Sive Morten
Special Consultant to the FPA
- Messages
- 18,701
Fundamentals
This week guys, we do not have any powerful shifts of long-term perspective. New inputs that we've got are mostly tactical ones. According to Reuters - gold edged higher on Friday, on track for its biggest weekly gain in six, as the dollar softened after data showed U.S. job growth slowed more than expected last month and a slide in stock markets burnished the appeal of bullion as a safe haven.
“The weaker-than-expected jobs data is supporting the overall current mood but the numbers were not disappointing enough to trigger fresh buying,” said Heraeus precious metals trader Alexander Zumpfe.
“However, the data helped gold to establish itself above the pivotal $1,200 mark and I wouldn’t rule out a test of this week’s high at $1,208.”
The dollar weakened and stock markets fell after data showed U.S. nonfarm payrolls increased by 134,000 jobs in September, the fewest in a year.
However, the Labor Department’s monthly employment report also showed a steady rise in wages, suggesting moderate inflation pressures, which could allow the Federal Reserve to maintain a path of gradual interest rate increases.
Gold remains “relatively cheap, so attractive to value-based investors and others looking for a hedge” against uncertainty, said Societe Generale analyst Robin Bhar.
Despite this week’s gains, gold prices have fallen more than 12 percent from a peak in April largely due to strength in the dollar, which has benefited from a vibrant U.S. economy, rising U.S. interest rates and fears of a global trade war.
“The gold markets are still very short, which is highly unusual. In such a situation, a short covering rally can be expected if there’s anything to stimulate the market,” said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.
“Overall, it’s just a wait-and-see attitude to see what happens in the run up to the mid-term elections in the United States” in November.
Now take a look at SPDR ETF performance since March. This week we see strong divergence of gold price action and bullion sell-off. Fund has lost almost 12 tonnes this week, which is large outflow even for SPDR. With this collapse in place, every time when price deviate from physical gold storage value - later it turns in the same direction. Here we see three examples. To be honest, this is fair, because now it is really difficult to find economical reasons for gold demand. Political - maybe, because in politics not everything is regulated by return on investments. Safety, protection and fiscal independence plays major role for any country.
But, economy factors shows that Interest-bearing assets becomes more expensive as they offer higher return. Thus, US 10 year rate has raised recently again and is coming to our 3.35% target:
COT data also shows that net speculative short position has increased this week. This is unique situation for gold guys, because it never was net short within whole history. Sometimes speculative position dropped to around zero, but not to negative values. It means that we can't quantify whether gold is too overextended down or not, because we do not have historic net shot maximum.
Source: CFTC.gov
Charting by Investing.com
Open interest has jumped for 11K contracts this week. But direction of position changing is interesting. Take a look that speculators (non-commercial) have increased as longs as shorts, although shorts were increased more. The same hedgers (commercial) did - longs have been increased more (this is bearish sign, because hedgers take positions against anticipated action), but some value was added to shorts as well. Still bearish positions were increased 2 times greater than bullish.
Finally, yesterday we've mentioned that probability of rate increase by Fed in December for 4th time this year has raised for ~3% to ~77%.
So, taking it all together it is very difficult to call short-term sentiment on gold market as bullish. We pay a lot of attention to this moment today, just because we have technical setups that suggest long position taking. And we need to know in what degree we could rely on it. Our fundamental snapshot cautious us that bullish trading could be tricky.
Technical
Monthly
On monthly chart we keep our long-term technical scenario, that could be realized. this is not single possible scenario, but currently it seems as very probable. We will keep it intact for awhile, because it illustrates our fundamental expectations on gold market. Although final downside target could be revised higher someday because as political as economical situation is not static but we keep our direction "down" by far.
Here we try to involve fundamental view in technical analysis, trying to combine patterns with real fundamental situation on gold. So, we will take broader view.
If you follow our weekly updates, you should remember our explanation and why we think that gold inability to break through 1380 resistance should be treated as bulls' defeat and gold failure. This is important in outlook of longer-term perspective.
