Gold GOLD PRO WEEKLY, October 16 - 20, 2023

Sive Morten

Special Consultant to the FPA
Messages
18,440
Fundamentals

Gold once again is becoming absolutely unique asset that totally ignores all economical drivers. There are a lot of talks right now about geopolitics, safe haven assets and other stuff. Though it is very difficult to find economical factors in a bulk of geopolitics. But we will try. Recent action is very typical. It shows that when the World enters in a stripe of instability, you never know where the next "boom" happens. From that stand point it was seemed that gold is not needed yet and a lot of other assets around that are much more attractive. And this is fair conclusion when everything is OK. But when it is already "not OK", suddenly could happen situations like this. And this is valuable argument why we recommend to buy physical gold. No doubts, we probably will see few more drawdown on gold on a background of US Dollar rush, but it will be temporal and could even be negated by supportive factors of other sort, that we see now. Despite high rates, despite growth of real rate - gold is raising due tough geopolitical situation.

Market overview

This week, once again gold in China jumped to trade at the second-highest premium on record against the international benchmark, as mainland markets reopened following the Golden Week holiday. The Shanghai spot price was more than $112 an ounce higher than levels seen in London on Monday, according to Bloomberg calculations based on exchange data. The gap between the two markets has only been wider one other time, when Chinese prices last month blew out to trade at a premium of more than $120 over London as Beijing restricted shipments in a move that squeezed the market.

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Yet the precious metal on Monday rose as high as 2.7% on the Shanghai Gold Exchange — the biggest jump in almost seven weeks — in a signal of still persistent appetite. That compared to a gain of as much as 1.2% for the international benchmark due to haven buying in the wake of the Hamas attack on Israel. Many Chinese buyers are flocking to gold as a refuge from the impacts of a weakening currency and an increasingly uncertain economic outlook, Bloomberg economists David Qu and Chang Shu wrote in a report last month.

The precious metal gained as much as 1.7% on Monday as financial markets braced for headwinds and volatility from the shock attack by Gaza militants. Bullion was caught in a period of low volatility for much of this year despite surging bond yields, which would usually put the precious metal under major pressure.

“Gold prices are rising as a new geopolitical risk has investors scrambling for safe-havens on a day the US bond market is closed,” said Ed Moya, senior market analyst at Oanda. “The Israel-Hamas war stunned markets and the risks are elevated that this could spread further across the Middle East.” Moya sees near-term technical support for bullion at the $1,920 level.

The tensions in the Middle East may mean that the Federal Reserve will not “continue to hike rates into increased uncertainty, and the prospect for peak rates have suddenly move closer despite the potential inflationary impact of higher oil prices,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “We conclude that this development could signal a low in the gold price and as the attention turns to rate cuts instead of hikes it may receive additional demand from investors.”

The precious metal has seen support in recent days from a shift in mindset over the rate outlook. US policymakers are coalescing around the idea that the recent surge in US Treasury yields — which reversed on Tuesday — may substitute for additional increases in their benchmark interest rate. Higher rates are generally negative for non-interest bearing gold.

“Now that it looks like the Fed is signaling a peak in rates is likely in place, geopolitical risks and tight financial conditions suggest the Fed won’t need to deliver another rate this year,” said Ed Moya, senior market analyst at Oanda. “If the economy reaccelerates in early 2024, the risk of tightening may come back, but right now it seems gold is out of the danger zone.”

The metal’s longer-term performance will depend on whether there is deeper economic and financial fallout from the Middle East crisis, RBC Capital Markets LLC strategist Christopher Louney said in a note. The bank in September raised its base-case outlook for gold on a view that monetary policy will eventually turn as economic growth slows.

“Amidst oil’s price gains, we also highlight the potential implications that related price inflation and heightened uncertainty could have for the Fed and thus gold,” he wrote. “Given our current gold outlook and the move higher in risks, we may have seen a quarterly low already.”

A sharper escalation of the conflict in the Middle East could bring Israel into a direct clash with Iran, a supplier of arms and money to Hamas, which the US and the European Union have designated a terrorist group. In that scenario, Bloomberg Economics estimates oil prices could soar to $150 and global growth drop to 1.7% — a recession that takes about $1 trillion off world output.

