Gold GOLD PRO WEEKLY, September 05 - 12, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,705
Fundamentals
Gold stands aimed on previous lows, showing stable downside action. The major driving factor right now is crystal clear - Fed is focused purely on inflation level, ignoring other factors while they are more or less stable. Thus, although we've got a first bell of coming big problems with rising unemployment to 3.7%, it is still relatively low and doesn't prevent hawkish Fed steps.
We also suggest that Fed for some time should not pay attention to other important statistics, such as consumption, sentiment, business activity, unemployment etc. These data doesn't show yet the disaster, so It gives Fed time to lead rates up to 3.75-4.25% area.

Market overview

Federal Reserve officials in recent days quashed hopes of a dovish pivot, a view that had helped fuel bets that this year’s bear market is over. Since then, investors have been sifting through sometimes-conflicting economic data for further policy clues. While job openings data on Tuesday underscored tightness in the labor market, revamped ADP data on Wednesday showed US companies increased headcount at a relatively sluggish pace in August. All eyes will be on the job report on Friday for further hints about the central bank’s path.

“Now that the Jackson Hole dust is settling, markets have gained clarity on today’s investment question,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management. “Yesterday’s question was ‘will inflation level down’ when today’s is ‘how big will the needed slowdown be.’ For now, markets are pricing a marked slowdown, not a fully-fledged recession.”

The Fed has ditched its soft-landing goal and is instead aiming for a “growth recession,” which would mean a protracted period of meager growth and rising unemployment.

Euro-area inflation accelerated to another all-time high, strengthening the case for the European Central Bank to consider a jumbo interest-rate hike when it meets next week. ECB Governing Council member Joachim Nagel urged a “strong” reaction. Money markets have now priced in 125 basis points of tightening from the ECB by October, which implies a half-point hike and a three-quarter point increase spread over its next two policy decisions.

Investors are also contending with mounting friction between Beijing and Taipei after Taiwanese soldiers fired shots to ward off civilian drones and evaluating the latest Chinese data, which indicated factory activity shrank for a second month. Power shortages, a property sector crisis and Covid outbreaks all took a toll.

The European Central Bank appears set to deliver a second, (big) interest-rate hike on Thursday - front-loading policy tightening before economic conditions deteriorate further. With record-high inflation fast approaching double digits a key question is whether the ECB will go for a 50-basis-point hike, as it did in July, or opt for a supersized 75-bps move. Some (such as Goldman Sachs) expect the latter after the latest inflation data, while some ECB officials believe a 75-bps move should be at least discussed.

Board member Isabel Schnabel warns that central banks risk losing public trust and must act forcefully to curb inflation, even if that drags their economies into a recession.
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Gold headed for a fifth straight monthly drop, the longest losing run in four years, as speeches by Federal Reserve officials indicate the central bank will keep monetary policy tight for some time. The metal briefly pared losses Wednesday as the greenback fell back after ADP Research Institute showed US companies had the smallest increase in private payrolls since the start of 2021.

Other officials struck a similarly hawkish tone. New York Fed chief John Williams said Tuesday interest rates probably need to advance above 3.5% at some point to contain price pressures. Separately, Richmond Fed President Thomas Barkin said the central bank will “do what it takes” to curb inflation.Meanwhile, Atlanta counterpart Raphael Bostic called the duty to curb inflation “unshakable,” but also said he’d be open to dialing back the pace of increases if prices cooled.

Cleveland Fed President Loretta Mester said Wednesday the US central bank needs to raise its benchmark rate above 4% by early 2023 and leave it there through year-end. That’s the latest in a series of hawkish messages coming from US policy makers.

Officials have been vague on how big their policy move will be at the rate decision meeting in September. There are fresh signs of robustness in the economy, with job openings and a consumer confidence gauge both topping forecasts, pointing to strength in household and labor demand that risks sustaining inflationary pressures and raises the prospects for a third straight 75 basis point interest rate hike.

The ADP Research Institute’s national employment report showed 132,000 jobs added in August, significantly lower than economists’ median forecast. The data will be kept in mind ahead of the government’s nonfarm payrolls report on Friday.

Bullion fell for a fifth day on Thursday, deepening its slump as a gauge of the dollar’s strength rallied to a record high and Treasury yields climbed following encouraging data on US manufacturing growth and jobless claims. The reports add support for larger interest-rate hikes by the US Federal Reserve, dampening the appeal for non-interest bearing gold. The Bloomberg Dollar Spot Index climbed as much as 0.9%.

