Gold GOLD PRO WEEKLY, October 31 - 04, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,932
Fundamentals

Yesterday we've made update and some add on to fundamental analysis of the US economy, EU and briefly have taken a look at GDP, explaining why, in fact, it is not 2.6% growth, if you look at components. Today is a gold market. The major question that is interesting to everybody - when gold turns up. But gold is a more complex asset. Partially it indeed depends on Fed policy but partially it depends on politics, at least at the degree that it impacts economy, and gold market in particular.

Yesterday, in our FX market analysis, we've come to conclusion that Fed is too early to pivot by few reasons. Inflation is not dropping by far, GDP is nominally positive, but those who are not too lazy to take a look at components immediately will see that growth is based only on energy export (mostly to EU). Long-term investments, as well as whosale inventories are negative, suggesting stagnating of an economy. Also we suspect that statistics is strongly manipulated, especially in terms of inflation, that is artificially undervalued. This lets statisticians to show higher GDP levels. We suggest that GDP is dropping for 4-6% YoY since IVQ of 2021. But we talk from the point. Unemployment rate is low. Real estate market bubbling is blasting up, but stands right in the beginning of this process. So Fed has time and tools to rise rates few times more.

BofA confirms our suggestion and says too early for Fed pivot as Investors flock to stocks. Investors are pouring large sums into equities but the rally has limited room to run as the Federal Reserve remains steadfast on hiking interest rates, according to Bank of America Corp. strategists.

Still, it’s too early for a Fed policy pivot “absent sudden collapse in inflation & payrolls,” strategists led by Michael Hartnett wrote in the note. The central bank normally starts cutting only once the unemployment rate exceeds 5.5% versus the current rate of 3.5%, they said.

The stock market rally is only a “bear hug,” according to the strategists, who see the S&P 500 extending gains to as much as 4,000 points -- about 5% from the last close -- before pulling back again and hitting a low in the first quarter of next year.

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The bond market is “now pivoting from inflation to recession,” the strategists said. “Recession trade is always long bonds, short stocks.”

Bank of America’s custom bull-and-bear indicator remains at the “maximum bearish” level, often regarded as a contrarian buy signal.

Meantime Commodities remain a key asset class for diversifying portfolio risk despite continued underperformance to their own fundamentals given a strong dollar, rising recession fears and declining liquidity, analysts at Goldman Sachs said. The bank forecast returns of 12.8%, 21.1% and 34.9% on commodities over a three-, six- and 12-month horizon, respectively, on the oil-heavy S&P GSCI Commodity Index. Over a 12-month period, the bank forecast returns of 46.7% from energy, 29% from industrial metals and 23.8% from precious metals.

Goldman expects gold
to potentially rally to $2,250 per ounce in case of a sizable U.S. recession and fall to $1,500 per ounce in an ultra-hawkish Federal Reserve scenario. This in general agrees with our suggestion as well, although we think that gold could rally two times, if Fed switch the back pedal.

Other issues that definitely will make impact on Gold market soon

As we've said yesterday, the US economy coming to some thin points. First is, concerning Households wealth, their savings and consumer loans. In two words, we could say that American households are not doing very well. Usually, in a crisis time, savings are growing. And now is clearly a crisis situation, but savings are declining. This means that the guidelines for adequate economic behavior among citizens are lost, which often means the threshold of panic.

In general, it can be noted that there is a discrepancy between different behaviors in a crisis, and this discrepancy concerns not only households, but also corporations and the state. And if the picture does not change after the elections, it means that the entire US economic system has come to the threshold of a big collapse.

Another important thing - the complete refusal of the ruling elite of Great Britain to discuss the program of the new prime minister. It seems that no one is interested in this question at all. Of course, there is a political explanation for this issue (and not even one), but our review is macroeconomic, and from this position such neglect of the most important topic is absolutely surprising.

We could understand it if economy situation stands OK, but there is nothing even close to it. The picture is developing, which is called by "common" scenario and this means that the "powerful ones" have no idea what is happening and what to do about it.

In the USA, the picture is similar. But at least here you could appeal to the elections, which are only a week away. Since the economic situation in the United States is deteriorating, the J. Biden administration does not want to draw attention to it, and the Republican Party does not want to ease the pressure on the Democratic One by switching to a constructive style. Aggressive swearing is much more effective here.

Couple a weeks ago we said that the US political establishment is changing and J. Biden team stands at the eve of resigning. To keep it simple, in the US two major groups of power. First is based on Liberal way, globalist tendencies and supported by financial superstructure, that is represented by transnational banks, global financial institution, such as IMF, WTO and controlled through dollar domination, Bretton Wood system, Fed and US Treasury. Second power is presented by conservative forces that are focused not on global domination and distribution of Liberal values and global control, but on US domestic production power. This is from "MAGA" slogan comes from. They want to return production and industrial power back in US and relay on real sector of economy. But this is impossible to do until you do not destroy the financial superstructure and dry it out from the state government.

