR, here, on 4H chart we also get no single close above 3x3 DMA and no reasons to speak on pullback:
gold_4h_04_10_23.png


While on 1H chart gold takes some shape that reminds DRPO, but due to reasons that we've mentioned about, it makes sense to consider a bit different pattern - downside butterfly that agrees with daily OP.

Besides, if you carefully look at price action around 3x3 DMA for DRPO "Buy purposes, you could see that 2nd close above 3x3 has happened already, and now, at least, formally, it could mean that we're going to DRPO "Failure" instead. Despite how to call it, we suggest that current place is not suitable for long positions.
gold_1h_04_10_23.png
 
Greetings everybody,

As you could see gold shows significantly less reaction on recent ADP numbers that has triggered the bounce on EUR (that we actually haven't planned). Because now any statistics and even Fed decisions are taking the backseat. The primary factor is the debt supply. It is becoming too large, but potential buyers are less. Yes, Fed with TARP could buy everything from the banks by notional value, but it means only one thing - hidden QE and inflation. Besides - it will not make debt to stop growing....

That's why on Gold we do not see even minor reaction on recent ADP report. I would say even more. If even we get very poor NFP report tomorrow - reaction will be temporal and we have to get sooner rather than later our OP @ 1790-1800 area:
gold_d_05_10_23.png


On 4H chart we've got 1st close above 3x3 DMA and could keep an eye on possible DRPO "Buy" here. It probably could have different target - either 1840 or 1890 depending on what thrust you consider - the whole or just last part of it. And probably target will be determined by NFP - how poor it will be.
gold_4h_05_10_23.png


At the same time, 1H picture keeps door open for DRPO failure. Here we have clear signs of bearish dynamic pressure, suggesting downside breakout. Together with daily OP - it creates reliable setup:
gold_1h_05_10_23.png


Thus, gold gives us few options. Do nothing and wait until Monday and 1800 level - this is for conservative traders and seems reasonable. Second - for those who would like to bet on NFP. It hardly relates to technical analysis, just some thrilling gambling. You could watch for DRPO and once it will be confirmed, make a decision on position taking. Bears could watch it as well, but for "Failure" pattern. That's probably it that we have for now.
 
Greetings everybody,

So Gold market stands like stunned, without any action. Mostly we've discussed everything already, here is just few moments to mention. Thus, our base scenario is to wait when price hits 1790-1800 major support and target area. It might happen just with some occasional spike on NFP release...:
gold_d_06_10_23.png


On 4H chart we have nominal DRPO "Buy" pattern, but i wouldn't rely on it because of other factors contradict it. Second, the shape of price action with DRPO is not normal, too quiet. This is more the consolidation, despite that we have 2nd close above 3x3 DMA already:
gold_4h_06_10_23.png


Bearish dynamic on 1H chart looks more reliable. Together with daily OP that yet to be touched, chances on downside spike or some drop looks more preferable.
gold_1h_06_10_23.png


That's being said, we just follow our plan - do nothing, wait for NFP and completion of daily OP. Second step - watch for market response, what pattern will appear around 1800$ and make a decision on direction then.
 
Back
Top