Gold GOLD PRO WEEKLY, September 04 - 08, 2023

Sive Morten

Special Consultant to the FPA

So, it is not needed to talk a lot about gold market reaction on recent statistics. Reaction was more or less predictable, when gold jumped on poor JOLT and GDP revision reports and returned right back down after moderate NFP, showing no big drop in employment yet. There are different things that are quite interesting in relation to gold market US economy performance. Many investors are deceived right now by some political statements that special US-China committee is creating to avoid economical confrontation, Chinese government takes some special measures to support market etc. And there are a lot speculations on these topics, that maybe everything is not as bad and situation will turn to better soon. We do not want to upset anybody, but we guess not. Today we will show you very specific numbers and charts that Bloomberg (or whatever) will not show you. And also will take a look at some specific political moments that should help you to see situation better.

No peace with China

First of all, those pacifists who believe that this is just accidental misunderstanding between China and US, I would like to remind you two epic moments. First is, in the beginning of 2023 U. S. has created special committee to compete with China to combat Beijing’s growing international influence. Second is, just two days ago US Commerce Secretary Gina Raimondo has made it clear to her Chinese counterparts during a four-day visit to the country this week that there will be no let up in the economic warfare waged by Washington. It means that all these peaceful speeches have no real foundation. Even brief look at recent geopolitical events obviously shows that the US is preparing to hot confrontation with China. We've discussed and explained this multiple times in our gold reports. By the way, Japan has increased defence spending up to 2% of GDP until 2027 and 26% in this year. Meantime, China keeps selling US debt. China has reduced its holdings in US Treasury bonds to $835 billion, the lowest level since 2010, which is 14-year low, $481 billion down from peak levels. Partially they use it to support national currency and partially this is geopolitical response on external pressure.


Another bulk of rumors stand around temporal problems in Chinese economy. Some people talk that the Chinese government is kind a make strong support, and everything will return back. Recent Chinese stock market performance was showing very weak reaction on all government initiatives of dropping tax, reducing minimal capital requirements to the banks, cutting mortgage rates etc...

We would tell you just one thing - real estate prices in large cities fell by 9% per month (!). 70% of all Chinese assets are decomposed into real estate. More than a quarter of China's GDP is construction. Quite the point where the risks are concentrated this time may be China. Two of China's biggest banks on Wednesday posted sluggish profit growth as the economy struggles to bounce back after the lifting of pandemic restrictions, with one saying local government financing vehicles (LGFV) had defaulted, hitting asset quality.

"Some regional financing platforms that are weak in fiscal backing, have experienced a series of risk events, including defaults," said Liu Jiandong, BOC's chief risk officer in a post-results press conference. There are some regional risks that have begun to emerge," Liu said, adding that asset quality has declined slightly but remains under control.

Both lenders posted a shrinking net interest margin (NIM) - a key gauge of profitability - for the first half of this year, a sign that lenders are under pressure to expand credit support to the struggling economy.Chinese banks' profitability is also set to come under pressure in the near term from an expected cut in existing mortgage rates, which sources said on Tuesday was likely to be implemented soon.

Fathom has been warning for years that things have gone badly wrong in China’s real estate market, a fact which is now becoming widely appreciated as some of China’s biggest property developers default on their debts. The country is in the grip of a house price bubble which has put home ownership out of the reach of many ordinary people, while at the same time suffering from a monumental over-supply of partially completed and unoccupied housing stock which is being held back from the market.

In a speculative and highly overvalued market such as Chinese real estate, the only way for housing demand to rise is through continuous expectations of price appreciations. But market momentum has slowed and now reversed, and in Fathom’s view it is likely to prove very difficult to turn things around.

Fathom estimates that Chinese house prices range between 5 and 18 times the average household disposable income, depending on the province. Going forward, weak sentiment among buyers will continue to weigh on housing demand, and recent policy-rate cuts will not be enough to arrest the downward momentum of prices.
The result has been a dramatic fall in housing starts, which are down by more than 60% since their peak in December 2020. There is enough uncompleted housing stock to accommodate 200 million people, roughly equivalent to the population of Brazil. These houses are not reaching the market, as property developers have delayed releasing properties onto the market in a bid to avoid a collapse in prices.

The structural problems of the housing market have made investors more sceptical about the ability of highly indebted property developers to repay their debts, resulting in a sharp fall in the value of real estate bonds. Cracks in the system have already started to emerge. First Evergrande, and more recently Country Garden, two of the largest property developers in China, have defaulted on their debts and will have to go through a debt restructuring process.

