Gold GOLD PRO WEEKLY, October 25 - 29, 2021

[Sive Morten]

Fundamentals

The storm of major new from the Fed is calming down a bit and markets get some space to fluctuate and to show reaction on the news of different kind. This weekly gold mostly remains under pressure but it was able to show couple solid spikes. It means that although hardly we get breakout in fundamental background, in short-term market has ability to create bullish setups.

Market overview

Gold edged lower on Monday as a rise in U.S. Treasury yields dented its appeal, although a risk-off sentiment in wider financial markets limited losses for the metal.

“If yields keep rising, the headwinds will remain significant for gold,” OANDA analyst Craig Erlam said. Unless markets start to price in bad news for the economy and stock markets, which may be a rational next step if policymakers insist on tightening even as the recovery remains sluggish and downside risks significant.”

Sentiment in wider financial markets remained weak as economic growth in China slowed, while a relentless surge in oil prices fuelled concerns about elevated inflation.
U.S. benchmark 10-year Treasury yields climbed as investors ramped up rate hike bets, while the dollar index held steady. Investors increasingly expect the U.S. Federal Reserve to start tapering asset purchases after data showed a solid increase in U.S. consumer prices last month.

“In the event that the Fed hastens its policy tightening agenda, strengthening the dollar along the way, that should weaken the floor below bullion,” said Han Tan, chief market analyst at Exinity.

Data on last Friday showed U.S. factory production dropped the most in seven months in September, as an ongoing global semiconductor shortage depressed motor vehicle output, further evidence that supply constraints were hampering economic growth. While a regular Bank of Canada survey of companies on Monday anticipated stronger demand as COVID-19 fades, they also said current supply constraints could limit sales and put upward pressure on costs.

Russia’s Nornickel, the world’s largest palladium producer, said on Monday it had begun a contest for scientists to find new ways to use the metal hit by a chip shortage in the auto industry, its top consumer sector

Gold prices were on the front foot on Tuesday, rising as much as 1%, as a sluggish dollar lifted bullion’s appeal in the face of increasing inflation expectations.

A weaker dollar is gold supportive and the metal remains an “interesting asset for investors looking to hedge against the risk of inflation going out of control,” said Carlo Alberto De Casa, external analyst at Kinesis Money. He added that, while gold has created a solid support zone between $1,750 and $1,760, “a clear indication from the European Central Bank on tapering could be a negative catalyst for bullion.”

Elsewhere, Bank of England Governor Andrew Bailey sent a fresh signal for early UK rate hikes by saying that the BoE will “have to act” to counter rising inflation risks. In New Zealand, bets for faster policy normalisation were stoked by data showing the fastest consumer-price inflation in more than a decade.

“Inflation expectations have become a dominant factor for gold and the perception that it is more than just transitory ... is supporting the metal,” said UBS analyst Giovanni Staunovo. Speaking on other precious metals, there is some expectation that the chip shortage has potentially peaked,” UBS analyst Giovanni Staunovo said. “If data shows that’s the case, we should get some improvement on the car production side.

“There’s not much conviction on bullion right now,” said Edward Moya, a senior market analyst at brokerage OANDA. “We don’t know exactly if we are going to see any major shifts from the Federal Reserve. You’re seeing earnings, for the most part, impress, and that’s been the primary driver to keep risk appetite strong.”

Wall Street rose on Tuesday, aided by upbeat results from Johnson & Johnson and insurer Travelers. Diminishing the appeal of gold, which is non-yielding, U.S. benchmark 10-year Treasury yields hit their highest level since early June at 1.6302%. Market participants are increasingly expecting the Fed to start tapering its asset purchases soon, as the earnings season has been encouraging so far and recent data showed a solid increase in U.S. consumer prices.

Reduced stimulus and interest rate hikes tend to drive up government bond yields, raising bullion’s opportunity cost.

The Federal Reserve will wait until 2023 before raising interest rates, according to a majority of economists in a Reuters poll, though persistent inflation would likely be the greater risk for the U.S. economy over the coming year. Market expectations for future interest rates do not square with the European Central Bank’s guidance for no hike until inflation is seen stably at 2%, its chief economist said.

If inflation keeps rising at its current pace in coming months rather than subsiding as expected, Fed policymakers may need to adopt “a more aggressive policy response” next year, Fed Governor Christopher Waller said. Fed Governor Michelle Bowman also said inflation may last longer than expected just a few months ago.

