Gold GOLD PRO WEEKLY, October 17 - 21, 2022

[Sive Morten]

Fundamentals

So let's keep up our analysis. In gold market report we take a look at some political issues and global markets - bonds, stocks in general. Yesterday we've discussed specific moments of coming collapse on global bond market. UK has become the first bell, Fed now publicly acknowledges liquidity problems on US bond market. Fed shows operational loss because of huge demand from commercial banks (~ $2.2 Trln) for liquidity and reverse RePo trades. And this liquidity drought will increase. Additionally we see USD swaps with SNB, supposedly to support following Credit Suisse and UBS banks. In general, crisis processes are accelerating.

Market overview

Gold pared early declines after hotter-than-expected US inflation data set the stage for more aggressive interest-rate hikes by the Federal Reserve. The rebound in bullion came as the dollar sank and the British pound climbed amid reports that the UK government officials are working on a U-turn of the sweeping tax cuts proposed by Prime Minister Liz Truss. A softer dollar boosted the precious metal which is priced in the greenback.

Earlier, gold tumbled the most in more than two weeks following higher-than-expected inflation data in the US. The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labor Department data showed Thursday. Overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.

The Fed’s aggressive moves have strained bond and currency markets around the world this year, while failing to significantly cool the US labor market. It has also hurt gold, sending it down almost 20% from its March peak. Now the US central bank looks set to carry on more big hikes, the precious metal could come under further pressure.

“The narrative of 75-basis-point hike in November and then slowing to 50 basis-point is in some jeopardy,” said Tai Wong, a senior trader at Heraeus Precious Metals in New York, noting that the CPI report suggests inflation may be more stubborn than investors believed. Wong said a 75-basis-point hike in November is “a total done deal.”

Officials from the US central bank have committed to raising interest rates to a restrictive level in the near future, although some emphasized the importance of calibrating the increases to mitigate risk.

There are two major events this week, guys, CPI report and Fed minutes. By the way, sharp reversal on the markets that has happened right after CPI downside reaction, was triggered partially by Fed minutes, partially because of comments from CEO's of big commercial banks. Fed minutes shows that some members still have doubts that Fed should follow with hard hawkish policy - maybe it makes sense stay on hold for awhile and see how economy reacts. Commercial banks top manages also have given a hint that sharp rising of the interest rate makes negative impact on Bank's provisions and profit margins. We briefly talked about it last week. Banks already have increased provisions for $4 Bln, and this is just a preparation for possible negative consequences. BoE already said that defaults on mortgage loans will increase.

CPI/PPI numbers stand above expectations. It is not the number is important per se, but the fact itself - whatever Fed is doing, inflation stands strong and even rising, despite that now we already have 3.5% Fed rate.

We have the following compounding of CPI numbers - ▪ Heating oil: +58.1%; ▪ Gas utilities: +33.1%; Gasoline: +18.2%; Electricity: +15.5%;
Transport: +14.6%; Homemade food: +13.0%; New cars: +9.4%; Food away from home: 8.5%; Used cars: +7.2%; Medical care: +6.5%

High level of energy and electricity inflation is not a surprise. As we've said previously it should have tendency to decreasing soon by two reasons. First is, global economy is slowing down, thus, demand for energy is dropping, while extraction stands around the same levels. Thus, demand for energy will drop as well. Second - fewer and fewer companies could buy energy resources with the price that we have. So hydrocarbons inflation should converge the average level of 6.5-8%.

Most important thing in report is food and transport inflation that I suspect better reflects the real inflation level. Transportation is everything. To buy or sell something you need first to deliver it and shipping price always will be the part of final price of the goods. And Transportation will make long lasting negative effect on average inflation level. We suggest that inflation level is manipulated now, supposedly it should be higher, standing around 10-11%. But take a look what White House tells -

"We do not agree that the consumer price index is an accurate indicator of inflation"

So we need to adjust it a bit, to make it show that inflation stands at 2 %.

