Gold GOLD PRO WEEKLY, October 26 - 30, 2020

Sive Morten

Special Consultant to the FPA
Messages
14,023
Fundamentals

If you check the headlines for this week concerning gold market, you'll see that they are mostly the same and in one or another degree relates to stimulus pack discussion. It seems that nothing else is interesting and gold has no other driving factors. In fact this is not true. Besides, as we come closer to elections as they become more important for the gold than stimulus. Today we will take a look on what will happen in economy depending on elections result.

Concerning stimulus - In our FX research we've provided most recent information on this subject. There we've discovered one important detail. By D. Trump words, N. Pelosi would like to push through Congress 2.2 Trln because they would like to provide additional financing to the sates that are governed by Democrats but have problems with crime and finances. So, Democrats what to disguise this money by CV19 help. This doesn't suite to D. Trump who said that we want to be "CV19 related". With this new point of view, compromise could be difficult.

Our suggestion that the deadline for stimulus pack comes on Tuesday, maybe Wednesday. Later US will be too close to elections and this will be the time for different tasks, not to discuss stimulus pack.

Speaking in general, driving factors of November probably will be more the headwind rather than backwind for the gold market. Worsening situation with CV19, holidays, delay in announcement of the new President (especially if D. Trump wins), will trigger demand for US dollar and US bonds. Theoretically, Gold also is safe haven asset, but people prefer liquidity and cash, money market instruments to sit through unrest times. It means that we should not get the collapse on gold market but strong rally also looks doubtful within a month or so. Gold could start shine if US elections will out of control, but I hope that situation will not go too far.

Thus, it means that although we keep positive view in longer-term perspective, in shorter-term situation might be not as obvious as it seems. Gold shows gradual downside action right since August, when yields on US bonds start to rise in anticipation of providing more liquidity and because Fed has lighter control over long-term yields, let them to grow.

Goldman Sachs released report for the clients on commodity markets, including gold. A weaker U.S. dollar, rising inflation risks and demand driven by additional fiscal and monetary stimulus from major central banks will spur a bull market for commodities in 2021, Goldman Sachs said on Thursday.

The bank forecast a return of
28% over a 12-month period on the S&P/Goldman Sachs Commodity Index (GSCI), with a 17.9% return for precious metals, 42.6% for energy, 5.5% for industrial metals and a negative return of 0.8% for agriculture. Markets are now increasingly concerned about the return of inflation, the Wall Street bank said.



Expansionary fiscal and monetary policies in developed market economies continue to drive interest rates lower and create demand for hedging the tail risks of inflation, lifting demand for precious metals, Goldman Sachs said in a note. Goldman forecast gold prices at an average of $1,836 per ounce in 2020 and $2,300 per ounce in 2021, and expects silver prices to be at around $22 per ounce in 2020 and $30 per ounce next year.

Gold, widely viewed as a hedge against inflation and currency debasement, has gained 26% this year, benefiting from unprecedented global stimulus and near-zero interest rates. Non-energy commodities could see an “immediate upside” as the market balances tighten ahead of expectations on strong demand from China and weather-driven risks, the Goldman Sachs analysts said. The bank maintained a “neutral” view on commodities in the near term and “overweight” in the medium term.

Gold is tracking a gyrating dollar, with investors watching "whether a fiscal stimulus plan will be agreed before the election or will have to now wait because of the lack of time, until the next president has been voted in," said Robin Bhar, an independent analyst. Prices are likely to trade sideways "until we know who the next president is," but could break above the $1,950 level post the elections, Bhar added.

"Gold's moves are really mirroring the dollar at this point," said Tai Wong, head of base and precious metals derivatives trading at BMO. Gold is in a "restive" $1,890-$1,930 range with any dips to the bottom being lapped up, he added.

More than 50 million Americans have cast ballots with 11 days to go in the campaign.

"Gold still remains stuck in its stimulus limbo range. Stimulus optimism faded after National Economic Council Director (Larry) Kudlow noted that negotiations still have policy and numerical disagreements," Edward Moya, senior market analyst at OANDA, said in a note. "Gold's fate will be determined on Election Day, a blue wave
signals huge stimulus and hello $2,000
, while a Biden victory with the Republicans keeping the Senate suggests a slower grind higher," Moya said.


President's Run

There are a range of possible outcomes - Fathom consulting reports, including different permutations in the House and Senate. Overall, we judge that a Biden win would be consistent with increased fiscal support, and higher GDP growth (real and nominal), despite an anticipated increase in taxes. By contrast, any Trump victory is unlikely to come with Republican control of the House and would be associated with reduced fiscal measures. Foreign policy would be the area to watch during a second Trump administration.