Fundamental picture suggests two major things. In shorter-term US will keep dominate role in the world, because indirectly it controls EU economy as major EU companies have significant part of their business in US, or on US territory, US dollar is still world major currency and, as we've estimated above, China starts to show signs of chilling their economy. US economy itself feels good. D. Trump by restructuring of political role of US on international arena will safe a lot of "unnecessary" spending, such as revolutions, different programs of opposition financing, military spending of different kind. This should improve US budget, reduce deficit, which also will work on support of US economy.
Second important issue, this long-term relations that stand for decades start changing. Both of these moments, putting together, lead us to following conclusion. Within few years, 2-3 probably gold will remain under pressure of positive interest rates cycle. While gradually, when breaking of long-term economic relations will be seen brighter and brighter and impact not only China, EU but US as well - this will be turning point for the gold, or slightly before that. Because any global crush of any kind triggers demand for gold. That is what we see from fundamentals. The same view we see among other analysis, which they backed with statistics and fundamental research. Thus, Fathom Consulting expects starting of world crisis around 2020.
It could look unbelievable, but technical picture shows approximately the same. Failure of 1380 upside breakout confirms our idea of 2-3 years of US and US Dollar domination. But at the same time gold should show preparation to reversal, and here it is. One of the scenarios that might be formed here is big 1.618 butterfly, which is bullish reversal pattern. It has 1.618 target right around gold price, which is corresponds to extraction spending approximately. So, it is long-term breakeven point.
Finally, butterfly could become large reverse H&S pattern around all time 5/8 Fib support and ~40% of this pattern could be seen on the market. What we see on the chart nicely corresponds to current fundamental background. Alternative scenarios suggest appearing of different patterns, such as "222" Buy, or 1.27 butterfly but it doesn't affect the core and reflects only a degree of global political and economical processes, whether they will be smooth or drastic.
Of course, political life is not static, and it could show fast turns. But right now, everything looks very harmonic.
Here we also have mentioned huge demand on gold from emerging countries - China, Russia and Turkey. Developed countries repatriate gold from US. It means that everybody prepares to something, which should significantly increase demand for a gold.
Weekly
Weekly price action mostly stands inside the range of long August candle, when gold has hit weekly oversold. Since then we watch for patterns here and upside bounce to at least 3/8 resistance area of 1238$, which seems normal pullback in such conditions.
Despite our long term bearish trend on gold, it can't show straight down action without any pauses. And we think that one of these stops we have right now. Although the scale of this "pause" looks impressive 50-70$ per contract bounce, on weekly chart this is just 3/8 pullback, which seems normal when market hits oversold and YPS1 areas. Thus, on weekly we still watch for our directional pattern, based on the thrust down.
This week market has closed above 3x3 DMA for 2nd time. As a result we have confirmed DRPO "Buy" pattern in place. How to combine it with fundamental bearish picture? I don't know. May be it will turn later to DRPO "Failure". But this is serious pattern - it suggests rally at least to 50% resistance around $1260. And we can't ignore it. Also it puts restriction on short positions, at least until it is valid.
The bottoms of DRPO are too different. This is the major and single sign of weakness of this pattern. I've heard different opinions on this subject. DiNapoli talked on forum that DRPO with second bottom at 5/8 support is stronger type of DRPO. Because it means that buyers are more aggressively step in trading.
At the same time, smaller 2nd bottom tells that less sellers have entered short at previous retracement, when 1st bottom has been created. So, fewer short positions mean fewer buying stops and fewer traders on wrong side. Upside action due DRPO will be weaker. Everybody agrees that when second bottom is slightly lower than the 1st one, a kind of W&R - this is perfect situation.
In this case trading volume could help us a bit. Let's take a look at Gold futures chart with trading volume.
We can see that selling pressure at the bottom of DRPO was approximately the same as during downside thrust, even on Thu sell volume was rather high. On Friday buyers are stepped in with the same volume. It means that positions from both sides should be enough to make DRPO work. We will see...
Daily
Last week our "222" Buy pattern has worked perfectly. In general gold stands in flat since August. The invalidation point for DRPO is 1180 Fib support. To cancel DRPO and turn it to "Failure" pattern, market should close below it on weekly chart. Trend stands bullish here.