Two U.S. Federal Reserve officials said on Wednesday while the central bank should begin winding down its stimulus measures, it was too soon for interest rate hikes.

“Gold remains supported because there’s inflationary pressure due to higher energy prices and weaker data coming out of China and U.S. factory output,” said Xiao Fu, head of commodities markets strategy at Bank of China International. On the downside, there is safe-haven demand from global growth concerns, “but upside still capped by potential rise in Treasury yields and tapering expectations.”

Production at U.S. factories fell by the most in seven months in September, another indication that supply constraints were hampering economic growth.

“For the last few weeks U.S. treasury yields have pushed higher as inflation concerns increase, yet gold has struggled to make any significant move one way or the other .... Gold is trading in a range between $1,720 and $1,820,” said Michael Hewson, chief market analyst at CMC Markets U.K.

Gold prices dipped slightly on Thursday on elevated U.S. Treasury yields, but there was some support from concerns over persistently higher inflation.

UBS analysts said in a note that rising inflation expectations and softening growth expectations could support gold prices in the next month or two, though it is not indicative of a “regime change” towards stagflation. The bank forecasts gold prices at $1,700/oz at end-March 2022 and $1,600/oz by end-December 2022.

“The near-term trend is still very much against the dollar which is supportive for gold prices. A move below 93-93.50 support in the dollar index should force gold above $1,800,” OANDA analyst Craig Erlam said.

Gold prices gained for a fourth consecutive session on Friday, and were on track for a second straight weekly gain as a weaker U.S. dollar and growing inflationary pressure boosted demand for the safe-haven metal.

“There has been a pick up in inflation expectations and that has supported gold, along with a softer dollar,” Saxo Bank analyst Ole Hansen said, adding that the metal was making another attempt to challenge the $1,800 mark. Further, Hansen said, while growth concerns could reduce the ability for central banks to be aggressive on hiking rates and in turn help gold, the sharp recovery in stock markets remains a hindrance.

Meanwhile, euro zone inflation expectations hit their highest levels in years on Friday, putting additional pressure on the European Central Bank and its insistence on maintaining crisis-era stimulus.

Elsewhere, Atlanta U.S Federal Reserve President Raphael Bostic said he expects high inflation to persist into 2022 and the central bank should raise interest rates by the end of next year.

However, Citigroup, in a note, said, “spot bullion trading remains lackluster despite robust U.S. inflation data and increased investor concerns about stagflation risk... price action appears to struggle near or above $1,800/oz. Several forces might be driving what seems to be weaker bullish sentiment for gold - certainly versus 2019 and 2020.”

Gold prices more than halved their session gains on Friday after U.S. Federal Reserve Chair Jerome Powell said he expected inflation to ease next year and that the U.S. central bank was on track to begin winding down its stimulus.

“Clearly, the pullback was in regards to comments from the Fed Chairman with regards to how he expects inflation to potentially remain elevated well into next year,” said David Meger, director of metals trading at High Ridge Futures. “However, that is a double-edged sword. The inflationary pressures remaining in the market will be an underlying supportive factor for gold and silver in the weeks and months ahead.”

Powell said the U.S. central bank should begin reducing its asset purchases soon, but should not yet raise interest rates because employment was still too low.

“Inflation is the one thing that everybody is talking about today,” said Daniel Pavilonis, senior market strategist at RJO Futures. “The perception is that the Federal Reserve is behind the curve, and the metals market is looking at that as the Fed is not going to do enough to slow inflation ... that is where gold is going to find its value.”

COT Report

Precious metals funds faced a fourth weekly outflow of $463 million this week. SPDR Fund, as you see from the chart below also doesn't show any reserve growth. CFTC shows bare change in net position, showing that net long position mostly has increased because of short covering. This change stands in the range of week by week fluctuations and doesn't suggest the big shift in investors' mood. Net position stands in the same range of 165-215K contracts since April.

Also guys, to show you the real sentiment in economy, I would like to show you the change in copper net position. This week it shows huge 20% jump. Together with crude oil and natural gas dynamic this is big confirmation of global bullish cycle.

While SPDR Fund reserves absolutely shows no reaction on short-term gold price fluctuations.

Also, I would like to show you the relation between real interest rates and the gold. Previously we already talked about it but earlier real rates were flat and showing no dynamic. Now the background is changing and real interest rates start to rise. If it has the same effect as in 2011-2013, then gold should start dropping soon.