If Joe Biden wins November’s presidential election, there is a reasonable chance that the Democrats will keep the House and take the Senate. Under this scenario, we would expect further fiscal support to be the administration’s number one priority. Reports suggest that advisors are pushing for an immediate $1 trillion support package. Meanwhile, Biden’s policy platform will require a big increase in spending that is only partly offset by fresh taxes on corporations and high earners. The overall impact would be a large net fiscal stimulus versus the counterfactual, with associated upwards pressure on GDP growth (real and nominal) as well as higher budget deficits, with some upside risk to inflation and interest rates.

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President Trump has surprised before. It would be foolish to rule him out. However, his path to 270 votes in the US Electoral College (the number required to win) is tight, and if national polls remain where they are, it seems unlikely that Republicans will be able to win a majority of seats in the House. As a result, our baseline expectation is that a Trump second term would be hamstrung by House Democrats, and any prospective fiscal support would be comparatively small. In this scenario, a second-term Trump administration would have its biggest impact on foreign policy. Sino-US tensions have already increased sharply. Without the need to win another election, it seems possible that President Trump could take a more confrontational approach to Beijing.
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Evidence suggests that financial markets tend to react ahead of elections. Wins by the incumbent are associated with a rising stock market and easing dollar before election day, according to data from presidential races dating back to 1992. By contrast, incumbent losses tend to be preceded by a falling stock market and a rising dollar. This finding is intuitive. Periods of US economic weakness, such as 2008, tend to be ‘risk-off’, explaining the stronger dollar and falling equity markets. However, this trend may also reflect investors pricing in uncertainty about the new administration. If it is the latter, and Joe Biden maintains his strong lead in the polls, there is reason to expect some fading in the S&P 500 and a rise in the US dollar over the coming month.

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COT Report

Recent CFTC data shows solid jump in long positions and boost positive sentiment among hedgers and investors. Open interest has increased for 30K+ contracts. Although net position has not changed significantly, the details of changing looks impressive. It could mean that investors prepare either for stimulus receiving or directly for Biden's victory.

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So, guys situation around elections stands very tricky. Stock market performance and US Dollar Index suggest (!!!) D. Trump victory, as we do not see yet either drop of stock market or rally on the dollar. D. Trump victory suggests less stimulus and more dollar-supportive policy that should press on the markets. But we see the opposite picture - investors accumulate gold position in anticipation of Biden victory. Besides, Biden is leading with 10% gap within just one week before voting. And gold was showing lazy reaction on new spiral of stimulus discussion. Probably because of assurance that sooner or later but market will get the money and it is not as important when this will happen - either one week later or earlier.

In such environment it is difficult to make bet, especially totally relying on poll results. Previously we already said that polls might provide big mistake in numbers, as most of them belong to media companies that relates to Democrats. So, D. Trump victory can't be taken off the table by far and it could provide much better position for long-term entry. Still, within a year any long position should give positive result, according to Goldman's view. But as risks exist, the good decision might be to take 30-50% of long-term position before elections...


Technicals
Monthly


Here, if we take a look at gold price together with long-term real interest rates, once they start to show upside bounce - gold was standing " On hold" with gradual downside action. Take a look that now something like DRPO "Buy" is forming which means that inflation could start rising and also supports Biden's victory. That, in turn, could put the pressure on the Gold market. Here you can see direct relation with Gold market. Based on technical picture of real yields, it seems (as they start dropping again), Gold could jump back to previous top or slightly higher on background of downside action of real yields, but upside potential is limited at least in short term perspective. Only If rates keep going in negative territory gold will keep climbing. This is possible only if nominal rates stumble (for example due Fed bond purchasing) while inflation keep rising.



October provides no additional information for monthly chart as gold was fluctuating inside September's range. Here we could just suggest two possible outcomes depending on elections result. As it was mentioned above by OANDA's analysts, in a case of Blue wave, gold could jump to 2K area. Using target it seems that gold could reach 2'160$ area - 1.27 extension of BC leg. It is easily to imagine huge butterfly pattern on monthly chart.
Conversely, D. Trump victory, supposedly, could push gold market to the downside, and we might see 1700 area where nearest monthly 3/8 Fib support stands and Oversold level.

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Weekly

Even on the weekly chart we've got inside candle, so weekly analysis stands the same and mostly relates to triangle pattern here and direction of its breakout. Oversold level is important but it could be ignored if market starts reaction on elections' result. Any drop before elections will be held by 1835 Fib level and oversold level. As we've said last week, while price remains inside, hardly we will get interesting trading setup and our scenarios will be limited by short-term targets.

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Daily

The result of previous 2-3 weeks shows that Gold needs some stronger driver to break 1935-1950 K-area but market doesn't have it right now. Probably it should be either stimulus or election results directly. At the same time, COT report shows accumulation process and investor's preparation for upside breakout. It means that this tendency has chances to continue right till "X" time moment. So, we closely should keep an eye again on 1880 support as it stands as indicator of market sentiment. While price holds above it, bullish context is still valid.

