Gold GOLD PRO WEEKLY, October 09 - 13, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

In fact, I was preparing to write different report and touch other topics. But recent events in Israel could become a turning point not only for Gold market but for the whole World. I do not intend to turn our Gold report into politics research - this is not what we need. But, we have to specify some points that could let us to understand whether situation is becoming worse or better. Also we avoid any political judgement on situation, because our primary interest is performance of Gold market here, although it might sound a bit cynic in current environment.

Market overview

This week gold extended its decline to hit a near seven-month trough, as a robust dollar and prospects of higher U.S. interest rates took the shine off bullion. Since powering above the key $2,000-per-ounce level in early May, gold prices have fallen more than 11%, or $230, pressured by a sharp rise in benchmark U.S. Treasury yields, which makes the non-yielding gold less attractive.

"There is a reckoning that interest rates are going to be higher for much longer, which has been the bearish element in the precious market. Gold prices could go below $1,800 in the near term," said Jim Wyckoff, senior analyst at Kitco Metals. "Trends in the currency markets tend to be stronger and longer-lasting. The appreciation of the U.S. dollar may not end anytime soon, pressuring the gold market."
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Federal Governor Michelle Bowman said she remains willing to support another increase in rates if incoming data shows progress on inflation is stalling or proceeding too slowly. Fed Vice Chair for Supervision Michael Barr, however, said rates are "at or near" sufficiently restrictive level.

"The buying on dips (in gold) by central banks is now conspicuously absent," said Tai Wong, a New York-based independent metals trader.

U.S. job openings unexpectedly increased in August, pointing to tight labour market conditions that could compel the U.S. Federal Reserve to raise interest rates next month.

"The JOLTS report has surprised the market as it raises prospects of another hike but also lowers expectation of a slowdown in the U.S. economy, pressuring precious metals," said Edward Moya, senior market analyst at OANDA.

"We reiterate our 12-month target of $1,725 per ounce and remain cautious on gold," said Julius Baer analyst Carsten Menke.

Gold prices gained on Friday, helped by a technical rebound after a nine-day losing streak, although robust U.S. jobs data raised worries over another U.S. rate hike and kept bullion on track for its second weekly drop. Benchmark Treasury yields headed for a weekly increase, denting the appeal of gold. The bounce in gold prices despite the strong jobs data indicates that selling pressure has been exhausted and there is covering of short positions, said Tai Wong, a New York-based independent metals trader.

The U.S. Labor Department's report showed non-farm payrolls increased by 336,000 jobs in September on a monthly basis, beating expectations of 170,000 additions, according to a Reuters poll of economists. Traders are pricing in around a 29% chance of another rate hike from the Fed this year, according to the CME Fedwatch tool. Higher interest rates increase the opportunity cost of holding bullion.

With the recent rally in bond yields and the dollar, it is difficult to build a bullish case for gold, Ole Hansen, head of commodity strategy at Saxo Bank, wrote in a note.
But "we maintain a patiently bullish view on gold with the timing for a fresh push to the upside being very dependent on U.S. economic data as we wait for the FOMC (Federal Open Market Committee) to turn its focus from rate hikes to cuts," Hansen said.

China added to its gold reserves for an 11th straight month in September when a surge in local gold premium drew market attention. Bullion held by the People’s Bank of China rose by 840,000 troy ounces in September, according to official data released Saturday.

Among the world’s central banks, China has stood out this year as a keen buyer of gold. Robust demand in the Asian nation has been a support for the precious metal, which has come under pressure from rising interest rates around the world. Global central bank demand in August was sizable, though limited to a small number of countries including China, the World Gold Council said in an October statement.

While premiums saw a sharp decline last week after the government issued import quotas to banks, there is heightened attention on the central bank’s purchasing activity as prices remain elevated for local consumers.

Gold’s recent tumble has made it more attractive in an environment in which elevated interest rates boost the odds of unexpected market ructions, according to Nikko Asset Management. The retracement has pushed some of the froth out of the market, and it’s prudent to own some of the precious metal, according to Robert Samson, global head of multi-asset at Nikko Asset Management, who has about $1.5 billion across two mandates domiciled in Japan and Singapore.