Speaking on Fed minutes here are major conclusions:

Participants agreed that at some point it would be advisable to slow down the pace of rate increases when assessing the cumulative effects of policy adjustments.
Fed officials have decided that they need to adopt and maintain more restrictive policies in order to achieve their goal of reducing elevated inflation.
Many participants expressed their assessment of the ways of federal funding needed to achieve the goals of the committee.
Many participants indicated that once the policy reaches a sufficiently restrictive level, it would be advisable to keep it at this level for a certain period of time.
Several countries need to calibrate Fed tightening to reduce risk
Many participants emphasized that the costs of doing too little to reduce inflation outweigh the costs of doing too much.
It would be extremely important to adjust the pace of further tightening in order to reduce the risk of significant adverse effects on the economic outlook.
As the policy becomes more restrictive, the risks will become more two-sided.
Acknowledge the importance of maintaining a restrictive position for as long as necessary.
Unemployment may rise above forecast
The tightening of monetary policy in other countries may have an impact on the US economy through side effects.
Several officials mentioned the risk of spiraling wages and prices.

Federal Reserve members have expressed concern at their meeting last month about the persistence of high inflation and expected that lower prices and wages would probably require a weakening of the labor market. - WSJ

BofA warns that the US economy will start to lose 175,000 jobs during Q1 of 2023, expects a ‘harder landing’ rather than a softer one. Bank of America, expects that nonfarm payroll gains to be cut in half in Q4 of 2022 and turn negative in 2023. During the first quarter of 2023, the bank projects that the U.S. will be losing roughly 175,000 jobs a month. And it’s not just the labor market that’s going to take a hit.

“We are looking for a recession to begin in the first half of next year,” Bank of America’s head of U.S. economics Michael Gapen tells CNN. “The premise is a harder landing rather than a softer one.”

Given this labor market strength and rampant inflation, the Fed is raising interest rates aggressively to bring price levels under control. The central bank increased its benchmark interest rates by 75 basis points last month, marking the third such hike in a row. Gapen expects the Fed to remain hawkish.

“They’ll accept some weakness in labor markets in order to bring inflation down,” he says, adding that “we could see six months of weakness in the labor market.”

According to the Fed’s latest projection, Federal Open Market Committee participants have a median forecast of 4.4% for the unemployment rate in 2023. Gapen, on the other hand, sees the unemployment rate in the country rise to 5% or 5.5% next year.

So, BofA confirms same things that we were talking about for few months. Job market should become the next victim in a crisis spiral. I would say that 5.5% is without those who sit on the "stocks welfare" of helicopter Covid money. As stock market will drop more - people will start searching jobs. FPA suggestion that unemployment should be closer to the 8%.

And stock market will do - the prospect of negative job growth and a recession probably won’t bode well for the stock market. When the economy contracts, corporate profits usually deteriorate. In fact, stocks have already been pummeled — the S&P 500 has plunged 25% year to date.

Bank of America’s head of U.S. equity and quantitative strategy Savita Subramanian recently said that the benchmark index is “expensive” and “super crowded. The worst thing to hold is the S&P 500 wholesale,” she tells CNBC. Subramanian suggests that if you have a 10-year investment horizon, you can “hold the S&P 500 and watch and wait. “But if you're thinking about what's going to happen between now and let's say the next 12 months, I don't think the bottom is in.”

Maybe 2000 level is a bit overextended, but we expect sharp drop to 3000 level by S&P and slow creep under 2500 before the party will be over. Last week we've shown the chart that overall assets, including stocks and real estate are 40% greater than 2x GDP level.

Somewhere we already could see the normal balance that should become common to the whole market. Now we could see it only at some particular stocks. Take a look at virtual assets of Meta (Facebook) comes to match to real assets of Exxon - but that has not happened across the board yet.