The weakness in gold may continue unless there is a substantial correction in the dollar and bond yields, said Ravindra Rao, head of commodity research at Kotak Securities Ltd. Also weighing on price are concerns about health of Chinese economy, which may hamper consumer demand,” he said.

Gold rose after a US jobs report showed more Americans returning to the labor market, a welcome sign for the Federal Reserve as it tries to cool inflation.

US employers added a healthy number of jobs in August and a steady stream of people entering the workforce lifted the unemployment rate. Nonfarm payrolls rose 315,000 last month, a Labor Department report showed Friday, while the jobless rate unexpectedly rose to a six-month high, the first increase since January, as the participation rate climbed. The dollar edged lower following the data release, boosting gold.

The increase in nonfarm payrolls was broadly in line with expectations “and therefore doesn’t add much pressure on the US Federal Reserve to raise rates faster than the market already expected,” Capital Economics commodities economist Edward Gardner said in a message. “The gold price rose slightly on the news as the data release reduces the risk of faster-than-expected rate hikes going forward, which would raise the opportunity cost of holding gold.”

After being trapped in negative territory during the lockdown days, inflation-adjusted Treasury yields are again breaking out, with five- and 10-year measures back near multiyear highs. In another sign that the free-money era is no more, short-dated real rates suddenly jumped this week to the highest since March 2020 after finally turning positive in early August.

All this is bad for news for money managers across the board, with rate-sensitive allocations harder to justify from tech stocks to long-maturity corporate bonds. Rising real yields -- seen as the true cost of money for borrowers -- are rippling through the economy as mortgage rates soar while Corporate America adjusts to the higher cost of doing business.

It could get a whole lot worse. The thinking among Wall Street traders is that a hawkish-at-all-costs Federal Reserve is increasingly determined to engineer tighter financial conditions -- via lower stock prices and higher bond yields still -- in order to combat raging inflation.

That suggests investors in just about every asset class risk fresh market chaos, as Goldman Sachs Group Inc. projects 10-year real yields are moving closer to levels that would materially restrict economic activity.

“The next few months for equities will be bumpy and there is a risk of further drawdowns if this dynamic of rising real yields with decelerating growth continues,” said Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs.
10- and five-year real rates in the US have advanced some 30 and 38 basis points while technology-heavy Nasdaq 100 Index has plunged 8%.

“It is likely that any push to new multiyear highs in real yields would likely correspond with a new leg down in stocks,” said Charlie McElligott, a cross-asset strategist at Nomura Holdings Inc.
Rising inflation-adjusted yields are putting pressure on the likes of tech shares because the latter’s long-term earnings prospects now have to be discounted at higher rates. At the same time assets bereft of income streams like gold and cryptocurrencies look less appealing given the greater opportunity costs to hold them compared to a Treasury bond that pays out a real return.
“There’s clear competition from higher real bond yields for any type of store value, especially more speculative, long duration ones,” said Mueller-Glissmann.

These days, the thinking goes that monetary officials are effectively seeking to anchor real rates higher to help moderate the excesses of the inflation-addled business cycle. Yet policy makers must tread carefully. The yield on 10-year inflation-protected securities is now less than 30 basis points away from the 1% tipping point that would start seriously hurting economic growth, according to Goldman Sachs analysis. And while the latest jobs report may give ammo to those who reckon the Fed can secure a soft landing, skeptics clearly outnumber optimists right now.

Investors who might be looking for the world’s biggest bond market to rally back soon from its worst losses in decades appear doomed to disappointment. While Treasury yields slipped as the figures showed a slight easing of wage pressures and an uptick in the jobless rate, the overall picture reinforced speculation the Fed is poised to keep raising interest rates -- and hold them there -- until the inflation surge recedes.

Swaps traders are pricing in a slightly better-than-even chance that the central bank will continue lifting its benchmark rate by three-quarters of a percentage point on Sept. 21 and tighten policy until it hits about 3.8%. That suggests more downside potential for bond prices because the 10-year Treasury yield has topped out at or above the Fed’s peak rate during previous monetary-policy tightening cycles. That yield is at about 3.19% now.

Inflation and Fed hawkishness have “bitten the markets,” said Kerrie Debbs, a certified financial planner at Main Street Financial Solutions. “And inflation is not going away in a couple of months. This reality bites.”

Rick Rieder, the chief investment officer of global fixed income at BlackRock Inc., the world’s biggest asset manager, is among those who think long-term yields may rise further. He said in an interview on Bloomberg TV Friday that he expects a 75-basis-point hike in the Fed’s policy rate this month, which would be the third straight move of that size.

