Gold GOLD PRO WEEKLY, October 30 - 03, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals
So, gold... indeed, a lot depends on geopolitics. But, besides of geopolitics, there are few economical issues as well. Yesterday, we've made in-depth analysis of inflationary expectations and ability of the Fed to resist it. Mostly it will make impact on Real rate, as usual, and for now it is not obvious that it will keep go north. Now we have a relief, at least based on official inflation data, but expectations are raising. At the same time, the Fed seems exhausts its tools to confront inflation. Which makes us think that real rate still could reverse and gold gets additionally positive economical background.

Market overview

Gold prices have pushed higher in the past two weeks, driven by safe-haven demand as the conflict between Israel and Hamas threatens broader, regional turmoil.
The precious metal’s momentum shouldn’t be a surprise, given its historical role as a store of value in dark times. Gold has climbed more than 7% since Hamas attacked Israel on Oct. 7, erasing a decline in prices seen following an earlier peak in May. Gold return this year already is higher than of the stock market.

On Friday, after Iran-backed Hezbollah said it targeted multiple sites in Israel with guided missiles, bullion closed in on $2,000 per ounce. How much higher can it climb? The non-interest bearing metal still faces headwinds from tighter US monetary policy, which has pushed up bond yields and made it look less attractive.
Last week, Federal Reserve Chair Jerome Powell kept further rate hikes on the table, even as few swaps traders see further tightening ahead.

“We’re seeing this spike as Israel moves into Gaza, and there’s now a growing risk this might become a broader conflict,” said Bart Melek, managing director and global head of commodity strategy at TD Bank. “We have a situation where we’re now seeing that oil could move higher on broader geopolitical tensions, while the Federal Reserve might not be willing to counteract a supply shock. So that reality, along with gold hedging, likely prompted some short-covering that contributed to today’s spike.”

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Gold’s rally this month leaves the metal increasingly disconnected from one of its traditional trading dynamics as inflation-adjusted Treasury yields stay near the highest in more than a decade. Non-interest-bearing bullion would typically come under massive selling pressure in such a scenario. Yet, the relationship has appeared to unravel over the past year as a combination of central-bank demand and haven buying kept gold prices elevated — and reasonably range-bound — for months, even as real interest rates spiked.

Analysts also flag that the magnitude of the recent spike likely reflects a short squeeze. Hedge funds trading Comex futures had flipped to a net short just prior to the conflict erupting and were forced to rapidly cover their bearish bets following the price jump.

As World Gold Council reports Physically-backed gold ETFs saw another monthly outflow, losing US$3bn, equivalent to a 59t reduction in holdings by the end of September. Total AUM settled at US$198bn, further impacted by a nearly 4% reduction in the gold price, while collective holdings dropped 2% to 3,282t. September pushed Q3 losses in gold ETFs to US$8bn (-139t), with North America accounting for the vast majority (US$6bn). European funds also witnessed heavy outflows, while Asia captured notable inflows, adding 11% to holdings. Y-t-d, global outflows stand at US$11bn.And total holdings have fallen by 189t so far this year. European funds led global outflows and North America has now also seen sizable y-t-d losses.

“The correction of the positioning should now be more or less complete,” said Thu Lan Nguyen, head of commodity research at Commerzbank AG in Frankfurt, also noting that money continues to flow out of gold exchange-traded funds, lured by stronger US bond yields. We only envisage further sustainable gains for gold prices once there are signs that a turnaround in US interest rate policy is on the cards,” she said.

Still, the increasingly chaotic nature of the war may attract new investors to the precious metal as a hedge against macroeconomic risks. Israel’s military is widely expected to launch a ground assault into the Hamas-ruled Gaza Strip, and that could draw in more actors who are hostile to Israel. Bullion’s rally during the Israel-Hamas conflict marks the fourth major spike since the outset of the Covid-19 pandemic. Gains also followed the collapse of Silicon Valley Bank — which triggered fears of a greater financial contagion. Sadly, the current spike in prices once again validates what gold bugs have said for decades: The precious metal is a haven amid a world on the brink.

"Safe-haven demand will continue to drive gold higher after a slight period of consolidation. We believe geopolitical tensions and the uncertainty in the Middle East will continue to drive prices higher," said David Meger, director of metals trading at High Ridge Futures.