“The situation in Israel is a horrible one, and if it spreads into a regional conflict, the human costs will rise exponentially, and the financial costs around the globe will begin to rise very, very quickly as well,” said Matt Maley, chief market strategist at Miller Tabak + Co. Investors should get at least “some insurance against a sudden drop in the stock market between now and the end of the year,” he noted.

Jamie Dimon warned of serious geopolitical risks as Israel prepared for a ground assault on Gaza.

“This may be the most dangerous time the world has seen in decades,” the JPMorgan chief executive officer said in the bank’s third-quarter earnings statement. “The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships.”

"This is a good example of why people need gold in their portfolios. It is a perfect hedge against international turmoil," said Peter Cardillo, chief market economist at Spartan Capital Securities, who predicted that the dollar would also benefit. Anytime there is international turmoil, the dollar strengthens," Cardillo said.

"It seems Wall Street has a new geopolitical risk after Israel declared war with Hamas," said Edward Moya, senior market analyst at Oanda in New York.

Analysts were focused on the impact on energy prices as they tried to assess the ripple effects. Oil prices jumped more than $4 a barrel in early Asian trade on Monday.

"Whether this is a massive market moment or not depends on how long it lasts and whether others are sucked into the conflict," said Brian Jacobsen, chief economist at Annex Wealth Management, of the situation in Israel.
The Hamas attack was openly praised by Iran and by Hezbollah, Iran's Lebanese allies.

"Iranian oil production has been increasing, but any progress they’ve been making behind the scenes with the U.S. will be dramatically undermined by Iran’s celebrating Hamas’ actions," said Jacobsen, adding that "the possible output loss matters, but it won’t be earth shattering." It’s most critical to see how Saudi Arabia reacts," Jacobsen said. Washington has been trying to strike a deal that would normalise ties between Israel and Saudi Arabia.

David Kotok, chair and chief investment officer at Cumberland Advisors in Sarasota, Florida, said that the situation was concerning as the United States is weakened by dysfunction in Washington. Republicans are looking for a successor to ousted Speaker Kevin McCarthy of the House of Representatives, and a budget showdown looms.

"I am very worried about more explosive situations that require U.S. determination and U.S. defense capability which is being injured," by the situation in Washington, Kotok said.

US consumers’ year-ahead inflation expectations rose sharply in early October, driving a steep deterioration in Americans’ views of their finances as well as sentiment. Former Federal Reserve Bank of St. Louis President James Bullard said investors were too complacent on inflation and the central bank might have to increase interest rates as high as 6.5% if it starts to rise again.
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“The risk that’s underpriced in markets is that disinflation stalls out or stops altogether and core PCE inflation starts to go up again,” he said Friday in Marrakech, Morocco, at a Euro50 seminar on the sidelines of the annual meetings of the International Monetary Fund and World Bank. “That would start a whole new round of consternation among policymakers about whether they’ve done enough.” If that happens the committee will have to contemplate going to 6% or 6.5%,” said Bullard, who stepped down from the Fed in August to take a job in academia.

Gold prices jumped more than 3% on Friday and were poised for their best week in seven months as the intensifying conflict in the Middle East sent investors scurrying for safe-haven assets. Zero-yield bullion got an additional fillip from expectations that the U.S. interest rates may have peaked. This fuelled inflows into assets considered to be safe havens such as gold.

"Investors are fleeing to safe havens as the risks of Middle East tensions grow," said Edward Moya, senior market analyst at OANDA. If the geopolitical situation gets gloomier, there is a good chance that gold prices could go to the $2,000 levels this year. We have come from mid-$1,800s to mid-$1,900s, $2,000 is just a fraction of that."

U.S. consumer prices increased in September amid higher costs for rent and gasoline, but underlying inflation is slowing, data showed on Thursday.

Apart from the conflict, "despite yesterday's warmer-than-expected (U.S.) inflation report, currently there is an expectation that the Fed will not hike rates in the November meeting, which is also helping (gold) prices," said David Meger, director of metals trading at High Ridge Futures.