For a long time (few decades), Liberals (aka Globalists, NeoCon etc.) were very strong, building their expansion and control over the Globe, making global large-scale division of labour, concentrating production in Asia, science and technologies in the west and chip raw materials in Middle East and Russia. Now this system is breaking apart. It is too big topic to describe everything, but in two words, Russia and China would like to follow its sovereign interests that actually was not supposed by the Liberal system. The punishment tool in a way of sanctions and military forces either are not working strong enough or not applicable. Now Middle East is also going out of the control.
Liberal system shows weakness across the board. EU leaders somehow still try to work in the same model, either because they do not understand that it is finished, or, which is more probable, that they have no choice as EU doesn't have sovereignity and totally controlled by the US. The signs of crush we also see in the US. As we've mentioned - first is demarche by Saudi Arabia and OPEC+ countries. Even inside the Democratic party we see disagreements.

You probably heard about a group of the 30 Democrats, led by Congressional Progressive Caucus Chair Pramila Jayapal, said in a letter to Biden on Monday (24th of October) that it was in the interest of the US and Ukraine to avert an extended conflict that would increase the risk of a dangerous escalation. Within few hours letter was backpedaled - after the letter drew criticism from other Democrats, Jayapal issued a statement clarifying that the group supported Biden’s strategy. Nevertheless, the fact of letter's existence per se, tells that tectonic shifts stands inside the party.

B. Obama also has called J. Biden to set the edge between "defence" and "escalation" in Ukraine question, hinting that it is too much. All these signs point on weakness on J. Biden, Liberal global strategy and coming Democrats' defeat. We do not know all political tricks, but I wouldn't surprise too much if it will find out some day that J. Biden not occasionally has become a president and he was "chosen" to f..k things up. And this was said by B. Obama in 2020...

Anyway, what's next. Next is drastic turn on foreign US policy. US can't keep Liberal global strategy and build own industrial production with the 31 Trln in debt. So, US will focus on AUKUS, building local dominance and focusing on own country. It means that US puppets, especially in Europe have hard times ahead, including Ukraine by the way. US now have to hold hard struggle with China. THe US already has taken legislative act against Chinese microelectronics sector, restricting on so-called US persons supporting the development, production or use of integrated circuits at some chip plants located in China. Second is - the reaction of foreign investors to the re-election of Xi Jinping is indicative.

On Monday, there were the largest net sales of Chinese shares by non–residents - $ 17.5 billion. Excluding October 24, there were only three times when sales were over 15 billion. Chinese economy is becoming less transparent:
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The collapse of the Hong Kong HK50 index was 8.4%, being at lows since the spring of 2009 The strongest drop since March 12, 2020, but if the index rose by 7.4% on March 13, then there was practically no recovery on October 25.

Xi Jinping has been re-elected for a third term for the first time since Mao Zedong. Mr. Xi has cleared the political space from the opposition a little less than completely, ruthlessly burning out almost any opposition at the highest level. Hu Jintao's demonstrative and forcible extraction from the hall with Xi's tacit approval probably had a political signal. Mr. Hu was in a camp of Liberal group, supporting by banker's power and follower of this way of development.

The sharp reaction of foreign investors is due to the fact that the current vector of China is aimed at reducing the openness, transparency and access of foreign companies to the Chinese market. The histogram above shows the trajectory of China's openness measure in terms of economic data publication. During Xi's rule, access to data is consistently closed, statistics are becoming more and more closed, and trust in data is decreasing.

It is assumed (according to the logic of foreign investors) that the main emphasis will be placed on retaining power to the detriment of economic development. The risk of both political, economical and military confrontation between China and the collective West is growing. The policy of isolationism from the collective West and the building of an autonomous architecture of the world order.

Import brings around 25% of Chinese GDP and Mr. Xi understands that with new US political vector, and bringing production back in US, China will lose big investments and it is hard times ahead.

But the shift in US political backstage elite we should not suggest that Liberals just give power for free. They will fight to protect the empire that they were building for decades. They will fight as inside the US with Republicans and conservative coalition, as outside with China, maybe Russia or BRICS in a whole as new power centers. And it is difficult to suggest how it will impact the US economy. Because when you're in crisis, you can't foresee all thin places and it could break up where you do not suggest.

For example, I do not exclude that trigger might come not from UK, US or EU but from Japan. It stands on a dead way and there is no out for them. On Friday (October 21) and Monday (October 24), the Bank of Japan has made two unsuccessful attempts to intervene in the foreign exchange market. According to preliminary estimates, at least $50 billion were burned.