However,

"while not a negative signal, it is a red flag and that momentum (in gold) that previously existed has not been restored in early trade this week which could lead to some profit-taking," said Craig Erlam, senior markets analyst at OANDA in a note.
And here are few other comments, that show general sentiment on the market:
"We saw some profit taking earlier in the session and then traders came to buy the dip... $2,000 is still (on the) cards for the near-term or even a new record high if there is an escalation in the Middle East crisis," said Jim Wyckoff, senior analyst at Kitco Metals.
But gold's inability to rally (this week) is a signal that "safe-haven demand has started to wane, as markets learn to live with tensions in the Middle East," Marios Hadjikyriacos, senior investment analyst at forex broker XM, wrote in a note.
"Direction of gold for the foreseeable future will be linked to the direction of interest rates. If the economy weakens, and there’s a view in the market that we are entering a recession, then interest rates will likely decline and the price of gold will likely go up," said Chris Mancini, associate portfolio manager of the Gabelli Gold Fund.
If an escalation of the conflict causes the U.S. to increase war-related spending that raises the deficit, Treasury yields could rise beyond the 16-year highs they already have hit, said Peter Cardillo, chief market economist at Spartan Capital Securities.
"So far, U.S. government bonds have not been performing their usual safe-haven function," UBS Global Wealth Management said in a note on Friday. "However, an escalation of the conflict would likely shift attention away from monetary policy concerns and boost safe-haven demand for Treasuries."

Malaysia government will revisit the idea of using the gold dinar as a reserve currency, the Dewan Rakyat heard today. Prime Minister Datuk Seri Anwar Ibrahim said the matter will be discussed during the upcoming meeting on Islamic economics and finance held in December.

"If we can get between five and six per cent with Islamic countries (using dinar), it would be a positive start as it provides strength and reduces dependency on the US dollar," he said during the Prime Minister's Question Time today.
The use of gold dinar gives the country an alternative, subsequently strengthening the domestic strength of each country's economy. Earlier, Anwar in replying to the initial question said the use of ringgit when trading with several countries in line with "de-dollarisation" has shown some encouraging development.

"Islamic countries are familiar with the dinar. Furthermore, with growth exceeding $1 trillion in the halal industry, other countries are well-informed about the position of the dinar," he said. The use of local currency for trade was well-received particularly by China and Asean countries, namely Indonesia and Thailand.

Well, it is more or less clear with disposition on geopolitical situation. Another question is - will 5% US yields (10-year) represent a new peak? Or will the yield go still higher? Two investment gurus gave us their tuppence yesterday. Hedge fund manager Bill Ackman and retired “bond king” Bill Gross both issued comments implying they are not at all confident that bond yields will go any higher.

My colleague John Authers covered this in his newsletter this morning. But here’s Ackman’s quote is: “We covered our bond short. There is too much risk in the world to remain short bonds at current long-term rates. The economy is slowing faster than recent data suggests.” Gross said something similar — to paraphrase, he reckons a recession is very likely in the US in the fourth quarter (ie this one) and that rates are potentially heading back down.

But, here is a nuance. B. Ackman was shorting bonds for some time already, and it was not 10-year but 30-year where nominal drop was even stronger. From this point of view, it is understandable why B. Ackman has said what he said - he just has closed shorts. But it is absolutely different things - to close shorts and to open longs, right?

In the interests of giving you the alternative view, Gavekal’s Anatole Kaletsky put out a good piece a couple of days ago in which he argued that the 10-year yield probably still has room to go a little higher.

Why? Kaletsky reckons that inflation will be higher on average in the coming years than it was in the preceding decades. That implies that the 2% target rate for short-term interest rates “will now be a floor, not a ceiling.” In the normal course of things, the Federal Funds rate (the key US interest rate) should be above inflation, and bond yields, in turn, should trade higher than the Federal Funds rate.

Slap all that together with some assumptions based on pre-2008 relationships, and you get a return to a trading range of between 3.7% and 5.2%, reckons Kaletsky — though if you skew towards the more pessimistic side, he says you could justify as high as 6.8%. In his view, yields probably haven’t quite yet peaked, but probably will do in the next few months at around the current Fed funds rate — which is 5.25% to 5.5%.

Meantime, BRICS &CO now has more gold reserves than the US. It is interesting to note that the process is not chaotic, it has started accurately after 2008 crisis and constantly goes. It is impossible to say for sure, but it seems that 20 years ago it already was some concerns on Bretton - Woods system stability.
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Analysts start suspect that China sells US dollar assets and replace them with gold. Everything looks exactly like this. In August alone, Chinese investors sold $21.2 billion of US assets - mostly US Treasuries. ️Meanwhile, the Chinese government is steadily buying gold. ️
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However, the sale of dollar assets could largely be caused by an attempt to maintain the June exchange rate. ️On the other hand, by minimizing dependence on the dollar, the country can weaken America's ability to control its foreign policy decisions. ️And if China is trying to withdraw some of its money from the global financial system controlled by the United States and dominated by the dollar, then it does not have many options other than gold.