In fact, we could say that Fed absolutely doesn't know what to do next - whether to keep fast tightening or to stay on hold. Here, even without comments, it is clear: "I wish I may, love it so, but mother says "No". Some believe that it needs to be sharply tightened, others that it needs to be stopped for now, but everyone is insanely scare of, as it said in aviation, "to exceed the angle of attack and break into uncontrolled mode." There are suspicions that this situation has already caused political consequences (about the Liz Truss government are already almost obvious, about the Biden administration — not yet).

Meantime, markets across the board are turning to the nosedive. Previously we were talking on Germany, UK or the US bond market. But here is global bond market performance. A bond market crash is infinitely worse than a stock market's one. The US Aggregate Bond ETF $AGG, an analogue of the highest quality bonds, is failing. If this continues, we will have big problems:

Speaking in general, as on global stocks as global bond markets situation stands tough. The last time US markets faced a drawdown of this magnitude, the US government defaulted on a gold peg over the next 24 months. 1933 - Executive Order 6102 and 1971 - Nixon Shock:

Previously we've said, that stock market should be relatively stable until US households and foreign investors don't start selling their stock assets. Now it seems that time has come. SNB balance sheet stands in a tight relation with FANG (Facebook, Amazon, Netflix, Google) shares. This chart shows that the Swiss National Bank SNB is one of the largest sellers of FANG shares.

T
he National Bank of Switzerland, as an independent central bank, implements the state monetary and currency policy. Its primary goal is to ensure the stability of the country's financial system and control the level of inflation. The sale of key shares of the US technology sector, which have long been the basis of the Central Bank's portfolio, indicates the SNB's high need for US currency. It is possible to save the system-important Swiss banks that are in a difficult situation.

According to media reports, Credit Suisse, a global system- significant bank and the second largest in Switzerland, was, if not on the verge of bankruptcy, then at least in a critical situation. After another unsuccessful financial quarter, the bank's credit default swaps (CDS) soared to record levels and reminded the market of the 2008 financial crisis. Now C. Suisse under the tax investigation and probe in the US.

Concerning SNB, this information seems correct because it also gets USD Swaps this week for $10 Bln, supposedly to support national banks - C. Suisse and UBS:

it's getting really tough. And some hopes that Fed will stop and stock market will turn up are in vain. In fact, historically, when Fed stops, stock markets drops more:
Over the past 6 major crashes, stocks have fallen by an average of 28% AFTER the Fed cut the rate for the first time. It took another 14 months to get to the "Bottom".

Demand for the gold is rising. UK coin yard reports on overload on unprecedented demand because of bond market collapse and attempt to exchange wrap pounds to real metal:

While in the US Congress debates start on golden standard. The bill on the gold standard of a member of the House of Representatives A. Mooney was introduced on October 7, 2022 and submitted to the House Committee on Financial Services. Referred to as the “Gold Standard Restoration Act” by sound money activists, H.R. 9157 calls for the re-pegging of the Federal Reserve note to gold in order to address the ongoing problems of inflation, runaway federal debt, and monetary system instability.

Upon passage of H.R. 9157, the U.S. Treasury and the Federal Reserve would have 30 months to publicly disclose all gold holdings and gold transactions, after which time the Federal Reserve note “dollar” would be pegged to a fixed weight of gold at its then-market price. Federal Reserve notes would become fully redeemable for and exchangeable with gold at the new fixed price, with the U.S. Treasury and its gold reserves backstopping Federal Reserve Banks as guarantor.

“The gold standard would protect against Washington’s irresponsible spending habits and the creation of money out of thin air," said Rep. Mooney in a statement

To be continued...