There’s a “decent chunk” of gold at around 6% to 8% of the Japanese portfolio, which has benefited from the yen’s weakness, he said. We don’t have the speculative juice there, which means we’re relatively at fair value,” Samson said in an interview. “It’s a funny macro world, which makes gold not such a bad place to be, particularly since no one’s really terribly interested. That’s usually the time you want to have some.”

While some may still see gold as overvalued against bonds, it’s a sensible time to own it now, according to Samson. There’s likely to be a “significant tailwind” as central-bank tightening first nears a peak, then policy becomes more accommodative in response to potential risks, he said.

“Every day that we sit here with rates as high as they are, as quickly as they got there, with real rates particularly high — the stress of the system — that’s a big part of why we see it as a protective asset,” Samson said. “So it’s a weird dynamic, and an uncomfortable one.”

MAJOR BEACONS

First of all, we suggest that recent events in Israel could become a turning point of a global scale. World could become different, as it usually talked - "never be the same". This is not just "ordinary" confrontation in Gaza (if any confrontation could be called as "ordinary" at all), which were happening rather often in recent few years there. This is something different. Because a lot of different events were preceding its hot stage. We mention there major ones. Here I just mention it without a details. Those who're interested could read about it in the net.

So, with China intermediary, Saudi Arabia and Iran Agree to Restore Ties. It has happened in March. In August, J. Biden has promised some mega-deal, involving S. Arabia and Israel (!!!) where the US should become a warrant of safety to S. Arabia. US negotiators are seriously considering Saudi Arabia’s requests for a civilian nuclear programme and “iron-clad” security guarantees from Washington in return for normalising ties with the Jewish state, according to The Wall Street Journal.

However, it stressed that Saudi Arabia was still seeking major concessions from Israel on the creation of a Palestinian state, which is likely to be a non-starter for Benjamin Netanyahu, the Israeli leader.

In September 2022, Israel and Lebanon have agreed on Border demarcation that should Increase Natural Gas Supplies. Lebanon has big reserves of natural gas on its shelf which are relatively easy to extract. Offshore gas fields in the Mediterranean could become one of several new energy sources for European countries as they seek independence from Russia. In fact, Total SA already has started to make preliminary work there.

And final point in this puzzle - Turkey and Israel are intended to explore joint drilling in East Mediterranean. This agreement has reached at the end of September 2023. Erdogan told reporters the two countries agreed to cooperate on energy and build an energy transmission line between them, linking to Europe. In fact, Israel needs Turkey to set a logistics and gas delivery by land to the EU. Just take a look at the map:
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Now we could say definitely two things - the US initiative has failed, but what countries China has turned to peace and against whom - this is rhetorical question. By recent official reaction of Middle East countries, Israel now stands in difficult situation. Iran, Syria, Qatar, Saudi Arabia and Egypt do not accuse Palestinian attack. You could find corresponding statements on Foreign Ministries pages of these countries. For example:

Israel alone bears responsibility for the continued escalation of violence against the Palestinian people - Qatar Foreign Ministry

Hamas' actions were also supported by Syria, Iran and the Lebanese militant group and political party Hezbollah. That's all. We've arrived... It's amazing how cyclical the history of American stagflation is. Exact repetition. The war between Israel and the Arabs, too expensive oil, high inflation, loss of efficiency of the US economy, Europe in an economic knockout, rising debts. Except that instead of Vietnam it is now Ukraine.

Those who're interested with details of this conflict - just surf the net, there are a lot of materials. For us the major conclusion is - this conflict stands for long time. In fact we have to answer on few questions. From an economic point of view, what will be interesting to us in this whole story in the coming days is this:

1. How long will this take? What successes will the Arabs have as a result? If any positional battles start there, it will completely take over the entire media agenda for the coming months.

2. Will Iran, the Saudis or some Egypt fit in on the Palestinian side? If something like this happens, the price of oil will fly up, since the consequences of such an escalation will be as uncertain as possible.