The Friday labor report showing a slowdown in payroll growth allowed markets a “sigh of relief,” according to Rieder. He said his firm has been buying some short-term fixed-income securities to seize on the large run up in yields, but he thinks those on longer-maturity bonds have further room to increase.

“I can see rates move higher in the long end,” he said. “I think we are in a range. I think we are in the upper end of the range. But I think it’s pretty hard to say we’ve seen the highs currently.”

Greg Wilensky, head of US fixed income at Janus Henderson, said I’m in the 4% to 4.25% camp on the terminal rate,” Wilensky said. “People are realizing that the Fed won’t pause on softer economic data unless inflation weakens dramatically.”

The upcoming holiday-shortened week has some economic reports set to be released, including surveys of purchasing managers and weekly figures on unemployment benefits. US markets will be close Monday for the Labor Day holiday, and the most significant indicator before the Fed meeting will be the consumer-price index release on Sept. 13.

Investors gauging the Federal Reserve’s interest rate path for the months ahead get another morsel of economic data on Tuesday, when the Institute for Supply Management (ISM) reports the results of its monthly services sector survey. Yet upcoming economic indicators starting with the ISM index could shape views of the rate trajectory, with signs of continued strength bolstering the case for the Fed to continue going full throttle.

The U.S. services industry unexpectedly picked up in July, adding to a panoply of data showing the economy was humming along despite several big rate hikes. Analysts polled by Reuters expect a reading of 54.8 for August.
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Conclusion

Thus, as you could see recent week hasn't brought any surprises. Market just has become more focused on inflation, as Fed does the same. Our magic chart shows that market expectations have increased for another 0.2% rate change till the end of the year:
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Thus, market participants are pricing more and more rate change, leading to 2x0.75% change. Now it seems guaranteed 0.75% and 0.5%. As this was correctly mentioned, the real interest rates are rising as well. Indeed, nominal 30 year TIPS rate stands positive - 1.07%, challenging the gold performance:
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The real interest rates is the all time major gold driver as it shows yield return of alternative investments, gold rivals. Once it turns positive it starts generating return higher than gold could provide. But, at the same time we should keep healthy scepticism on the real numbers. TIPS yield is calculated based on forward inflation expectations and 30-year nominal yield. Forward inflation rate is not reliable value as it is easily manipulated by futures market. CPI/PPI numbers also are not as true as it should be, but they provide more or less acceptable values.
Just recall, what we've said about GDP data. Since GDP consists of goods and services for 30/70 and we have PPI around 37% with CPI around 9% - recent GDP inflation can't stay for just 9.5%, it shoud be around 11-12% at least.
This tells us that real interest rates are overvalued. In reality, current 30 year interest rate should be somewhere around "-3-3.2%". Because nominal rate is 3.35%. And if we suggest long-term structural inflation around 6.5%. If you use nominal CPI inflation instead, it will be "-6-6.5%".

Thus, all these talks that gold should get the problems soon as real interests are turning positive - just an attempt to create a sensation where it doesn't exist. Fed has to rise rates up to 5-6% at least to set real interest rates equal to the Gold return, i.e. zero. We have shown you many times in last few months that they just can't do this. 6% interest rates means total collapse of US economy, population poverty, absolute stagnation in consumption, real estate, massive bankruptcies as of companies as population, big loss for banking system etc.

It means that bond market never equals in return with the gold in foreseeable future. But, as margin is gradually contracting because Fed rate change - this makes pressure on gold. From that standpoint everything goes as we've suggested. But it should last not too long. If no political turmoil starts in the US after November, at the levels of 4-4.5% by Fed fund rates, the US economy engine slows dramatically. Fed reserves of 2.5 Trln are sufficient to support markets, lack of QT and new bond issues by the US Treasury within 9, maximum 12 months. This is if everything will be quiet after November.

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Unfortunately we see rising of big political risks of social confrontation while we're coming closer to elections. Democrats are now demonizing, while D. Trump and Republicans are introduced as "good guys" that should save the country from catastrophe. The this sentiment is spinning up. The Economist predicts possible social split and giving the hint on possible civil war or at least hot conflict stage on a background of political confrontation.
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The major concern stands around coming November elections results. The loosing of Congress and Senate together will be the catastrophe for Democrats, making no sense to keep J. Biden presidency as no new initiative can't be approved without Republicans. But not this results Democrats are scared most of all. They are scared of possible massive legal claims that no doubts, D. Trump will initiate while they gradually start digging the participation of powerful Democrats in falsifications of 2020. Donald Trump major target is to defeat the "Deep State" to free America and Made it GA. And every democrat who has taken the part in past dirty deeds are scared of it. So this becomes personal for many of them. This is even not the subject of losing political power. This becomes a question of personal surviving. And they will do everything just to escape jail.