Traders currently see around a 69% chance of the Fed leaving interest rates unchanged this year, according to the CME Fedwatch tool.

ASKING RIGHT QUESTIONS

There were a lot of comments on the topic of conflict been made already, as well as the reasons for the events - so we do not want to re-tell the same things that you could read in media. But there is no doubt that the financial, logistical, and geopolitical consequences will be enormous. It became clear, in particular, that there is no hope for restoring stability in the global economy.

Today it is obvious that the confrontation in the world is only intensifying. The key question is where the US strike will be directed. There are several options, the main one is China's interests in Southeast Asia. But there are many who want to redirect the American armed forces to Iran. But the events of the last week have shown that the United States understands the real state of affairs and attempts to direct them to Iran do not work.

Another very important topic is the contradiction of the interests of the United States and Great Britain in the Middle East. Roughly speaking, the US wants to preserve Israel and weaken Turkey, the UK — on the contrary. And this contradiction has come to the surface and it is no longer possible to reconcile the opposing positions. Events may develop either way, or even together (the destruction of both Israel and Turkey), but it is no longer possible to restore the situation of recent years. Just a brief example - Turkey officially supports HAMAS,while HAMAS released official video where they told that part of armor has come from Ukraine, but the only way how it could happen - by sea under cover of "grain trade" which hints on UK and Turkey participation:
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Turkey supports Hamas, wrote Oktay Saral, chief adviser to Turkish President Erdogan:
“While we do not support war or violence, we view [military operation] Al-Aqsa Flood of Palestine as a legitimate right to defense, and we fully support our Palestinian brothers in the fight against occupying Israel. May the Almighty help all oppressed regions.”

We will not elaborate on this topic, it clearly does not relate to macroeconomics, but since it has a tremendous impact on the development of the economic situation, it was impossible to remain silent. It will be possible to talk about more or less distinct consequences only two weeks later, and certainly after the start of the Israeli ground operation in Gaza and the actions of other potential participants in the conflict. Now we need to keep an eye on the steps of major players in region - Israel (+US), Iran, S. Arabia and Turkey. For now any efforts of T. Blinken of negotiations with major payers, such as S. Arabia has failed.

In general the White House has developed a creative exit strategy from the Middle East:
  • normalize relations between Israel and Saudi Arabia, two of the United States’ most important partners in the region
  • turn them against Iran
  • keep Saudi Arabia out of China's orbit
Such tactics would allow Washington to reduce its presence and attention in the Middle East, and also ensure that Beijing does not follow into the region. But now all these plans are been ruined in a blink of an eye, Foreign affairs writes. Great article, by the way, highly recommend to read...

Meantime, despite the “sweet” yields on European and American bonds, the world’s central banks have been buying gold all year. Summer net sales do not count - it was the Turkish Central Bank that struggled with the falling lira. The Bank of China is leading the purchase of gold:
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the Central Banks of Poland, Uzbekistan, and India are actively buying. At the same time, it is clear to the naked eye that the trend of purchasing gold from the Central Bank is growing, even though bond yields are also growing, offering profitable investments.
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Central banks, as professional players, understand that the next (exhausted after 2008) economic cycle is coming to an end. Ahead, the collapse of the debt pyramids of developing countries will obviously greatly affect Europe (Italy and Greece). Against this background, bond yields that seem quite good today will appear in a few months to be completely inadequate to the new crisis situation. Gold, as an eternal value, if it is stored in the holdings of national central banks (and not in London), cannot be seized, is easily sold and converted into any currency.

Recent reaction on crude oil could explain by possible reduction in oil supplies from Iran and, in general, a mess in the Persian Gulf. But Americans will now have to borrow even more money to support two hot conflicts. Current rate of increase in government debt: trillion per month. With a total debt of $33.5 trillion. At the same time, payments for the same oil are rapidly moving away from the dollar. In such conditions, oil simply cannot become cheaper. The petrodollar is shaking. Moreover, as it eventually turned out, the entire collapse in oil prices in recent weeks was based solely on faith in the J. Biden's deal with the Saudis that eventually failed.