In the mid of last week we've mentioned two bearish patterns that were formed. First is the grabber and later it has become a part of tweezers top. Both are valid right now and theoretically have not been cancelled yet. But - market has shown no price action due this pattern, although 3 days passed. This makes patterns look weaker, even without mentioning DRPO on weekly chart. Now recent price action mostly looks like bullish flag consolidation inside wide flat range. This supports weekly DRPO spirit.
Intraday
Most sophisticated task guys, is to plan entry points in current conditions. Obviously we can't place stop just below 1180 (although somebody could probably), because it will be too far end expensive, or we will trade with very small lot. It means that we have to search for compromises.
Here is the moment where market mechanics could help us a lot. Take a look at daily picture. We have first thrusting action up from 1160 lows, then AB-CD retracement to 1180. Now market shows thrusting action up from major 5/8. It means that it is again stands in extension mode. From this point of view, if market bullish indeed, any return back to 1180 will look irrational. Retracement already is done. This could happen only if market will stop to be bullish or sentiment will change by impact of additional factor.
It means that upside action should continue with minor pullbacks. This lets us to search smaller setups and patterns that could let us to be involved in larger patterns. On 4H chart we have flag consolidation. This is bullish pattern and if everything OK, it should be broken up. It means that we could search changes to go long inside this flag. We see that multiple grabbers were formed here, which let us to suggest some downside action inside the flag. Thus the first pattern that we have - possible "222" Buy.
On hourly chart in fact we have pennant, which is the same character and minor "222" Buy, which lets to take long position around WPP. Stops should be placed anyway outside the lower border of the flag:
I suggest it makes sense to split total position in two parts with the same stop. Take the first position by hourly setup and second one by 4H.
I doesn't make sense to place stops below 1180. Because if gold will fail to proceed higher by flag pattern and start dropping back to 1180, first - we anyway will look for larger patterns in this case. Second - it will be bearish, because AB-CD retracement already has happened. In this case chances on DRPO Failure will increase. It means that if DRPO is real - gold will proceed up right from here. Otherwise - DRPO probably will fail and all that we've said about fundamentals and sentiment will be confirmed.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
This week guys, we do not have any powerful shifts of long-term perspective. New inputs that we've got are mostly tactical ones. According to Reuters - gold edged higher on Friday, on track for its biggest weekly gain in six, as the dollar softened after data showed U.S. job growth slowed more than expected last month and a slide in stock markets burnished the appeal of bullion as a safe haven.
“The weaker-than-expected jobs data is supporting the overall current mood but the numbers were not disappointing enough to trigger fresh buying,” said Heraeus precious metals trader Alexander Zumpfe.
“However, the data helped gold to establish itself above the pivotal $1,200 mark and I wouldn’t rule out a test of this week’s high at $1,208.”
The dollar weakened and stock markets fell after data showed U.S. nonfarm payrolls increased by 134,000 jobs in September, the fewest in a year.
However, the Labor Department’s monthly employment report also showed a steady rise in wages, suggesting moderate inflation pressures, which could allow the Federal Reserve to maintain a path of gradual interest rate increases.
Gold remains “relatively cheap, so attractive to value-based investors and others looking for a hedge” against uncertainty, said Societe Generale analyst Robin Bhar.
Despite this week’s gains, gold prices have fallen more than 12 percent from a peak in April largely due to strength in the dollar, which has benefited from a vibrant U.S. economy, rising U.S. interest rates and fears of a global trade war.
“The gold markets are still very short, which is highly unusual. In such a situation, a short covering rally can be expected if there’s anything to stimulate the market,” said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.
“Overall, it’s just a wait-and-see attitude to see what happens in the run up to the mid-term elections in the United States” in November.
Now take a look at SPDR ETF performance since March. This week we see strong divergence of gold price action and bullion sell-off. Fund has lost almost 12 tonnes this week, which is large outflow even for SPDR. With this collapse in place, every time when price deviate from physical gold storage value - later it turns in the same direction. Here we see three examples. To be honest, this is fair, because now it is really difficult to find economical reasons for gold demand. Political - maybe, because in politics not everything is regulated by return on investments. Safety, protection and fiscal independence plays major role for any country.