 

[Sive Morten]

Few political issues

Politics, guys, as you understand, is a blur thing. Here FPA shares with you some suggestions and hypothesis, but to agree or not is up to you. We do not pretend on the truth of last resort. Still few moments makes us think that we're not too far from correct view. The major thing is a obvious weakness of J. Biden's team. Not only inside the US but on foreign arena. Inside the US, D. Trump, general Flynn and his followers take a loud and wide campagne before coming elections. In 2020, D. Trump advantage on elections was not too large and that has helped Democrats to falsificate the results. This time, Democrats will lose the control over Senate. D. Trump will not wait for two years and J. Biden impeachment comes fast.

On Foreign arena the weakness of J. Biden is absolutely obvious. Just recall recent UAE demarche and refuse request to not cut oil extraction. It was ignored. It means that nobody treats J. Biden seriously any more. Everybody is preparing to global changing.

The same story around Russian Military operation. It was almost stopped in summer, when there were chances that Democrat (Liberals and financials) could come in some agreement with Republicans (Conservative and industry production). Now it becomes obvious that they have not agreed. At the same time Republicans want to focus on domestic industrial production rising not on financial sector, they need to focus on domestic prosperity. To achieve it, they need to stop spending money on so-callled "liberal values" across the Globe and spend money on puppets, just because they do not have money for that. They need to withdraw the huge debt somehow, because they would like to focus on AUKUS block support and rise production and real assets value of national economy. This, by the way, explains, why, Russian operation accelerates in recent month. We suggest that V. Putin was in negotiations with this Republicans, Conservative-oriented elites and some agreements have been achieved.

Now we could recognize four definite currency areas - China, India, Europe and US. New "old" US elites do not want to get "UK" zone and they want to weak UK role in AUKUS block. Just to remind you, according to Canada and New Zealand Constitutions, the chief commander of national forces is a King of GB.

The main news now are mostly analytical: the liberal bankers who run the world dollar (Bretton Woods) system have no plans to save the situation in the global economy. There are many signs of this. This is also the resignation of the British Finance Minister Q. Kwarteng, who held his post for only 38 days. This is also the speech of J. Borrel at the last conference of EU ambassadors (let me remind you, he is the coordinator of EU foreign policy). And finally, it is the publication of the minutes of the meeting of the US Federal Reserve System.

Let me remind you that the current Prime Minister of Great Britain, Liz Truss, went to her post for a reason, but with the reform of finance. During her work, it became clear that the reform was not feasible, while the pound sterling collapsed, the kingdom's pension system was on the verge of collapse, and the Bank of England, in fact, began unlimited money printing.

For the first time, J. Borrel officially acknowledged that the economic well-being of the European Union was built on cooperation with Russia and China. If this interaction does not happen (and it will not happen with Russia for sure), the EU does not have a positive scenario for development. Borrel also said that the EU has relied too much on US security guarantees, and there are serious concerns that these guarantees will not be fulfilled after the US elections. Therefore, the EU must build a new security system.

If we recall the recent speeches of Angela Merkel (today she is a private person), who said that the European Union needs a new security architecture that can only be built with Russia, it becomes clear that this topic is becoming fundamentally important for the EU economic elite and even the liberal establishment of the region cannot ignore it. The only question is that in order to implement this task, some economic resource is needed, which still needs to be found and taken somewhere.

Another topic, which was mostly missed by big media is recent US act against China micro electronics companies. A critically important story that is not given corresponding attention.

The US government's new export controls are hurting the Chinese chip industry. The new rules regarding "Americans" lead to "industry-wide decapitation." "Many people don't know what happened last week. Simply speaking, Biden forced all Americans working in China to choose between leaving their jobs and losing their American citizenship.

All American executives and engineers working in the Chinese semiconductor industry resigned yesterday, which paralyzed Chinese production overnight. One round of sanctions by Biden has done more damage than all four years of performative sanctions under Trump. Although American semiconductor exporters had to apply for licenses during the Trump years, the licenses were approved within a month.