Traders start asking proper questions. As we've mentioned yesterday - Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds. Investors long shrugged off U.S. deficits, but a torrent of Treasury's is testing the bond market. It sounds like invitation to pay out some accounts that bonds supply is becoming too much. US bonds auction yield has jumped 10% up to 4.83%.

Gold is now the only asset in our world where there is no systemic risk. Therefore, even despite such a rapid increase in profitability, gold quotes are close to the level of $1900, which is very unconventional for this market. That is, the growth of real yields has always killed gold, just to the floor. Now it has barely pressed down from 1930 to 100 dollars, it is already rebounding.

And as soon as the Fed pauses, there will immediately be the next step in the growth of gold. There it goes to 2800 - 3200. Silver will follow gold. So I would wait for this moment. It's already on its way, from my point of view. The Fed started talking about how rising real yields reduce the likelihood of a rate hike— these are the first signs that they are starting to get sick.

BlackRock has warned that the worst bond crash in history is still to come:
  • The US bond market suffered its biggest sell-off, with benchmark bond yields rising 5x for the first time since late 2020, but it's not over yet and further turmoil awaits the market, according to BlackRock, writes Business Insider.
  • The reasons for this are inflation, the Fed’s long-term interest rate policy and the growing debt burden in the United States. The world's largest asset manager said the US bond market is in the midst of an unprecedented three-year collapse with no end in sight.
  • The rise in Treasury yields has accelerated in recent weeks, spooking traders across all asset classes. The concerns come as the central bank has raised its key rate by more than 500 basis points since the start of 2022 to curb pressure on consumer prices and has no plans to lower it yet.
  • BlackRock itself said that it avoids investing in long-term US bonds. To recap: Yields rise when bond prices fall.
  • “We continue to avoid long-term US bonds even after their sharp rise. Why? "We think the term premium - the compensation investors demand for the risk of holding long-term bonds - will continue to rise, pushing yields higher as inflation rises, interest rates rise and debt loads are high."
  • A unique situation has arisen - a global fund of funds publicly expresses concerns about the safety of investing in US government securities. A very interesting intelligence sign.
Conclusion:

Chances that current reversal on gold market could become the major one are raising. Even massive headwinds from financial factors, such as a high interest rates, might be limited because the geopolitical situation stands in a road to escalation. Besides, it is more and more concern raising among investors around the US debt. Investors start suspect that jump in the yield might be not the result of the Fed policy only. Raising debt supply and concern of its credit quality and ability of the government to manage it might be and probably are among the other reasons of explosive rates jump. Taking it all together, now any deep on gold market becomes even more attractive for accumulation of physical gold. As many analysts suggest, including BlackRock, the major events are stand ahead. And it is difficult to argue with this.
 
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Technicals
Monthly

So let's take a look at technical picture, although currenty the reasonable concern might be at what degree technical tools are applicable for making forecasts. Anyway, from the technical point of view, we see important reversal on Gold and it is still two weeks until the end of the month. Potentially we could get as huge bullish engulfing as bullish reversal month. Pay attention that it has happened right around YPP, which is very symbolic and long-term sentiment remains bullish. Finally, we could get "2-bar bullish grabber" as I call it. Although it is not mentioned by DiNapoli, but my experience tells that it works exactly the same as common grabber.
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Weekly

Theoretical trend remains bearish on weekly chart, but we've got unprecedented rally last week and huge "morning star" pattern that has become a response on "222" Buy pattern. Although we've expected reaction on weekly OP, as we've mentioned it, but not of this scale of course....