So, as we have a lot of different sources of information right now, it seems that some confusion stands in the heads of investors. Everybody tries to rely on the news that it likes more. Bearish view is based on good earnings reports, statistics and higher interest rates, while bullish view on stagflation hazard and rising inflation. Now we see more and more opinions that everything stands not as good as described and global economy is coming to the stage of stagflation rather than reflation. They really worry that soon statistics change the vector and that's why it is too early to talk on gold weakness.
But currently it is too many facts that make us doubts on this suggestion. Basic commodities show too strong action for stagflation, which suggests stagnation in economy when economy shows slow stable growth pace. In stagflation commodity markets usually stand in consolidation or slow downside action. Interest rates and inflation data also rise too fast, while with stagflation interest rates should be stable at high levels. This is major reasons why we think that global economy stands in the beginning of growth cycle, but not at the top of it. Consequently long term gold investment seems tricky by our view. Situation could change only if fundamentals will be broken and everything turns in opposite direction. As Fed is announced its policy change, hardly they did it occasionally without in-depth view on current economy conditions. It means that current economy dynamic should be more or less stable, that also keeps very small room to stagflation idea.

Monthly

Long-term charts are not very interesting to us right now as recent price action barely impacts on the long-term picture. October is an inside month by far. On a technical side, we have few bearish moments that suggest deeper action, but, in general, market stands in very small pullback from ATH comparing to the scale of the rally. Market again shows problems with breaking through YPP. We have three equal tops month by month around YPP. It means that somewhere around 1835-1836 big selling orders hold gold from further upward action.

In a shorter-term everything is based on August huge trading range. With the more information from the Fed, we suggest that sentiment becomes more bearish and action to 1650 support area gets more chances to happen in near term. Next target is YPS1 at 1540$. October month right now doesn't make our task easier as it stands inside the September range and brings no information.

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

Weekly

Here we have a bit tricky situation. Market is too chaotic since summer makes difficult to prepare clear and realistic trading plan that we could follow right now. We haven't got the bearish grabber that I've warned you about on Friday (we get it on continuous futures but do not have it in October contract), thus, we miss the pattern now that could give us more or less clear direction.
At the same time, it is difficult to call the action here as bullish, especially with current sentiment and fundamental background. Big pattern now still stand in progress and could take the completed shape later in the year.
Based on the technical picture and for trading purposes we could say bullish context will be set if price at least breaks 1850$ resistance area with following 1925$ level breakout. It means while gold stands in 1680-1850$ range it is relatively flat in sentiment and could form as bullish as bearish short-term setups on daily and intraday charts.
On next week we suggest that Thursday should be the culmination day. If ECB follows to BoE and turns to more hawkish rhetoric this will be painfully to the gold market. As EU inflation hits the highs - this scenario probability is above zero.

Daily

Once again Friday brings disappointment. It was seemed that gold finally has got some ground and shows explosive upward action, while very soon J. Powell has chilled it out and performance turns from bullish into bearish. The price shape in the red circle on the chart, despite MACD direction, doesn't let me to relax and rely on it, suggesting that it is bullish. We have big doubts about it. If you take a look at it from H&S pattern perspective - you could see torted shape, with the obvious weakness to the right. While H&S suggests opposite performance and the strength in last phase.
The performance since June also reminds bearish dynamic pressure but it is not evident. All these moments, and chances that ECB could step in on hawkish side makes me think that downside butterfly could appear. At least, until we get upside breakout of at least 1850$ (as we've said above), it is tricky to consider long entry on the gold market. For the truth sake, gold has to break above 1910$ tops to destroy downside tendency totally. We do not see any factors that could let market to do it in near term.

Intraday

So, our "222" has turned to 1.27 butterfly, when gold has jumped and then dropped in a blink of an eye during J. Powell comments. Butterfly is completed its minimum target already and MACD stands bullish, but would you like to buy against huge bearish engulfing pattern? This is the rhetoric question. I would suggest that market has to play out its target or cancel it before any consideration of the long position.

Short position is also tricky, but it is more simple in terms of realization. Here we have big bar and just need its Fib levels for entry. Stop is above the top, as usual - classic approach to engulfing trading. Just avoid fast upside action. In this case ignore the bearish setup.

