Gold GOLD PRO WEEKLY, October 04 - 08, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,289
Fundamentals

While investors on FX market are totally upset with EUR performance as overall environment stands negative around euro currency, gold was able to show positive performance by the end of the week due statistics and external factors, mostly from China - Evergrande problems and energy collapse as both event are making strong impact on stock markets across the Globe. Still, although recent pullback looks nice but the major question is how long it could last and whether we have any positive shifts in market's sentiment.

Market overview

Since the beginning of the week market was aimed on JP comments, Chinese events and statistics. Gold prices were subdued on Monday, pressured by an uptick in U.S. bond yields and a robust dollar, as investors awaited speeches from Federal Reserve policymakers for clues on when the central bank could taper its pandemic-era economic support.

Denting gold’s appeal by raising its opportunity cost, benchmark 10-year U.S. Treasury yields rose to their highest level in nearly three months. The dollar also strengthened, adding further pressure.

“Gold seems to be in an extended period of doldrums and is unable to shake itself either way, with firmer 10-year Treasury yields and a robust dollar acting as headwinds,” independent analyst Ross Norman said. Norman said that while central bank buying was “encouraging” to the market, bullion lacked “quality” institutional flows, particularly from North America.

Investors were also keeping an eye on developments surrounding debt-laden China Evergrande, after the Chinese property giant missed a bond payment deadline last week. The People’s Bank of China continues to inject liquidity into markets, indicating some systemic risks in the market, and providing some support to bullion, said Stephen Innes, managing partner at SPI Asset Management. China’s central bank vowed to protect consumers exposed to the housing market on Monday and injected more cash into the banking system as the Shenzhen government began investigating the wealth management unit of ailing developer Evergrande.

U.S. Federal Reserve officials on Monday tied reduction in the Fed’s monthly bond purchases to continued job growth, with a September employment report now a potential trigger for the central bank’s bond “taper.” In prepared remarks, Powell said the U.S. central bank would move against unchecked inflation if needed.

“The dot plots set by FOMC members signalling an earlier-than-previously-expected rise in Fed’s fund rates, and the move higher across the yield curve continue to have a negative impact on gold,” said Bart Melek, head of commodity strategies at TD Securities.

Fed Chair Jerome Powell said on Tuesday the U.S. economy was still far from achieving maximum employment, a key component of the central bank’s requirements for raising interest rates.
San Francisco Federal Reserve Bank President Mary Daly on Wednesday said the U.S. central bank will be able to begin reducing asset purchases by the year-end, but believed an interest rate hike is still a “long way” away. Philadelphia Fed Bank President Patrick Harker said it would “soon” be time to start reducing the Fed’s economic stimulus.

Supply constraints thwarting global economic growth could still get worse, keeping inflation elevated longer, even if the current spike in prices is still likely to remain temporary, the world’s top central bankers warned on Wednesday.

Gold prices were set on Thursday for a second quarterly drop in three quarters as the prospect of the U.S. Federal Reserve tapering its pandemic-era stimulus strengthened the greenback, making bullion more expensive for holders of other currencies.

“Gold is lacking direction in the short-term as money whipsaws between different asset classes with the dollar being the ultimate hedge against most risk as opposed to gold,” Michael Langford, director at corporate advisory AirGuide said.

Expectations that the Fed could withdraw economic support kept the dollar index near a one-year high. Spiking U.S. bond yields added to the currency’s firmness.
Deepening safe-haven bullion’s woes, benchmark U.S. 10-year Treasury yields held above 1.5%, a level not seen since late-June.

“While there are ample risks that could help gold break higher, like weaker economic data or the Evergrande debt crisis potentially spilling over into other economies, these are unlikely to provide lasting support,” DailyFX currency strategist Ilya Spivak said. “We’re also seeing gold and stocks fall together recently, underscoring that gold is not acting as a haven against losses in riskier assets because what’s really driving both these assets down are rising bond yields and not a risk-off move.”

While factors including the U.S. debt ceiling impasse, rising global inflation and the Evergrande crisis should normally support gold, bullion remains under pressure from a strong dollar -- an alternate “safe-haven” -- and rising yields, Ricardo Evangelista, senior analyst at ActivTrades said in a note.

The number of Americans filing new claims for unemployment benefits increased last week, data showed on Thursday, which could raise concerns the labour market was softening.

“This is also leading to uncertainty about Fed tapering because they want a strong job market to announce a tapering,” independent consultant Robin Bhar said, adding that any delay could be positive for gold. Gold is also “running into some renewed physical buying, with some investors looking to hedge against the economic uncertainty, rising inflation,” Bhar said.

But heightened prospects for Fed tapering, widely expected to start in November, and chances of Treasury yields continuing to gain, are expected to heap more pressure on zero-yielding gold, said Han Tan, chief market analyst at Exinity.