But, economy factors shows that Interest-bearing assets becomes more expensive as they offer higher return. Thus, US 10 year rate has raised recently again and is coming to our 3.35% target:
COT data also shows that net speculative short position has increased this week. This is unique situation for gold guys, because it never was net short within whole history. Sometimes speculative position dropped to around zero, but not to negative values. It means that we can't quantify whether gold is too overextended down or not, because we do not have historic net shot maximum.
Source: CFTC.gov
Charting by Investing.com
Open interest has jumped for 11K contracts this week. But direction of position changing is interesting. Take a look that speculators (non-commercial) have increased as longs as shorts, although shorts were increased more. The same hedgers (commercial) did - longs have been increased more (this is bearish sign, because hedgers take positions against anticipated action), but some value was added to shorts as well. Still bearish positions were increased 2 times greater than bullish.
Finally, yesterday we've mentioned that probability of rate increase by Fed in December for 4th time this year has raised for ~3% to ~77%.
So, taking it all together it is very difficult to call short-term sentiment on gold market as bullish. We pay a lot of attention to this moment today, just because we have technical setups that suggest long position taking. And we need to know in what degree we could rely on it. Our fundamental snapshot cautious us that bullish trading could be tricky.
Technical
Monthly
On monthly chart we keep our long-term technical scenario, that could be realized. this is not single possible scenario, but currently it seems as very probable. We will keep it intact for awhile, because it illustrates our fundamental expectations on gold market. Although final downside target could be revised higher someday because as political as economical situation is not static but we keep our direction "down" by far.
Here we try to involve fundamental view in technical analysis, trying to combine patterns with real fundamental situation on gold. So, we will take broader view.
If you follow our weekly updates, you should remember our explanation and why we think that gold inability to break through 1380 resistance should be treated as bulls' defeat and gold failure. This is important in outlook of longer-term perspective.
Fundamental picture suggests two major things. In shorter-term US will keep dominate role in the world, because indirectly it controls EU economy as major EU companies have significant part of their business in US, or on US territory, US dollar is still world major currency and, as we've estimated above, China starts to show signs of chilling their economy. US economy itself feels good. D. Trump by restructuring of political role of US on international arena will safe a lot of "unnecessary" spending, such as revolutions, different programs of opposition financing, military spending of different kind. This should improve US budget, reduce deficit, which also will work on support of US economy.
Second important issue, this long-term relations that stand for decades start changing. Both of these moments, putting together, lead us to following conclusion. Within few years, 2-3 probably gold will remain under pressure of positive interest rates cycle. While gradually, when breaking of long-term economic relations will be seen brighter and brighter and impact not only China, EU but US as well - this will be turning point for the gold, or slightly before that. Because any global crush of any kind triggers demand for gold. That is what we see from fundamentals. The same view we see among other analysis, which they backed with statistics and fundamental research. Thus, Fathom Consulting expects starting of world crisis around 2020.
It could look unbelievable, but technical picture shows approximately the same. Failure of 1380 upside breakout confirms our idea of 2-3 years of US and US Dollar domination. But at the same time gold should show preparation to reversal, and here it is. One of the scenarios that might be formed here is big 1.618 butterfly, which is bullish reversal pattern. It has 1.618 target right around gold price, which is corresponds to extraction spending approximately. So, it is long-term breakeven point.
Finally, butterfly could become large reverse H&S pattern around all time 5/8 Fib support and ~40% of this pattern could be seen on the market. What we see on the chart nicely corresponds to current fundamental background. Alternative scenarios suggest appearing of different patterns, such as "222" Buy, or 1.27 butterfly but it doesn't affect the core and reflects only a degree of global political and economical processes, whether they will be smooth or drastic.
Of course, political life is not static, and it could show fast turns. But right now, everything looks very harmonic.
Here we also have mentioned huge demand on gold from emerging countries - China, Russia and Turkey. Developed countries repatriate gold from US. It means that everybody prepares to something, which should significantly increase demand for a gold.
Weekly
Weekly price action mostly stands inside the range of long August candle, when gold has hit weekly oversold. Since then we watch for patterns here and upside bounce to at least 3/8 resistance area of 1238$, which seems normal pullback in such conditions.