The France embassy in the US posts mystical message In twitter with just single word - "Revolution"
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While The Hill publicly writes that House conservatives prep plans to impeach Biden:

Republicans hoping to seize control of the House in November are already setting their sights on what is, for many of them, a top priority next year: impeaching President Biden. A number of rank-and-file conservatives have already introduced impeachment articles in the current Congress against the president. They accuse Biden of committing “high crimes” in his approach to a range of issues touching on border enforcement, the coronavirus pandemic and the withdrawal of U.S. troops from Afghanistan.

Recent polls clearly show that Democrats can't win November. But they have to, otherwise, this is the end of everything for them. Such a combination significantly increases the risk of falsifications on November elections. The echo of 2020 elections and big scandals around it are still in the air and not silenced totally yet. The new, more evident elections' tricks could trigger the social explosion, especially when majority of people are already near the edge with fast deterioration of wealth level. MAGA instead showing big rise of popularity especially in loyal to Republican states.

Taking it all together we see 30-40% probability that Fed just will not have the chance to finalize its tightening policy after November, at least in the way that they are following now. Political situation drastically will change after elections. While the banking system and privet bankers are the fortress of power for the Democrats and Fed have to consider their interest when makes a decisions, situation could change, so Fed policy, its strategy probably will change as well. But it is impossible to say now what particular changes will be made.

Whatever scenario will come, both are not bad for gold. The calm scenario with Democrats victory on November elections are longer way for gold, while Republicans victory, despite with or without social boom will lead make gold to turn north earlier. Until the year end Fed activity will keep gold prices under pressure. Because gradually rising interest rates makes real ones less negative, decreasing the yield difference between gold and its rivals. That explains why it is difficult to count on major reversal until November. Although we do not expect gold drop below $1650 as well and treat 1660-1680$ levels attractive for the long term investments either on futures market or on physical bullions, which is more reliable. Mostly because everybody already knows and ready for possible rate change up to 4.25-4.5%. It makes negative impact on gold prices limited either.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705

Technicals

Monthly

Here once again we do not have any big changes. We expect re-testing of 1670 lows as we're busy with weekly grabber and it has the target at previous lows.

So under impact of fundamental factors, mentioned above - it comes back to major 1660-1680 support area. The fact that YPS1 has held price also has important meaning. It lets us to treat downside action as retracement.

Gold is completed AB-CD pattern that we've talked about already. In general 1660-1680 area includes all kind of supports that we ever could imagine. We can't call it as "222" Buy by far, just because "B" point is lower than "D" right now. Since market has some momentum, it could flirt around this area for awhile, until crisis signs in the US economy will become more evident, on a job market in particular.

For strategic investments, it seems that current level could be considered for gold buying, at least at some fraction of total position. With some circumstance, gold could start reversal right from here. In fact, we have huge "222" Buy here, with absolutely superb support area of 1660-1680$.

As we've discussed on Friday, existence of 1672$ monthly OP gives a clear hint how deep market could go below the 1680 daily/weekly lows...
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Weekly

On weekly time frame we do not have anything new. While grabber is still valid and price has not renew the lows - we're going with the same scenario, believing that this should happen sooner, rather than later.
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Daily

Daily context remains bearish, and Friday's pullback on a background of good NFP but higher unemployment rate we treat as a trap. It is difficult to believe that gold leaves untouched stops under the lows and nearest COP target. As we've mentioned - any pullback we consider as "rally to sell" until major target is not hit:
gold_d_05_09_22.png


Intraday

Here we have local OP target, which agrees with the daily one around the same 1685 area, and... yes, nicely looking and ready-to-use B&B "Sell". Right around the K-resistance area. Obviously B&B should lead not to just 5/8 downside retracement but to continuation down to 1685 major target.
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Georget@

Private, 1st Class
Messages
33
I don't think there can be a better analysis than this. I remember some 12 years ago, Sive was making mostly technical analysis. It was very accurate but now, this fundamental one ... man it is superb!
I am all in with bullions since July. I bought it against Euro, so I would prefer that 1700 level holds, despite the SG on Weekly. Next supports are 1600 and 1530.
 