3. If the first 2 points are fulfilled, then the behavior of the United States will be interesting. Logically, they will have to sign up for Israel and thus have three points where they need to send weapons: Ukraine, Taiwan and Israel. Naturally, this will lead to the need for urgent de-escalation in Ukraine, or the creation of Afghanistan 2.0. I don’t know their plans here. But NATO definitely doesn’t have enough resources for everything. So we're watching and waiting. The trend in the oil market may change very seriously in the coming days.

On first two questions we have answers right now - it is for long time, and yes, Iran, Syria, now Egypt, Lebanon and Jordan provides passive support - open their territory for transit of military forces. Israel evidently accuses Iran and makes it responsible for Hamas' attack. So it seems that Gold turning point could come right on next week.

Besides, following to this logic, it creates perfect conditions for China activity around Taiwan - Beijing flexes muscles in the South China Sea.

But somehow everybody forgets about Eastern Europe, and there we see very important statements from NATO officials. Here they are. NATO's head of nuclear policy and nuclear weapons, Jessica Cox, said:

There are quite a lot of nuclear warheads in Europe. Therefore, we have begun the process of reviewing the need to store such quantities on the continent and possibly moving some of the ammunition to the states and some to the far western regions of mainland Europe. Thus, American specialists will have access to them directly across the Atlantic, which will reduce the time they travel across European countries, if urgent site visits are necessary.”

NATO head Jens Stoltenberg, regarding the use of Article 5 of the NATO Charter (on collective defense):

“The concept of Article 5 is too exaggerated. When attacking one, for example, a border country, the entire alliance cannot be attacked. The use of the article will be considered individually, taking into account all possible risks."

Hmmm. Representatives of the reverse side of the front sight also began to move the red lines. This is disaster for Ukraine, as they need at least $3.5 Bln per month, just to survive. Here we intentionally avoid discussion of potential beneficiaries of this conflict, because it doesn't relate to gold and economy, but believe me, they are more than just one, despite how it is presented in media.

Anyway, at least based on recent data we have a correction. First, gold was taken from $1930 to $1820, now oil is from $97 to $88. By the way, the gold/oil ratio still remained around 20, which suggests that the crisis has not gone away, but it is still far from peak values.

If we assume that OPEC+ will now again drive oil into the $90-100 corridor, then the price of gold during the period of worsening crisis (2024-2025) should not be lower than $2700-3000. This is +50% to current levels for a minute. So it’s quite reasonable to choose. By the way, even if OPEC+ fails to push oil to 90+, and the price remains somewhere around $80-85 (which in general does not look incredible), then gold should still look at $2400 in a crisis scenario
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Now, it makes no big sense to prepare technical analysis, guys - although we will do. Yesterday, in our FX Report , we already have specified common plan - what particular to watch. In fact, we need to wait of disbalance of interest rates and US Dollar direction. When dollar will start falling with high or raising interest rates - this is the end.

  • We use just common sense, without sophisticated tools. The national debt in the United States has grown by two trillion dollars in three months. And it is growing exponentially. And even if we take normal rates, it will grow by 8 trillion in a year.
  • The annual volume of US budget revenues is less than the national debt growing over the same period. That's All! And it’s not that this will happen in some kind of 2025, no, it’s just that at any moment something could be smashed into trash!
  • Even if they now stand at $34 trillion. Of this amount, 5% is 1.7 trillion. at 5 trillion. income. And we get that a third of your budget should go only to paying interest without reducing the debt.
  • That is, the primary budget surplus should be about 40%. How much should you cut costs? This is simply impossible! And there are two options: either there is a default, or they devalue the dollar multiple times.
When we see that in response to rising rates, the dollar exchange rate will begin to decline - this is already a signal according to all the canons of very big problems. But we don’t see this yet, while they manage to vacuum up extra dollars. But there simply aren’t enough resources on the planet to plug this hole. And big war could resolve this problem? So, I do not like pretentious statements, but tomorrow indeed, financial markets could wake up in absolutely different world...