Despite our long term bearish trend on gold, it can't show straight down action without any pauses. And we think that one of these stops we have right now. Although the scale of this "pause" looks impressive 50-70$ per contract bounce, on weekly chart this is just 3/8 pullback, which seems normal when market hits oversold and YPS1 areas. Thus, on weekly we still watch for our directional pattern, based on the thrust down.
This week market has closed above 3x3 DMA for 2nd time. As a result we have confirmed DRPO "Buy" pattern in place. How to combine it with fundamental bearish picture? I don't know. May be it will turn later to DRPO "Failure". But this is serious pattern - it suggests rally at least to 50% resistance around $1260. And we can't ignore it. Also it puts restriction on short positions, at least until it is valid.
The bottoms of DRPO are too different. This is the major and single sign of weakness of this pattern. I've heard different opinions on this subject. DiNapoli talked on forum that DRPO with second bottom at 5/8 support is stronger type of DRPO. Because it means that buyers are more aggressively step in trading.
At the same time, smaller 2nd bottom tells that less sellers have entered short at previous retracement, when 1st bottom has been created. So, fewer short positions mean fewer buying stops and fewer traders on wrong side. Upside action due DRPO will be weaker. Everybody agrees that when second bottom is slightly lower than the 1st one, a kind of W&R - this is perfect situation.
In this case trading volume could help us a bit. Let's take a look at Gold futures chart with trading volume.
We can see that selling pressure at the bottom of DRPO was approximately the same as during downside thrust, even on Thu sell volume was rather high. On Friday buyers are stepped in with the same volume. It means that positions from both sides should be enough to make DRPO work. We will see...
Daily
Last week our "222" Buy pattern has worked perfectly. In general gold stands in flat since August. The invalidation point for DRPO is 1180 Fib support. To cancel DRPO and turn it to "Failure" pattern, market should close below it on weekly chart. Trend stands bullish here.
In the mid of last week we've mentioned two bearish patterns that were formed. First is the grabber and later it has become a part of tweezers top. Both are valid right now and theoretically have not been cancelled yet. But - market has shown no price action due this pattern, although 3 days passed. This makes patterns look weaker, even without mentioning DRPO on weekly chart. Now recent price action mostly looks like bullish flag consolidation inside wide flat range. This supports weekly DRPO spirit.
Intraday
Most sophisticated task guys, is to plan entry points in current conditions. Obviously we can't place stop just below 1180 (although somebody could probably), because it will be too far end expensive, or we will trade with very small lot. It means that we have to search for compromises.
Here is the moment where market mechanics could help us a lot. Take a look at daily picture. We have first thrusting action up from 1160 lows, then AB-CD retracement to 1180. Now market shows thrusting action up from major 5/8. It means that it is again stands in extension mode. From this point of view, if market bullish indeed, any return back to 1180 will look irrational. Retracement already is done. This could happen only if market will stop to be bullish or sentiment will change by impact of additional factor.
It means that upside action should continue with minor pullbacks. This lets us to search smaller setups and patterns that could let us to be involved in larger patterns. On 4H chart we have flag consolidation. This is bullish pattern and if everything OK, it should be broken up. It means that we could search changes to go long inside this flag. We see that multiple grabbers were formed here, which let us to suggest some downside action inside the flag. Thus the first pattern that we have - possible "222" Buy.
On hourly chart in fact we have pennant, which is the same character and minor "222" Buy, which lets to take long position around WPP. Stops should be placed anyway outside the lower border of the flag:
I suggest it makes sense to split total position in two parts with the same stop. Take the first position by hourly setup and second one by 4H.
I doesn't make sense to place stops below 1180. Because if gold will fail to proceed higher by flag pattern and start dropping back to 1180, first - we anyway will look for larger patterns in this case. Second - it will be bearish, because AB-CD retracement already has happened. In this case chances on DRPO Failure will increase. It means that if DRPO is real - gold will proceed up right from here. Otherwise - DRPO probably will fail and all that we've said about fundamentals and sentiment will be confirmed.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.