Non-performing loans reached 50% of Chinese GDP in 2022 according to Fathom analysis, well above official estimates of 2.5%. A chain of defaults by property developers could cause this figure to skyrocket, shaking the foundations of China’s financial system. In this scenario, house prices would fall dramatically, sending the economy into outright recession, with GDP falling by almost 10% by 2025 relative to Fathom’s baseline scenario. If we recall 25% youth unemployment, drop of PMI and Manufacturing and US confrontation - we get a dark picture. US just needs to organize capital outflow from China, triggering financial crisis which significantly undermines China's ability to resist to external aggression. This might be the major and most important step to the victory. And high interest rates is one of the key elements of this strategy that supports capital outflow on a background of different stimulating legal acts against investments in China and other restrictions. That's why our opinion is - everything is just starting and don't be deceived by loud headlines in news. Because the root of Chinese problems are not in economy. They are in geopolitics and economy problems are just used by opponents to make maximum damage. That's all.

Back to the US

Situation in the US economy is becoming stretched and tight as money is coming to an end. The Fed and US Treasury keep tightening policy with unprecedented levels. Although we do not hear about QT, but it is under way. Money supply has dropped to unprecedented levels, never seen in history:

Money are flowing to Money market funds. And Cash is becoming insufficient to everybody - US banking deposits shows epic outflow. This leads to higher lending restrictions and drop in banking liquidity - some banks already feel problems with capital solvency ratio.


And here is specific data that we've mentioned in the beginning of the report that shows you clearly what is going on - take a look with the comments:


About significant drop in personal savings ratio we've talked already many times. In fact, now the Americans, in order to save the public debt pyramid, are sucking all the juice out of their households, completely running them in their own bonds. The rate on short government debt is already above 5%, while the issuance of new debt is enormous. It vacuums up liquidity from everywhere: bank deposits, mortgages, the stock market, gold, consumption. Indeed, for some time the Americans were given a positive real rate, at least in short-term securities.

On the charts above, the amount of cash in money market funds. These are wrappers of short American debt securities, which are a direct competitor to bank deposits.
And as you can see, the amount of money there is at record. That is, there is not enough money for everything at once (public debt and other elements of the debt / stock market). At some point, this approach must necessarily lead to a burst of some kind of bubble. The Americans are not yet trying to slow down this trend, although there are a lot of indicators at critical levels.

Many analysts point on the same things - here you could read interesting article on ten reasons why it can't be the soft landing. Pieter Schiff points on the same things - exhausting of the savings, public over-crediting, drop of ability to pay interest payments, returning of student loans payments soon, tightening of lending standards by banks, corporate defaults, etc... All these things we have discussed as well in details and with corresponding charts...

Another interesting moment is GDI - "Gross Domestic Income" indicator. Usually it is harmonized with GDP performance, but when it starts to deviate from it - is a sign of coming crisis. Simply speaking, GDP shows the volume of "production" in the economy, and GDI shows the income of economic agents. Before recessions, GDI almost stops growing, while GDP continues its trajectory. Although it is a question of time lag, but now this tendency is becoming evident:


Everything seems clear, but still few questions are still exist. Why everything except corporates' accounts and short deposits has not yet been transferred to the money market? It appears that 13-15 trillion. dollars are now depreciating at a rate of 3-4% per year, and it is not clear what for. The decision on where to shift them is made by the owners of the deposits, and not by any managers. Yes, and there are no restrictions here. If big demand for short-term US Bills and pumping money into them will lead to lower yields, then the reverse repo with the Fed is a bottomless well. At least trillions, at least quadrillions can be sent there. But no, the reverse repo continues to decline, flowing into treasuries (to the account of the Ministry of Finance) in pursuit of an additional ~0.25% yield, while 17 trillion. dollars in deposits depreciate. Completely counterintuitive and incomprehensible.

As long as everyone believes that the victory over inflation is possible - all is well. But as soon as the rate becomes lower than inflation due to the need to save the economy and everyone understands that inflation will grow, and the rate can no longer grow, then simply a huge amount of funds from money market funds (those who have already understood that money from inflation depreciate) and deposits (of those who do not seem to understand yet) will go somewhere in order to protect themselves from inflation. Where exactly depends on the narratives that will be on the market at that time, but the most obvious answer is in gold and commodities, which we have already mentioned. And this should happen relatively quickly, that is, not for years, in view of the fact that all these assets into which the money is laid out are short-term and relatively liquid.

And inflation will go up, no doubts. We have discussed this in our previous reports.

And another one important point. Previously we've shown you this chart of interest income and household spending. The nuance is that these are all numbers “in general / average”. These are interest expense figures as a percentage of interest income. That is, interest expenses are 25% of interest income. But there is another 75% interest income, right? Yep. It just some people have expenses, and others have income. For most of the population, the savings are minimal and a significant part of the income is spent on servicing debt and for them the ratio of interest expenses and income, for example, is 200-300%, while the other part has almost no debts and has large savings, some of which are decomposed into debt securities. The fact that we see an increase in the average household ratio suggests that the first category is getting worse faster than the second category is getting better. And just the same, this first category in the course of a recession will have to be saved by the state. Helicopter money or tax breaks, it doesn't matter. It is important that this should once again lead to stimulation of demand and growth of inflation.