 

[Sive Morten]

Morning everybody,

Although environment stands negative around the gold in long-term, shorter-term factors provide some support and let it to climb a bit higher. This time the news that Modern Land developer also could fall in default has triggered some demand for safe haven assets.
Second factor is technical - US yields could show deeper retracement, somewhere to 1.55% area which is also supportive to the gold market:

This background makes us to stay aside from bearish positions by far. In general market slowly but stubbornly is taking out all local highs that were formed recently, although they were looking bearish at the moment of appearing. Now it is again - gold climbs back to the top of Friday's engulfing pattern that we've discussed, which is not good for bearish context.
As we do not have good patterns on daily chart by far and not considering any bearish entry, the only pattern that theoretically could be considered here is another minor upside butterfly. Potential target is around 1825$ and invalidation point is Friday's lows - everything as usual.

To play with it, we should try to take position as close to "A" lows as possible. Now it seems that 1800 level fits to this, but maybe we could get even 1793... We have to avoid the miserable plunge only. In this case we have to skip the trade. With gradual and slow retracement - it could be considered. This is unfortunately all that we could get today...

 

[Sive Morten]

Greetings everybody,

So, based on recent action, you could see how unreliable potential bullish setups. Hopefully we've warned you to ignore it if downside acceleration happens. As we've said in weekly report, technical picture also looks bearish on daily chart, showing signs of extended dynamic pressure. MACD trend shows upside direction, while price is forming LL and LH. This type of action stands in favor of possible drop within few weeks.
Today is BoC meeting and aggressive rhetoric or even rate change (although it is not expected by far) will make some pressure on gold market as well. US interest rates stands flat but it doesn't help too much right now to the gold:

As a result of yesterday's performance we have few bearish signs. First is, market was not able to form upside butterfly and reach the top border of the flag. Now we also get bearish divergence, that suggests drop below "C" lows. In this case next support comes around 1758-1760 area, which is also XOP target based on bearish engulfing pattern that is still valid, despite market has shown deep retracement inside.

Currently we do not see any setups for long entry on gold market. On 1H chart there are two major downside setups could be formed. First is the butterfly to 1778. In this case price completes OP target of engulfing pattern. Second - "222" Sell with following downside continuation. If you're looking chances to sell the gold - you could consider these ones.
You could combine both patterns in single trade. For instance, it is possible to take 50% based on butterfly but hide stop above 5/8 level. If "222" starts forming - add another half and stand possessed for downside continuation.

 

[Sive Morten]

Greetings everybody,

So, it is the really tough challenge to trade gold right now. Recent action shows that in general patterns works - but they works too fast and market now is very fast with sharp reversals as well. Today we should be aware of ECB meeting. As a rule, EU bank rare makes impact on gold. But today is a bit different story, as ECB decision could become a part of general Central Banks' trend where all major banks now consider rate change. If ECB follows by some more hawkish rhetoric, it could make impact on gold as well...

US interest rates dynamic stands supportive to the gold, and actually has become the reason why our bearish setup yesterday has been reversed sharp as soon as it hit the minimal target. Rates could drop a bit more as k-support stands lower, which also could support gold:

Still, overall situation remains bearish. Recent interest rates drop was not enough to help gold set the new tops. Market just has shown the bounce from the support line. It means that rest of downside action on interest rates hardly help gold to rise significantly. Technical picture remains bearish on 4H chart and we still keep on the table scenario of downside breakout and drop to 1760 support area:

On 30-min chart you could see that our "222" Sell from 1800 Fib resistance has played out perfect, but its reversal has happened very fast. In general - patterns work but skills are needed to move stops to b/e and close trades fast.
Now, price completes upside XOP and we have another "222" Sell, with minimum target around 1795-1797. That's the only visible pattern by far on the gold. Of course we would prefer to get something on 4H or daily chart, but unfortunately we have to deal with the ones that we have.

 

[Sive Morten]

Good morning,

Well, as we've suggested gold mostly was under pressure recently, not just because of ECB but mostly it was a cumulative effect of BoC, RBA, ECB, GDP release and coming BoE and Fed meeting next week. Hawkish rhetoric across the board makes negative pressure on gold's sentiment as money is becoming more expensive pressing on commodities prices, including gold.

So, as sentiment around the gold is fragile already, we suggest that bearish performance is more probable there. Maybe not today, but next week it could happen. That's why we do not consider right now the new long positions, and suggest that gold might be tending to 1760 support area:

Theoretically you could recognize triangle shape on 4H chart above. Well, if you still decide to play bullish "wild card" , we ask you at least to take position as close to the support line as possible, to minimize the risk....

On 1H "222" Sell pattern has played out, and now we have no new patterns been formed here. So, today probably we get some relief action. With recent spike gold keeps the shape of rectangle accurately. And, as it pushed out from the upper boarder - it probably is going to the lower one...