With the new Biden sanctions, all American suppliers of IP blocks, components and services left overnight, thereby ending all services in China. In short, every company producing advanced semiconductor nodes is currently facing a complete shutdown of supplies, the dismissal of all American personnel and immediate operational paralysis. Here's what destruction looks like: semiconductor manufacturing in China has dropped to zero overnight. A complete collapse. No chance of survival.

The level of embarrassment is comparable to Pelosi's visit to Taiwan. The major conclusion -

1. All Chinese companies involved in the development of advanced computing chips are subject to these sanctions, and TSMC will no longer make any records for them;
2. All chips for autonomous driving will also be sanctioned;
3. The starting point for this round of sanctions is to move up the food chain and ensure the exclusion of all American products and technologies from the entire ecosystem;
4. Any company or individual who violates these sanctions can be arrested by the US Department of Justice.

Let me stress once again: this round of sanctions means the destruction of China's semiconductor industry. This is nothing more than 10+ rounds of performative sanctions during the Trump years — this is a serious act of decapitation of the entire industry. However, executives in China, many of whom have U.S. passports, have a very difficult decision to make. Given that many of China's most successful entrepreneurs have decided to leave the country in recent years in light of zero Covid and Xi's leadership, these new rules could be a watershed moment for many of China's most experienced chip talent.

Thus, we could count on more escalation in US-China relationships that will be difficult for both currencies and positive to the gold market in long-term perspective.

Finally, speaking on the US Strategic oil reserves - they dropped more this week.

Meantime, everybody reports on Diesel fuel supply problems. Democrats have used national oil reserves to manipulate gasoline prices inside the country, trying to hold them and simultaneously sending all extracted oil overseas. Now reserves stand at lowest level, world enters winter time, and the US has no ability to increase the reserves due to green energy trend and massive cut of shell oil extraction. The industry is highly under-invested. It means either lack of supply inside the country or cut of EU export with following collapse in EU. No other ways we could see.

Conclusion:

Crisis processes are accelerating. Not only in economical sphere but in political and social ones as well. Markets are ready to drop in uncontrolled nosedive, and the only out is unstoppable money printing that makes agony even longer but leads to the same results. Coming crash of global political and business establishment increases uncertainty, liquidity problems and volatility on the markets. This makes investors to be nervous. Recent Asian countries summit in Astana shows the same - the global center migrates to Asia, region that controls majority of real assets in the world.

We suggest that global trigger comes in nearest 6-8 months and expect the reversal on the gold market should start as well. We keep our long term view that gold stands at attractive levels to make long-term investments without a leverage. Be aware of futures market, buy physical gold.

Technicals
Monthly

MACD trend stands bearish by far. Situation has turned from top to bottom since last week, when market was standing above YPS1. Now performance shape looks bearish, as market stands near monthly lows. Gold gets more pressure in nearest 1-2 months as the degree of entropy should increase. But, despite downside action price feels absolutely comfortable around 1600-1650 support area, showing good resistance to external negative factors. Pay attention that this is just 3/8 retracement on monthly scale.

Based on our fundamental view, gold has more chances to stay around 1600 rather than keep going to next strong support area of 1400-1420, but it would be naive to promise something now.

Weekly

Here picture also looks negative - MACD is bearish, gold has shown sharp reversal this week. Now picture looks more like aiming on weekly OP and recent lows rather than upside AB-CD pattern.

Daily

The same on the daily chart - bearish MACD, market has broken final 5/8 support area. No reasons to consider long positions by far. Daily oversold stands around major lows, which is most probable nearest target:

Intraday

Both patterns that we have considered on Friday - have failed. As big engulfing and "price rejection" on 4H chart:

As a minor ones on 1H chart - as grabber reversal bar, as potential H&S have not been formed. Market drops back to the lows. It means that bulls have nothing to do by far, while bears could consider short entry around resistance levels and against the top of CPI collapse bar.