Taking it all together

We will start from a farer standing facts. First is inner political confrontation in the US is reaching its peak. Democrats are panic - stricken to loose the power. We're not occasionally published the recent Tucker Carlson Interview, when he speaks that CIA could go on any steps, right up to assassinate Republican candidate, which is D. Trump for now. In fact, T. Carlson take huge risk, telling that, telling about war escalation in 2024 and his possible interview with V. Putin. In fact, by discovering that T. Carlson is signing his own death warrant. All these things mean that the fundamental agreement inside of the US political elite is broken - earlier all former Presidents and big politicians had unspoken legal immunity. That was a basic agreement of political elite. They could struggle but keep some limits. With the elections falsification and D. Trump legal prosecution all limits are broken. This is very dangerous precedent. In fact they intend to arrest D. Trump right at election day. What other proves do we need?

Now, we're entering in Presidential race. And right at the eve of October WHO reported a sharp increase in the incidence of COVID-19 in the world:

Between July 24 and August 20, 2023, about 1.5 million new cases of COVID-19 were reported worldwide, up 63% from the previous 28 days, according to the WHO weekly epidemiological summary.

It is hard to believe that they are so stupid to play the same card for the second time ... But some all-American and all-European lockdown for a month or two should be quite enough, to justify another non-resolution of problems and helicopter money for the second time. But it’s even interesting to see what will eventually become a trigger for the crisis. Besides, earlier we've shown that preparation to this stands under way.

Why we're talking about all this stuff? Because Democrats right now have two possible scenarios soft and hard. We're not considering now hard scenarios, but, as T. Carlson said, if they obviously start loosing the power, they could provoke civil war in the US by eliminating D. Trump, start hot war stage against Russia, or, what is more probable China and declare martial law and curfew. This will let them to postpone or even cancel elections. But, we treat it as ultimate scenario.

First, they are going to start with soft measures. First is, they have to dump inflation as strong as possible before election race will start. Everybody knows already, that it can't be any victory over inflation. It could be just disguised for some time by restrictive rate policy.

That's why we do not believe in any Fed pivot any time soon. They will rise rates at least once in November, but could do it twice. Why do they need it? Because later they will start new a kind of lockdown under hazard of new CV epidemy. It will not be as hard and strict as previous one, but quite enough to disperse everybody and lock everybody at homes. This is absolutely needed to reduce social tensions. Then, to get electorate voices - they start new QE.

Obviously it will lead to inflation jump again, but it will happen only in 2025, while in election 2024 year people keep enjoying prosperity. This is how they count to win elections. They will create the vision of resolving of any problems and total economy recovery, by just gifting money to people. That's why now they need to dump inflation as hard as possible and to keep it dampened right until new QE to postpone inflation jump as far as possible.

Indirectly the US Treasury strategy confirms this idea. Why US Treasury mostly borrows in short-term Bills and Notes? it would be cheaper to do it in long-term bonds - with adjustment to inflation it would cost them 1-2% max. While in short-term it is expensive and needs to be refinanced over time, searching new demand for raising bonds supply. Because with the strategy that they have chosen - the short-term debt is preferable. They decide to take full advantage of the IMF recommendations - making a zero, or better, a negative rate and launching high inflation. Then it is best to have as short a debt as possible now, which can be quickly refinanced.

The fact that they have 40% of their debt refinanced in the next 2 years, of course, does not mean that this will happen right in the nearest time. On the contrary, in their place, realizing that soon the rate will be negative, and inflation will go up, I I would have had the maximum possible budget deficit and financed it with short-term securities, which I could soon refinance to a conditional zero and depreciate inflation.

The question is who will buy these papers. And the answer is obvious, really. This is the Fed and, oddly enough, the banks. Banks don't care, even with high inflation they will have client money at zero or minus. In extreme cases, they will borrow from the Fed under the same treasuries. But the public market for government debt, of course, will be almost non-existent.

For the gold market everything becomes quite clear. Whatever scenario will be chosen, if even nobody will do nothing - inflation will grow and in perspective of 8-24 months gold could start new long-term rally. We need to be wait just a bit. And gold actually holds the punch of high interest rates quite well.
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Here, guys we could only repeat the same thing - most expectable event is possible bullish grabber that could happen within 1-2 months. Second - gold extremely well holds the pressure of high interest rates, which is potentially bullish. In previous years gold would totally collapse if rate hits 5.5% level. But not this time. This might be indirect confirmation of our long-term view:



We suggest that a lot of bad surprises are waited to markets in nearest two months. Very soon big despear is coming about hawkish Fed turn. That's why in nearest 1-2 months gold remains under pressure. Supposedly price could reach 1800 area, which is Agreement with major 5/8 Fib support area. Besides, monthly bullish grabber might be formed there.