The first plan completely failed. The breakthrough of the defense of the 145 level led to the growth of the JPY/USD to 150 and above. The market has sensed the weakness of the Bank of Japan and will use the situation to break, including through international speculators. Any weakness of the Central Bank is always used to shake up the situation. It's been two weeks with the Bank of England and the UK debt market, it's happening now in Japan. See - they are going one by one. The panic of Central banks is becoming more pronounced.

Why it is a bad sign? Too weak yen seriously worsens the trade balance when imports grows significantly stronger than exports. And now Japan's trade deficit stands at ATH. Second - weak yen provokes an outflow of capital from Japan, and with a trade deficit, Japan's current account is tending to zero, because investment income of 180-200 billion dollars are definitely not enough.

The deficit requires the attraction of foreign capital or the repatriation of Japanese assets back to Japan (the sale of foreign assets that belong to residents of Japan). This poses a threat to the global financial system, since Japan is the second supplier of capital to world markets after the United States.

Bank of Japan can't succeed because of too many cheap yen in the financial market and the difference in rates on the money and debt markets of Japan and the dollar, euro zone is too large, which naturally leads to the redistribution of capital from Japan to foreign markets.

How to fix the situation? No way. In order to stabilize the foreign exchange market and the financial system of Japan, it is necessary that the differential of interest rates begin to shrink. Either Japan will start raising rates, or the US and the Eurozone will lower them, but Japan will not be able to raise rates, because the debt market, which has a record load among all countries of the world (more than 230 % to GDP), will collapse.

The only way how Japan could survive is trying to make it all the way to the moment when Fed starts easing. It is a question how much reserves they will burn from their 1.3 Trln but they have theoretical chances... If some crush of global economy happens - Japan will be among the first.

Conclusion:

If everything will go under control, including crisis - we should get our basic scenario with some longer pressure on the gold market in near 3 months. And Goldman Sachs could be correct in their judgement of 1500-1600$ area expectations. But we already have a lot of surprises. With coming political turmoil - they are more to come. Processes will accelerate and distraction of global financial structure could accelerate. Since the role of the US Dollar in global finance will change, in a period of these changing we have nothing to replace it, even for some time, and investors could turn to gold to save their capital. Transition period still, could take for few years.

Thus, we're optimistic on gold in long-term and still thinking that the gradual long-term investing now is attractive, despite possible rise in volatility and 100-150$ more drawdown. In short-term we will try to keep the nose to the wind, following major turns.

In general, over the past 10 years, the United States has been using a proven strategy – any liquidity crisis and a shortage of foreign capital inflows are covered by a tougher monetary policy to form a stable differential of interest rates in favor of the dollar. The United States does not just form a positive rate differential in favor of the dollar, but does it with a large gap, effectively depriving global capital of an alternative.

However, in the presence of the first systemic problems, the response pattern changes and the Fed pursues a reverse policy with unlimited pumping of liquidity, as it was in 2009 and 2020. As long as the system of rate differential is not fallen, the Fed creates competitive conditions in favor of the dollar for the inflow of foreign capital, forming a margin of safety. But when they start to fall, the Fed replaces foreign investors with its own buyout program. In these conditions, foreign capital does not matter, because the printing press is working at full capacity.

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There has not been in modern history a more aggressive cycle of tightening. With such a shock, something will definitely break. Previously, there was an unlimited volley of liquidity in the conditions of a deflationary trend, but now there is a highest inflation in 40 years, which limits the Central Banks freedom. Thus, the end is promised to be interesting, but painful...

Technicals
Monthly

October mostly shows indecision action by far, flirting around 1615 lows and stands inside the September. It is logical, probably, as it is pre-election month. Thus, as we've mentioned, gold shows good resistance, standing above 1600 area despite external negative factors. MACD trend still stands bearish by far. Performance shape also looks bearish, as market stands near monthly lows. Gold gets more pressure in nearest 2-3 months as the degree of entropy should increase. But, despite downside action price feels absolutely comfortable around 1600-1650 support area. 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.
gold_m_31_10_22.png


Weekly

As we've said last time, we doubt on bullish nature of upside action and treat it more like pullback in downside tendency. As a result, gold returns back to the lows, while MACD trend remains bearish. This time we've got the bearish grabber here once again, but it is also not confirmed by CME futures charts, so whether it will work or not is an open question. But overall context meantime, remains bearish here:
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Daily

On a weekly chart it seems that situation could change if we get, say, Double Bottom pattern. And on daily chart, initial bounce was fast, as well as downside action was relatively slow. But within recent two weeks gold shows weak performance, which makes us keep valid potential downside butterfly shape here.