“A firmer U.S. dollar and higher yields are a toxic combination for gold,” Commerzbank said in a note. “In the short term, the risk of a further price slide predominates, meaning that the $1,700 mark could already be reached soon,” the bank said. “As long as gold remains under pressure, silver is also likely to find it difficult to get out of the defensive.”

Gold inched higher on Friday as a weaker dollar and worries about rising inflation and risks to growth countered bets for looming interest rate hikes, keeping bullion on course for a small weekly gain.

Dips in the dollar and lower bond yields are supporting gold, while investors reposition for the fourth quarter, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Helping gold’s appeal, European and Asian stocks fell on worries about inflation and possible slowdown in growth.

“Anyone trying to convince market participants that inflation is not here, that’s a fool’s game,” Saxo Bank analyst Ole Hansen said, adding that soaring energy prices due to a crunch in China and Europe will likely hit growth and earnings and lead to a volatile October, which will support gold.

Prospects that the U.S. Fed may still wind down economic support this year pressured gold, some analysts said, since reduced stimulus and higher interest rates tend to push government bond yields up, raising gold’s opportunity cost.

Current valuations and future returns – a cautionary tale
by Fathom Consulting.

The US Federal Reserve’s loose monetary policy and the relative unattractiveness of fixed income assets has encouraged investors into US equities, increasing equity prices. As a consequence, the cyclically adjusted price-to-earnings ratio (CAPE) for the S&P 500 is now within the top 95% of all historical values. The last time it was this high was during the dot-com bubble. Historically, we find that CAPE is negatively related to future returns, and when CAPE has been around the values seen today, the next ten years tend to see either very low or negative growth in average returns. It is difficult to predict when returns will weaken, but we can at least keep an eye on likely triggers, such as monetary policy tightening. According to projections released last Wednesday, a growing number of Federal Reserve officials now expect a rate increase next year. Another potential trigger could be more attractive fixed income investments as bond yields rise.

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COT Report

Precious metals funds faced outflows of a net $931 million this week, according Lipper Alpha data (Reuters). This confirms what we've said before when funds were showing inflows of two consecutive weeks. But these inflows were around 150-250 Mln. Outflows now overshadow any inflows were made and confirms moderately bearish sentiment on the Gold market.

Recent CFTC data also shows no room to positive mood. Net long position is dropping and comes to 160K level that holds since the beginning of the year.
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Besides, recent numbers look pity - drop of the open interest and massive drop in bullish positions as among speculators as among hedgers. Total drop of bullish sentiment counts for ~ 47K contracts which is around 7-8% of total contracts on the market. We think that this is big fall for just single week.

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SPDR Fund reserves also keep going lower and do not support any recent price bounce:

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On Friday, when we've got unexpected bounce we had doubts on durability of market reaction as overall sentiment has not changed and currently we have solid reasons to suggest major reversal on the market. It seems that we are not alone in our position as many other traders think the same as it is shown above. Besides, big events always reflect in market's sentiment. But now we do not see even minor hint on the possible change - neither in ETF data, nor SPDR and COT numbers. Last time we've considered few long-term forecasts from big banks on average gold price and many of them have decreased the expected values. UBS, for example suggests that it should be around 1600$.
All these moments makes us think that it would be better to not be deceived by recent jump and to not overestimate its value, treating it mostly as a pullback. We could get some interesting bullish setups on daily/intraday time frames but it mostly gonna be short term, with near standing targets. Overall sentiment remains bearish by far.


Monthly

We do not have big shifts on the monthly time frame. Price mostly stands in the same area where it has been for the whole month. On a technical side, we have few bearish moments that suggest deeper action, but, in general, market stands in very small pullback from ATH comparing to the scale of the rally. Market again shows problems with breaking through YPP. We have three equal tops month by month around YPP. It means that somewhere around 1835-1836 big selling orders hold gold from further upward action.

In a shorter-term everything is based on August huge trading range. With the more information from the Fed, we suggest that sentiment becomes more bearish and action to 1650 support area gets more chances to happen in near term. Next target is YPS1 at 1540$.

At the same time, as we've mentioned before, in long term scale price action has the features of retracement, forming big flag consolidation with choppy action inside and standing above nearest 3/8 Fib level. This type of action is difficult to call as strong bearish reversal, at least for now.

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Weekly

Weekly trend remains bearish and we do not have reasons to change our view by far, despite recent pullback. Weekly time frame shows patterns and scenarios that theoretically are possible here. Gold very accurately follows to scenario that we've suggested a month ago. Here we have two important details. First is - gold inability to reach the upper border of triangle and early turn down. Since the drop is strong, we could say that this is real early reversal and hardly gold returns back to hit the triangle line. The most interesting thing now is what performance we get next week on daily chart and the degree of impact on higher time frames.