It means that bullish context remains valid until market stands above 1805 lows and within few next weeks we intend to consider pullbacks and deeps for taking long position on gold market:
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Daily

Market is strongly overbought on daily chart, but now technicals reasons for pullback are ignored. Major resistance levels are broken, so we've got the last one around 1975$. For now, it is not very important where gold stops, but to not miss the deep to buy. Potentially we could watch for reverse H&S pattern here:

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Intraday

On 4H chart we see the structure of Fib levels. Based on daily chart, harmonically, it makes sense to consider an area around $1900, if it will be H&S indeed.
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While on 1H chart we have great thrust up. I'm not sure that it makes sense to trade some reversal patterns, such as DRPO "Sell", for example. But we could just watch it to identify when retracement starts. If it will be B&B "Buy", it could traded, since it doesn't contradict to major direction.
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Greetings everybody,

While on EUR and GBP we have interesting trading setups - everything is quiet on Gold market. Daily picture stands the same. Still, so stubborn standing in overbought condition is a bullish sign. Despite that media reports on some agreements been made as in recent 48 hours everybody has talked to everybody - Israel, US, Iran, Russia, S. Arabia, Syria, Egypt etc... Based on gold market - it seems that agreements are cloudy still.
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On 4H chart we have obvious pennant pattern that is potentially bullish:
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Our 1H B&B "Buy" has worked perfect. In a current situation technically the short position is forbidden. Sharp reversal could come on some real peaceful breakthrough on Gaza conflict. But this is out of our control. That's why for now it would be better to either not to consider bearish positions at all, or, if you very want to, - think about using of Stop "Sell" order around 1910 area. If some news will be released and gold collapses - you could step in, risking not too much.

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For now we could consider only long position. Potentially upside butterfly might be formed, as it usually happens from triangles, but here is the problem - daily Overbought. If you intend to go long - you have to decide what you will do when gold hits it once again (out, tight stops etc.)
 
Greetings everybody,

So, here everything goes well, our 1H Butterfly stands in progress. From the technical point of view, we could count on pullback from 1950 area, and potentially could get reverse H&S pattern on daily chart. Even without H&S, recent performance takes the shape of huge bullish engulfing pattern on monthly chart. And in most cases, before upside extension, market shows the pullback, at least to 3/8 level, which is around 1900-1910:
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On 4H chart we have few upside extensions. Now Gold has completed AB-CD XOP and AB*C*D OP - they stand in the same point. Next XOP stands around 1990 area, which is potential next upside target:
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Our 1H butterfly has completed 1.27 extension, but it seems it should reach 1.618 as well, because of fast upside action. It's appearing around 1950 area could be important. As we watch for the pullback - this butterfly and H&S later could become patterns that put the starting point for it:
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That's being said. Bulls could hold positions at least 1950. Scalp bears could watch for these patterns for short-term bearish positions. While bulls on daily chart should wait for the pullback, supposedly to 1900-1910 area by far.
 
Greetings everybody,

So, 1H butterfly target is hit, and now market starts showing at least some reaction on resistance factors. It doesn't mean that we're going to take short position. It just means that the pullback that we hope to get, maybe starts finally.

As you know, the 20-30 year US interest rates skyrocketed yesterday and now above 5%, mortgage is above 8%. This is definitely the headwind, but gold also has its own specific factors. On daily chart we just see minor bounce out from Obought area and around the neckline of our potential H&S pattern:
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On 4H chart ~1910 area might be the one that we're watching for, as potential upside reversal. Yes, we have untouched XOP here but it is a bit too far, so let's hope that we still will get the pullback first.
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It means that on 1H chart tactic is the same - just wait for pattern and pullback. If gold really starts retracement, we should get our H&S pattern on top... If not - anyway, it is too risky to go long right now from technical point of view and we have to wait.
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Greetings everybody,

It seems that gold has not heard about 5% yield on 10 year US bonds... But jokes aside... of course, we're really happy that our long-term view is working and we call to buy gold in recent 2 years. But, current political and economical situation makes trading process, especially entry process very difficult. Technical factors obviously take a backseat for now. And maybe you could make decision by some other factors that look reasonable to you.

From technical point of view, once again we have no ability to jump in as market hits 1975 Fib level and keep standing with Overbought. Now we have DiNapoli bearish "Stretch" pattern. Second - we have to increase the scale of our H&S pattern here:
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On 4H chart we said that it seems XOP is a bit too far. But gold said "OK" and take a look - almost has reached it. Now we need to see the reaction (if any) on 1975-1988 Agreement resistance and Overbought level. Hopefully we will get something interesting here.
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