 

[Georget@]

I like the "rumors" section the most

 

[Georget@]

XAUEUR is holding much better, showing that EUR is weaker. The retracement down is hold by 0.382 of a minor reaction, not even the whole last swing up. There is a new SG on Weekly. Next level down is 1600 and I will add bullions at that level for sure.

 

[Sive Morten]

XAUEUR is holding much better, showing that EUR is weaker. The retracement down is hold by 0.382 of a minor reaction, not even the whole last swing up. There is a new SG on Weekly. Next level down is 1600 and I will add bullions at that level for sure.

Valuable add-on. Thank you. Grabber confirms my suspicions that gold seems to re-test the lows... Great.

 

[Sive Morten]

Morning guys,

Here is our Telegram channel. Telegram has IOS, Android and PC/Mac applications - choose what you like more. I usually use mobile version.

ForexPeaceArmy​

ForexPeaceArmy.com Analysis of hot economical, political global events, rumors and humor

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I put light description in today's FX video, how to use it, why we've decided to start it etc. Actually we've talked about this yesterday here. It should be fun to read it, as we keep news and videos very short there, but it will complete the total picture of ongoing processes that we usually discuss in our weekly reports. Call friends to join if you will find it interesting.

Now concerning gold. Market shows heavy and shows worse performance, compares to EUR that actually tries to follow bullish scenario. Gold in turn, is coiling around daily support. As we suggested, it should stay under pressure for awhile, with possibility to re-test 1600-1615 lows. Georgeta also has put XAU/EUR chart with the bearish grabber, suggesting that advantage is a bit more on the bearish side.

On 4H chart market re-tested broken trend line and dropped, so short term entry scenario has worked nice, but price is not following down by far. Thus it makes sense to move stops to breakeven, at least. Besides, another problem now is total lack of patterns in any direction.

Market for now stands in some triangle consolidation. If we would get reverse H&S here, something like this:

We could start thinking on long entry. But, for now it is some choppy action inside triangle that technically is more favor to the bears:

Thus, we do not see much to do here by far...

 

[Sive Morten]

Greetings everybody,

It seems that our suspicions on Gold market are coming to reality, as it keeps going lower. If you remember, yesterday it was the only problem - no patterns. Daily chart keeps bearish trend and it is not at oversold. Major 5/8 support is broken, so the road to re-testing of 1600-1615 lows is open:

On 4H chart market starts forming shape of downside channel, with butterfly inside. It has two targets - 1632 and 1622. So, bulls have nothing to do here by far, while bears, those who wants to, could try to take position on retracement up from first 1632 target, or maybe to use the pullback even smaller scale on 5-15 min charts.

 

[Sive Morten]

Greetings everybody,

So gold brings no surprises today, keeping downside action. In fact, as US yields are rising, with 2-year yield around 4.65% already - it is clear why gold stands under pressure, despite that Dollar Index stands flat.

On 4H chart gold has completed our butterfly target and formed upside reversal bar, suggesting that we could get more extended bounce on lower time frame. In fact, the minimal butterfly target is 3/8 retracement. Thus, let's watching for it:

1H chart shows possible upside AB-CD pattern with target around 1640 that perfectly agrees with 3/8 level and minimal butterfly target. This is minimum upside target. Potentially this level is interesting for short position taking, if overall background remains the same:

 

[Sive Morten]

Greetings everybody,

Gold accurately completes our setups this week, starting with the butterfly, then retracement yesterday and now drop back to the lows. In general, on daily chart market has erased recent rally. Since we have uncompleted weekly 1595 target and based on recent Fed members rhetoric, re-testing of 1600-1615 area seems unavoidable.

On 4H chart gold has formed a chain of bearish grabbers, and current candle also could become the one:

Since market already has done major AB-CD retracement yesterday, and price stands close to 1615 lows already - we do not expect another deep retracement. It would be nice if gold climbs to 1635 K-area, but it could not happen.

Currently it seems that bulls still have nothing to do, while bears could consider any pullback to more or less solid resistance area as the chance for short entry.