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Daily

We haven't got the grabber, trend now stands bullish but we still have some doubts on daily H&S pattern. The only thing that probably could be used relatively safe is recent jump. It has nice momentum for intraday performance and it might be used for intraday long position. But this recent jump alone is not enough to suggest upward action with daily H&S pattern as its shape looks weak by far. Thus, our conclusion on daily chart is we could search for scalp long trades on lower time frames but we need more bullish signs to do the same on daily chart:

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Intraday

We do not need to invent the bicycle here but just follow the pattern. With upside reversal swing on Friday odds suggest 50-60% pullback before next extension leg. Thus, the area where we could get proper entry chance is around 1740$. With dollar Index at long-term resistance and deeper retracement on 10-year yields, potentially we could count on 1780$ target area. But this is the next step already. Now it is important to see what will happen around entry point.

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Sive Morten

Special Consultant to the FPA
Messages
15,289
Greetings everybody,

So, Gold now stands in the same environment as EUR - bigger and more valuable patterns could be formed, but market needs time to do this. Despite that we've come to conclusion that recent jump is not decisive for overall sentiment and investors are still cold to Gold market - it is not the reason why it can't go slightly higher. Impulse on daily chart looks strong enough:
gold_d_05_10_21.png


On 4H chart you could wait either for bigger pattern - for example it might be H&S with neckline around 1790. Or, like on EUR it is possible to trade the trend direction. Now gold is forming widening consolidation and we have bullish grabber in place:
gold_4h_05_10_21.png


On 1H chart market also stands at K-support area. Current upside tendency remains valid until price stands above "C" lows. In this case we could get upside AB-CD right to the same 1790 area. The weakness sign of this setup is minor MACD divergence that keeps chances on deeper retracement, maybe to 1740$. So, as it is often with trend trading - situation stands not simple for decision making. Here is the chance to try both setups or wait for deeper pullback:
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Sive Morten

Special Consultant to the FPA
Messages
15,289
Greetings everybody,

So, today we focus only on short-term setup on daily chart. Market has shown upside bounce and keeps bullish MACD trend, which means that context on daily time frame is bullish in short-term:
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At the same time we have few unpleasant moments. US interest rates is turning up again:
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And on 4H chart price has erased as our grabber as bullish reversal candle that was formed later. Price performance looks bearish.
gold_4h_06_10_21.png


1H chart shows more clarity now and we could clearly recognize H&S shape with OP around 1740 Agreement area. It means that gold has actually only one chance to save bullish context - rebound from support area. If it breaks it down - bullish chances become phantom. So let's sit on the hands and see what will happen around 1740$.
gold_1h_06_10_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Good morning,

Gold keeps short term bullish context. On daily chart after initial jump price holds above intraday support levels. Any attempt to sell is buying out that is showed by the long shadows of the sessions this week. NFP could bring some mess to the markets but pure technical picture suggests that gold could keep going at least to 1785-1800$ area:
gold_d_07_10_21.png


Upward action on interest yields is fizzled, at least temporary, maybe till NFP and this provides support to the gold. Price still stands in widening consolidation that mostly indicates indecision. Next gold direction will be the same as the direction of breakout. 4H trend has turned bullish as well. Minor bearish grabber has been erased. So it seems that potential large reverse H&S pattern still is on the table...
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On 1H chart is difficult to take particular trades. Levels that we were expecting to get for entry have not been achieved as market is choppy and turns direction fast. The only definite thing here is the range, and its borders have important meaning. For long entry, if you want, you could try to use either H&S pattern inside, with stops below the right arm's lows or to place stop outside of the range, although it is too far now.
Another way to buy is to use Stop "Buy" order around 1770 at the moment of possible upward breakout. Upside breakout could take the shape of butterfly and its 1784 target perfectly fits to the neckline of H&S on 4H chart:
gold_1h_07_10_21.png


Alternatively, we could wait for more clarity, after NFP release and watch for 4H big pattern will be in place. Choose the way that is more comfortable to you mentally.
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Good morning,

Gold keeps formal bullish context on daily chart with positive MACD and price action in tight range after initial jump. Still, with the interest rates performance that hints on better NFP data we suggest that it would be better to not hurry up with new position taking:

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On 4H chart shape is turning to diamond that theoretically is more friendly for downside action. Besides, recently price has failed few attempts to go higher, forming bearish grabbers. If we're correct in our suggestion that gold should move down at least to 1740 area.
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Theoretical chances exist on breakout at any direction as gold stands in narrowing action. Thus, upside butterfly is easy to imagine here. But, with the all factors that we have right now - it seems that odds stand in favor of downside continuation. Anyway, we suggest that it would be better to wait for NFP numbers and make decision after we have all information on the table.
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