It seems that fluctuation inside 1880-1935 are will hold through the next week as well, if no breakthrough with stimulus will be achieved.
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Intraday

Last week shows that market is scant of patterns and activity mostly was based on levels and trend directly. It means that decision making process is difficult. On Friday market was not able to show the same performance as in the beginning of the week and dropped even lower, challenging the fact of existence of upside butterfly.
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It means that Gold could go back to 1880 support area where next short-term downside XOP target stands. It seems that our task here gradually is changing from just trading through the week into position taking and preparation for elections result...

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Sive Morten

Special Consultant to the FPA
Messages
14,023
Greetings everybody,

let's keep up with the Gold market. Yesterday we've got interesting pattern that makes overall situation a bit different. I'm speaking about bullish grabber on daily chart:
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In general, we said that Gold doesn't have sufficient drivers to push it through 1935-1950 resistance. And it still doesn't have it, which means that if grabber works - it should happen by some external driver as well. Anyway, grabber shows a bit different scenario, compares to what we've discussed in weekly report, suggesting that gold could move slightly lower, back to 1880 area first:
gold_4h_27_10_20.png


But as you can see - 1880 is below grabber's invalidation point. And in this case the pattern will be cancelled. On 1H chart we might get minor grabber around Fib support as well. So, it seems that some chances now exist that upside action could continue.
Yesterday Gold indeed has dropped, but it was not able to complete XOP target. And now is a big question whether this will happen or not.
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What you could do in current situation. The most simple thing - follow the plan and be conservative, wait when drop to support will happen. Second approach - put the bet on the grabber but stop anyway should be somewhere below XOP and 1880 Fib level. It is more than 25$ per contract and not everybody could accept this. Right now it is more the question of money management and trading style. The possible compromise might be on decreasing of trading volume... Personally I bought the gold without leverage and without stops. This is small amount from margin trading point of view. I'm sure some different ways exist as well.
 

Sive Morten

Special Consultant to the FPA
Messages
14,023
Greetings everybody,

It is few that we could do today on the Gold market - maybe just move stops to breakeven on our recent trade. On daily chart market keeps valid our grabber and keeps bullish context, despite that overall price action on intraday chart looks choppy:
gold_d_28_10_20.png


The problem is different markets react on current nervousness differently - EUR, stocks are dropping while BTC is rising. Gold barely rising as well. At the same time we can't call it as the "trend" as price action is rather choppy. Existence of XOP below the market around 1880 keeps situation tricky.

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On 1H chart price shape starts look like H&S pattern and our yesterday's entry was around the right arm's bottom. Currently we could move stops to breakeven and see what will happen.
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Sive Morten

Special Consultant to the FPA
Messages
14,023
Greetings everybody,
So, gold is a hostage of global tendency - run into the quality. Investors sell everything and buy US Dollar and US Bonds at the eve of the elections.

Our bullish context already was looking fragile and we have had to keep breakeven stops every time. But as recent collapse shows - it was worthy of it.

Currently, trend has turned bearish on daily chart and now we do not have sufficient context, enough reasons to take new long position by far. GDP numbers should be good that could increase US Dollar value, besides, we should not be deceived by current pullback. American traders are sleeping right now. Once they wake up - tendency probably will continue as elections still stand ahead.

With this new environment we should be patient and wait for good levels for entry.
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On 4H chart price stands at our 1880 Fib support by far, completing downside AB=CD target:
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Meantime on 1H chart our former XOP was crushed and gold has reached OP target of larger AB=CD pattern. As sell-off of CD leg was unstoppable, it means that price supposedly proceeds to XOP sooner rather than later. Today, until GDP will be released, technical pullback could happen - either to 3/8 level where price already stands, or slightly higher to K-resistance area:
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Sive Morten

Special Consultant to the FPA
Messages
14,023
Greetings everybody,

As gold finally erased even theoretical bullish chances on daily chart, we need to recall more extended downside targets. First of all, this is1850 bottom, in case of Double Bottom pattern. We think that this scenario could happen with sharp reversal up, if elections will pass smooth and fast, with solid Biden gap and results will be announced soon. If some problems will appear, gold could stay under pressure longer. In this case, next target will be 1825 and more important - 1800, that also includes major downside OP:
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The reasons why we speak about 1850 is because on 4H chart we have two XOP extensions at this area. And if these targets will get support from elections result, we could get Double Bottom here:
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Meantime, while market is still going there, we do not expect reversal right now. As we've said today, minor pullback is possible, something like yesterday's reaction on OP target. As people are preparing to elections, today is not the post-election session yet. So, hardly they will start to unwind positions right now. Thus, it means that it would be better to not consider long entry right now...
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