Technicals
Monthly

So, let's try to make some analysis... On monthly chart trend has turned bearish, but the major intrigue - could gold jump up and turn trend bullish again, forming a kind of grabber action? This might be really symbolic, if it happens around YPP. In this case this will mean that long-term bullish sentiment holds. Based on monthly chart, we could say that market still stands around 3/8 monthly support level

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Weekly

Weekly picture barely has changed. With ongoing events now it is difficult to say where to take position, but definitely we could say that 1790 and below, this is great area for stop placement. At least based on technical combination of Agreement support and oversold, it should not be broken easily any time soon. It is also interesting what will happen with OP target next week. It is still not touched.

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Daily

Here we have reversal session on bottom and great thrust down. As we've suggested, let's try to focus first on 1865-1870 area, because of potential B&B "Sell" pattern.
Depending on what we will see on Monday and where market will open, we adjust our trading plan later, if needed:

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Intraday

Although we have a choppy action on 4H chart, but, indeed, we've got a DRPO "Buy". Its shape a bit tricky, looking like triple REPO. But, nevertheless, despite all NFP volatility, we haven't got any pattern's breaking close below 3x3 DMA. It means that our idea to consider 1865 area at least, seems reasonable. If you were in time to buy Gold - you should get nice result probably...
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On 1H chart, despite that market has reversed on NFP data - bearish dynamic pressure has worked as it washed out the lows. This is a minor relief, but sometimes this patterns works just with minimal target. Now, scalp traders could watch for minor pullback to consider long entry, probably. Although it is a big question, whether we will get it or not:
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This situation brightly shows the placement of gold in modern unstable world. Just yesterday everything was going bad, market has dropped for ~150$ and we were preparing for further pressure due to economical factors. In a blink of an eye everything has changed. And you never know. That's why gold now is very important as a protection of value.
 
Greetings everybody,

So, our daily B&B "Sell" Setup is ready to start. But, since overall background and geopolitical factors suggest the opposite - we have to be accurate with position taking. Take a look that we have overbought level near the market and it is nice factor for protection of bearish position
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On 4H chart we have unfilled gap. If B&B starts, its minimal target will be 1830 area:
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Still, since geopolitical background could change rapidly, it would be better to use clear patterns for entry. For example - large H&S on 1H chart, or wait for something smaller on lower time frames. Say, gold likes to form "222" patterns in reversal points. Thus, if we get one on 15-min chart - it could be used as well.

Finally, here we have MACD divergence ...
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Greetings everybody,

So, let's keep up with the Gold. As you could see, not occasionally we said, that we need reversal patterns on intraday charts, despite that theoretical shape of B&B is ready on daily. As US yields keep dropping, this suggestion is fair for today as well.
Now price is coming to daily overbought level and we will keep an eye on 1975 area:
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On 4H chart 1978 is 50% resistance level:
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Yesterday gold has not formed either "222" Sell or H&S that we've discussed. But patience is always rewarded and today picture looks even better. We have clear butterfly pattern with 1973 target, that potentially could turn to H&S. This is what we need to justify short position taking with B&B pattern.
Once again - if patterns fail or not be formed, we should sit on the hands:
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Greetings everybody,

So, upside action, although is relatively slow, but it doesn't give us a chance to step in on short side. Market forms no bearish patterns intraday. Still, action is becoming slower, first reaction on Middle East nightmare is fading and investors start thinking about routine of CPI, the Fed meeting, yields etc, despite how cynic it sounds.

So, we now consider 1895 level where potentially pullback could start, especially if we get higher CPI numbers:
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On 4H chart and 1H chart we have OP target around 1890 which makes Agreement resistance with the level. So, probably it makes sense to wait when this will happen. Here we see that CD leg is slower than AB, so, indeed, maybe we get our pullback finally:

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Greetings everybody,

So, Gold has shown downside reaction on CPI, but it was much weaker than on financial markets, which is understandable because of M. East conflict. So, it shows that our decision to wait for 1895 area was correct and we intend to follow. On 10-year yield we have reversal session that makes further yield growth possible, which is friendly to our suggestion of pullback from 1895 area:

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Here 4H chart shows CPI reaction.
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On 1H chart we keep following to our plan. As price is approaching to target area, now it seems most probable pattern is H&S. So let's keep watching, once it will be formed - our setup for downside pullback should be ready:
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