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Sive Morten

Special Consultant to the FPA
Messages
16,705
I don't think there can be a better analysis than this. I remember some 12 years ago, Sive was making mostly technical analysis. It was very accurate but now, this fundamental one ... man it is superb!
I am all in with bullions since July. I bought it against Euro, so I would prefer that 1700 level holds, despite the SG on Weekly. Next supports are 1600 and 1530.
I'm really pleased that my work here, at FPA is useful to our forumers.

Georgeta it is interesting weekly chart, that shows the same grabber as XAU/USD, but on XAU/EUR market stands a bit farer from the lows. So EUR should drop more? Gold confirms 0.98 target indirectly...
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Greetings everybody,

Gold market was closed yesterday due to the US holiday, so we have minimum changes, and most of them on CFD market, not on the spot gold. The core stands the same - as we've said in weekly report, current bounce we consider as a "rally to sell", aiming on 1685 and 1672$ major downside targets.

Now, on daily chart, it seems that the pullback mostly equals to the previous one:
gold_d_06_09_22.png


On 4H chart we haven't got supposed B&B "Sell", at least on CFD charts, but price still stands around the same K- resistance area.
gold_4h_06_09_22.png


Since we've made choice on direction, the only thing that we need is clear bearish reversal pattern on 1H chart. Now we suggest that two of them are possible - reverse H&S or upside AB-CD that gives us "222" Sell at higher resistance level. Since morning upside action looks a bit thrusty, it would be better to not anticipate downside reversal and take action "by fact". But this is just suggestion, not the obligation...
gold_1h_06_09_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Greetings everybody,

While daily picture mostly stands the same, we're watching for the same downside targets of 1685 and hopefully 1672$, but on intraday chart the price shape now is a bit different:
gold_d_07_09_22.png


Market has shown stronger downside action yesterday but keeps daily lows intact, which significantly increases chances for butterfly pattern (or 3-Drive, although the latter appears not as often as butterflies):

gold_4h_07_09_22.png


Butterfly pattern, in turn, suggest moderate pullback. That's why we consider 1705 K-area first, and potentially 1713$ as well. Let's be slow on short position taking and try to get better entry price...
gold_1h_07_09_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Good morning,

So, the bounce that we've discussed yesterday has happened, although a bit more stronger than we've suggested. Currenty it is interesting choice exist for decision making on short entry. On daily chart, potentially we could get the bearish grabber today, which is very welcome for our bearish context. But the problem that it is yet to be formed:
gold_d_08_09_22.png


On 4H chart butterfly is still valid and here is why I call current possession perfect for short entry. We have very small potential risk, as our stop will be just above the butterfly's top.
gold_4h_08_09_22.png


But risks exists either. Recent upward action was relatively strong, on 1H chart potentially we could get the Double Bottom, if something will go wrong with bearish scenario. And daily grabber is not formed yet, and potentially could be not formed at all:
gold_1h_08_09_22.png


That's the decision that you need to make. Personally, I suggest it is worthy to try, at least with 50% of ordinary position, just because of small risk and huge potential reward... But - this is just my opinion, think, decide...
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Good morning,

Gold performance now is driven by the same factors as other markets - fears of recession, leading to drop of energy prices and as a result, decreasing of inflationary pressure - support stocks and gold. We still suggest that this is temporal effect. The decreasing of energy prices is natural, we talked about it few weeks ago in weekly report - outbreak of energy inflation should converge to average level of structural inflation around 6-7%. This should happen not because everything becomes better, but because companies and households can't pay for it. This leads to natural drop of demand, which in turn leads to price decreasing and reducing of inflation.

It means that due to current euphoria gold also could climb slightly higher. Despite that we've got the grabber yesterday, as we've suggested, we do not intend to rely on it and intend to wait with taking new short positions by far:
gold_d_09_09_22.png


Despite that gold has shown nice downside reaction on resistance that we've discussed yesterday, later price has reversed and now it is challenging 5/8 resistance area. OP is completed, and next target stands around 1750 area:
gold_4h_09_09_22.png


On 1H chart price performance stands in wide challenge with gold attempt to accelerate out of it. This makes possible to consider intraday long position taking, but absolutely not friendly for the shorts.
gold_1h_09_09_22.png


That's being said our short term view is - no shorts by far. Scalp longs are possible, as soon as market make a deep to buy or to form some pattern.
 
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