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Finally, on political situation (a little bit).

In recent reports we've dedicated a lot of space explaining political background. Thus, I give you some links just briefly, that could give us some hints. First is, of course, famous Guterres speech in UN. As you understand, such high persons doesn't speak something emotionally or occasionally. This is well planned speech. Meantime, the US prepares plan of massive citizens evacuation from region, if conflict widens:

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Antony Blinken said recently that the United States does not want a war with Iran, but if Americans are attacked in the Palestinian-Israeli conflict zone, they will respond - US Secretary of State Blinken. "If Iran or its proxies attack the United States, rest assured, we will protect our people, we will protect our security quickly and decisively."

Israel has started ground operation in Gaza, and red lines that were mentioned by Hezbollah and Iran are closer. Since this lines were mentioned publicly, Iran could loose the political face if it does nothing. As we've explained earlier, this conflict is not in the interest of the US, while UK could get much of this, weakening its AUKUS "partner" and putting EU industrial sector in chaos, because all hydrocarbons mostly are delivered by sea. US oil industry can't hold this burden along, it works almost at full capacity. This lets UK to take dominant role in Europe region, becoming local "safe haven".

Meantime big disappoint is growing on muslim "fellowship". There are a lot of demonstration and speeches, but no real action. A well-known Sunni public figure in Lebanon shamed his fellow believers in a widely circulated video on Arab social media.
"1.5 billion Sunni Muslims around the world are waiting for 1 million Shiites in Southern Lebanon to support and liberate 2 million Sunnis in Gaza and Al-Quds.
In the meantime, what have you Sunnis done and what have you prepared for ?"

Yesterday the media found out that Israel exports ~ 40% oil from Azerbaijan, partially via Turkish sea ports. And this has happened right after epic Erdogan speech. In addition, social networks are spreading that the 900-foot tanker Seaviolet was loaded with more than a million barrels of Azerbaijani oil from the Ceyhan terminal in Turkey and is now heading to Israel. In the Arab segment of social networks, they accuse Aliyev and Azerbaijan of betrayal and demand that Erdogan return the tanker to the port.
Previously was reported that Jordan provides its air space and port for US war planes to deliver ammunition to Israel army. But later this news have been refuted.

Conclusion:

Just to close political topic - for now the major question and the driving factor is Iran participation in conflict - directly or indirectly. This will be the next level of escalation. If this will not happen and conflict keep burning in the same region and nobody third intrudes - economy society will loose interest very soon and turn back to ordinary problems of interest rates, budget deficit etc. As HSBC expert said - we've suggested 100-150$ price jump as gold's response to this conflict. Mostly this price move is done.

Now, go back to economical issues. One of our fundamental suggestions is higher inflation. So, the only riddle is - the level of the interest rates in the US. All big whales call to buy US Treasuries, appealing to high rates of return that have not been seen for a long time. Combination of these two factors indirectly suggest lower real yields, which is a supportive gold factor. If even the Fed will raise rate for 1-2 times, hardly this make big impact on situation. Inside the dollar system some really scaring moments appear - yield is equal to EM level, investors loosing faith in debt as safe haven, liquidity is dropping, US has "temporal" government until November.

So, we suggest that even same economical headwinds will stay - hardly gold drops significantly. It is more probable some sideways action if Middle East easing and higher rates come in the same time. But it seems that chances on this scenario are not too high. WGC suspects mostly the same thing. In their new report they tell:

Gold is likely to face some choppiness over the next few weeks as rising real yields, a firmer US dollar and a buoyant economy batter some sectors of investment demand. But longer-term concerns and continued central bank buying should, in our view, ensure that this turbulence doesn’t establish a more material downtrend.
As such, this could present potential gold buying opportunities for some investors. Historically, gold has tended to mean revert in instances when the market (futures positioning) becomes excessively short.

So, for short-term trading, geopolitical factors remain in focus. For now, with jump above 2000, let's say "initial shock" of war is done. And markets will keep an eye on political news. If nothing comes - gold turns to pullback and return back to economical factors. In longer-term, we suggest that gold is still attractive for physical purchase, especially if you've started to do it from ~1650-1700 level.

Technicals
Monthly

So, the intrigue on technical charts are not less than in geopolitics. "Two-bar" grabber, as I call it, once again shows good result. Obviously the nearest destination point is YPR1 and tops around 2060-2080$. Market is not on oversold, and purely technical moments suggest that upward action should be more extended. Even from pivot points framework - take a look, market already dropped from YPR1 back to YPP. Now it returns, confirming bullish sentiment. But, now YPR1 should be passed.