Meantime, gold stands in reaction on K-support area. Trend remains bearish. By daily and intraday behavior we could suggest that this reaction is coming to an end and within 1-2 weeks we could get bearish grabber on weekly chart. COP target remains untouched by far:



Here Friday's performance looks bearish, as market has failed an attempt to break the K-area, almost forming bearish reversal swing. It means that if even gold will not continue major downside trend - it could show deeper retracement at least. On Mon-Tue it would be better to stay aside from any long positions.



So, bullish dynamic pressure has worked as market has formed spike up, grabbing stops around the top. But this pattern is completed and we need to see what will happen next. Market has not dropped too deep by far, standing around resistance and forming widening triangle. Direction depends on the breakout of this pattern.

On 1H chart price drops precisely to our "hidden" gap Fib support level. It is classical "bullish trap" performance of a failure flag breakout. Price action shows signs of "bearish engulfing" and you also could recognize 1.27 H&S pattern here. It means that if you want to go short - 1946-1947 area might be the one where gold could turn down again. If, of course, patterns appears to be legitimate.

For the bulls we see nothing to do by far. Chances could appear if gold breaks above the 4H K-area again.
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Greetings everybody,

So, it seems our 1H H&S pattern has started well. On daily chart trend remains bullish, so, we treat current action just a pullback by far and response on daily K-resistance area:

Since we have big "222" Sell on 4H chart - we use its minimal target of 1926$ area - 3/8 retracement level (you cold see it on 1H chart). Second moment here - widening consolidation has been broken down, price has taken out its lows, so short-term direction is set to the downside:

Here is on 1H chart H&S target perfectly agrees with 3/8 support of 1926$ area. So, we keep short positions. Also pay attention to the gap on the left around 1922 that stands inside K-support area. Market should try to close it, so, maybe we will get even better target if price will try to close it.

Since we have a wood of support levels - it is difficult to take new short position. For the bulls we have nothing so far either. Let's wait when 1926 (or maybe 1922) will be touched, and then will see what to do next.
Greetings everybody,

So, our minimum target on gold is done and even more - Gold is tending to close the gap around 1921 area. This is most tricky moment for today. In general, US 10-year yields has jumped on the week's open after Labour day up to 4.27%. This supports current downside tendency:

But, the question is - whether yield will reverse later to close the gap, and second is - EUR stands at strong support area, suggesting upside bounce.

This makes me think that we're coming to very tricky area. Take a look that gap is accompanied by strong K-area (all this stuff we've discussed already), thus, I'm not excluding the scenario when after gap will be filled, gold starts upside bounce as well. So, you have to decide what to do with your position - close partially, tight stops, etc. Because, speaking in probabilities term - now chances on the bounce are better than on downside continuation.

As one of the possible scenarios - you could keep an eye on DRPO "Buy" on 4H chart. Not to trade it, but to make a decision on short-position close... But, this is just an option among all the other ones.
Greetings everybody,

So, Gold market was so kind to us this week, as we've got two times better result, compares to our minimal 1926 target. The gap has been closed and even 1H XOP at 1916 has been reached. So, 1H H&S is completed totally and perfectly. Now we suggest that it would be better to be not so greedy and book the result:

But not only targets achievement makes us think so. First is - potential daily bullish grabber might be formed. And this is serious thing. Because its theoretical target will be 1950 top. Definitely some external background will appear that will trigger gold rally.


Second - US 10-yields are closing the gap and show downside action, which is also gold-supportive.

That's why, we strongly recommend to think about result booking. And just to not sit on the hands, we could start watching on 4H chart. Downside thrust looks nice, so we could get, say, B&B "Sell", if pullback starts indeed... But right now we do not see something to do for both sides...
Greetings everybody,

That's it, gold has formed daily bullish grabber. Despite how fragile it looks, especially with strong downside momentum background - it is valid and we do not consider any new shorts by far, especially before the weekend:

Obviously to push gold back to 1950, as it is suggested by the grabber, some good driver is needed, and probably it should be external. Currently, the most correct way is to do nothing. If grabber will fail - this will be good background for new short entry.

On 4H chart we've got something between DRPO and B&B "Sell" ;). Anyway, due downside momentum, now gold shows downside retracement as it is suggested by B&B...

On 4H chart we have "222" Sell". If bullish setup valid gold should stay above 1919 Fib level. So, bulls as usual have the choice between greed and prudence. Either to take position now based on grabber or to wait for the next week for more confirmation.

Today's entry cares small risk, just around 5$ per contract, although also has higher uncertainty. Conservative approach is just to wait for the next week, because if gold indeed will go to 1950 then some visible preparation should start and some clear patterns should appear...