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Intraday

Here is everything turning around reverse H&S pattern. Market has failed to stay above predefined support levels, which in turn, totally cancelled our wish to take bullish new bets here. Price has broken through 1st and 2nd K-area, all downside targets right to major 5/8 support area and with clear acceleration of CD leg. As you understand this is absolutely not bullish type of performance.
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And despite it stands still above right arm's bottom and 5/8 support - I wouldn't take a new bet on a long side by far. Downside breakout of 5/8 support means H&S failure (although inability to break the neckline is the failure already), and increases chances on drop below 1615 lows:

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Sive Morten

Special Consultant to the FPA
Messages
16,932
Good morning everybody,

Gold also has moved slightly up due to dovish RBA decision to rise rate only for 25 points. But we should not be inspired too much with this. Australia and the US are very different as in terms of economy structure, fundamental statistics... Besides, we've come to conclusion that Fed is not near the pivot yet..

Technically situation is very similar to EUR but with a bit greater bearish weight. Here we also could get the bullish grabber (although I have big doubts about this):
gold_d_01_11_22.png


But, gold has worse performance on intraday charts compares to EUR. For instance, on 4H chart we have clear bearish reversal swing that erases previous AB-CD pattern and absolutely irrational to H&S pattern here:
gold_4h_01_11_22.png


On 1H chart price has broken through all support levels, which also hardly could be treated as positive sign for the bullish context. Thus, I suppose that we could follow the same tactic as on EUR here. If Gold will form the grabber on daily and some bullish reversal pattern appear here, then it will be something at least to consider short-term long position. But now bearish signs outweighs any desire to buy.

gold_1h_01_11_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,932
Greetings everybody,

So, while on the EUR we're still waiting for daily grabber, on gold market we have it. Yesterday it has been formed and also it is a bullish reversal session. I do not want to look too far ahead, guys, especially at the eve of Fed and NFP. Maybe we will get upside AB-CD to $1685 resistance and butterfly re-shape, but now it is better to focus on shorter term perspective, just on reversal bar swing.
gold_d_02_11_22.png


On 4H chart it is arguable whether we still could use the shape of H&S or not. Upward bounce from 5/8 support was more or less strong. Market shows growing white action, that reminds "three white soldiers" pattern:
gold_4h_02_11_22.png


Now we could focus directly on reversal swing. Upside target stands around 1667$, COP stands slightly above the "B" point. Since bears no have nothing to do, at least until grabber is valid, bulls could consider long entry, if you're ready to pass through Fed meeting volatility and ready to make bet during this meeting.
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Sive Morten

Special Consultant to the FPA
Messages
16,932
Greetings everybody, guys,

Based on recent Fed comments, it seems that our fundamental conclusion was correct - Fed is not at the pivot point yet. This probably sets the trend for nearest 1-2 months, at least. On a daily chart now the road to the lows and 1585-1600 targets is open:
gold_d_03_11_22.png


And 4H chart has taken off the table even theoretical bullish chances as crush of H&S here now is obvious. Although we've talked about it last week, when performance was irrational to the normal bullish market. As a result, here we could get minor, inside to daily one, butterfly with 1600 destination point:
gold_4h_03_11_22.png


Still, gold is an amazing asset. Despite obvious bearish Fed tone - 1H bullish target that we've talked recently has been completed. I do not know whether it was possible to trade it due to extreme speed of action, but, formally OP has been hit.

Now, as gold has "free space" we consider only short positions by far. If you would like to step in - try to catch some minor pullback. 1644 and 1654 levels looks nice, but as gold turns to active bearish stage and extension mode, I suspect that we hardly get so high pullbacks.
gold_1h_03_11_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,932
Morning everybody,

So, gold obviously looks better than EUR and many other markets, showing good resistance to Fed policy pressure. I gently hope that investors start thinking about gold role and consider it value in portfolios. Mostly we could say that market has not chosen the short-term direction by far, as recent action looks choppy with sharp trend changing on intraday charts. So, maybe NFP today brings some clarity:
gold_d_04_11_22.png


On 4H chart butterfly formally is not failed but is taking ugly shape. So only sharp downside reversal later in the session lets us to keep it on the table:
gold_4h_04_11_22.png


The bounce looks rather fast and market now stands at vital bearish area of XOP Agreement around 1650$. It should help us to get the sentiment. Upside breakout suggests more extended action. Taking the short position right now is very tricky but price stands at "culmination point" that provides best risk/reward ratio and smallest potential loss. Although it doesn't guarantee the success.
Long position taking also seems a bit early. So, current moment is mostly for those who would like to bet on NFP results:
gold_1h_04_11_22.png
 
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