The same we could suggest from classical patterns - we have reverse H&S on top in progress, and 2060-2080 is just a neckline level. Obviously, on monthly chart context is bullish. H&S shape looks good, right arm is smaller, that also hints on bullish activity.
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Weekly

Trend is bullish here, market accurately completed "222" Buy right around 5/8 support area and skyrocketed. Local AB-CD shows 2094 COP target. With stop triggering gold easily could squeeze slightly higher. Meantime price is approaching overbought and we sould try to catch the pullback.

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Daily

Here we have great thrust, but unfortunately haven't got and DiNapoli patterns last week. Trend obviously is bullish. Market has broken all major levels on a way back to the top. So, in fact, it has no barriers except Obought level. As daily as weekly OB stand approx. in the same area of 2030-2040. Here we just watch for pullback for predefined levels:
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Intraday

On 4H chart some signs of MACD divergence appear, but it is not at resistance level, so can't be used solely for short entry. Our butterfly on 1H chart hits first extension. Friday's acceleration hints on continuation to $2035 area, where we have next 1.618 target and minor XOP target. So, keeping weekly COP in mind, pullback hardly will be too strong. Potentially, it might be H&S pattern here, but, reaction on local targets might be shorter if nothing will change in fundamental background. We'll see...
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That's being said - it is nothing to do by far on daily/weekly time frames, have to wait for moderate pullback. While scalp traders could consider minor deeps buying with 1H targets.
 
Greetings everybody,

So, on technical side we could bring some comments only for intraday chart, as on daily one everything stands the same. Still, there are few events that we've shared in Telegram, that are not in mass media. It seems that escalation of Middle East conflict is coming. Here, here and here some news. Besides, Israel just disappeared from major Chinese maps providers, such as Alibaba and Baidu. It might have special meaning to the gold market. It seems that geopolitical factor will support gold for longer time than many people were suggesting.

Besides, today we see a bit tricky action of DXY drop and US yields. Usually they should go in opposite directions. Now it seems that investors are buying safe haven assets, but at the same time put under question the US ability to support own economy health. Whatever it is, direction of both also supportive to the gold.

It means that on 1H chart we change nothing. Pullback from 1.27 butterfly target shows re-testing of previous top, as we've suggested. Thus, we see no reason to change our plan here and still watching for upside continuation and reaching of two nearest targets of XOP and 1.618 butterfly:
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Greetings everybody,

So, market was resisting to pullback for long term, but yesterday the US wages data still has pushed it a bit lower. Still, as on EUR, here we have a contradiction between technical background and fundamental environment. Technically, Gold keeps obvious bullish context, pullback very small, and potentially we could get even the grabber today.
While fundamentally - DXY, yields are raising, market expects more hawkish tones from JPow and high borrowing level from J. Yellen. These factors, potentially supportive to USD and a headwind for Gold...
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Thus, the idea to sit on the hands and wait seems not the worst one. On 4H chart we could keep an eye on H&S pattern, if bearish suggestions will be realised:
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On 1H chart we have potentially another H&S, of a minor scale - but, be careful, because it easily could become a part of 3-Drive "Sell" with 3rd drive around 2020$ area. Keep an eye on daily grabber, and not hurry up with short entry:
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Greetings everybody,

So, Gold follows with our scenario that we've mentioned yesterday - daily grabber has been formed, as we've suggested:
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It means that we turn to 3-Drive "Sell" scenario, instead of H&S with potential upside target around 2018-2024:
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Correspondingly, 1H H&S could failure with high probability. Once we see that price is moving into ~1995 area, breaking the shoulders' harmony, it should be possible to consider long entry, or just use it as confirmation of H&S failure...
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No needs to say that until grabber valid we do not consider any shorts.
 
Greetings everybody,

It seems that everything goes with the plan. Daily grabber is valid, 1H chart shows more bullish signs, although they are not obvious yet. Cross market performance of DXY and UST is also supportive. We do not know what will happen on NFP release, but today also will be a lot of geopolitical events, such as speech of Hezbollah leader. It could change situation on gold drastically...
Meantime, as our grabber is valid - we do not consider any shorts and keep bullish view:
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On 4H chart we see more signs that 3-Drive is starting and it seems that our conclusion was correct:
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On 1H chart minor H&S still stands valid and is not failed yet, but taking all factors together, we suggest that chances on upside action looks better than downside breakout, at least for now. Nearest upside target is 2020-2024$. If Gold start breaking 1995 area, moving above shoulders - that's might be the starting point of H&S failure. But we've said the same yesterday.
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