Gold GOLD PRO WEEKLY, September 11 - 15, 2023

Sive Morten

Special Consultant to the FPA
Messages
18,648
Fundamentals

We suggest that this week was very important for Gold market. Not because of some statistics or anything else, but because of investors' behavior. This week we've got three important signals that market are preparing to the storm. Indirectly it confirms our long-term view on gold market. Second very important issue is a huge amount of political news. Whether it is good or not, but gold tightly relates to any political turmoil and now events are accelerating, which definitely will make impact on gold market in 6-12 months.

Market overview

Gold slipped to a one-week low on Tuesday on rising bond yields and a jump in the U.S. dollar as investors sought a hedge against global economic growth concerns. Jitters about global growth, particularly in China and the euro zone, caused the safe-haven dollar to hit multi-month highs against a basket of currencies, making gold more expensive for overseas buyers.
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"Global bond yields are up sharply across the board and it appears that there are concerns that global growth concerns could get even uglier, and that's sending everyone back to the dollar," said Edward Moya, senior market analyst at OANDA. The global growth slowdown story will eventually prove to be a positive for gold and that would only come once the market becomes more skeptical about the US recession risks."

Limiting gold's downside were trader's expectations of a 95% chance that the Federal Reserve will leave interest rates unchanged at its Sept. 19-20 policy meeting, and a roughly 60% chance that rates would remain at current levels for the rest of the year, according to CME Group's FedWatch Tool.

Fed Governor Christopher Waller told CNBC in an interview on Tuesday that the latest round of economic data is giving the central bank space to see if it needs to raise rates again.

"In the meantime, the precious metal is showing signs of exhaustion on the daily charts, with weakness below the 50-day SMA (simple moving average), opening a path back toward $1,920," Lukman Otunuga, a senior research analyst at FXTM, said in a note.

Gold investment has risen over the past year, driven by central bank purchases, with overall implied allocations by non-bank investors at the highest since end-2012, JPMorgan Chase & Co. analysts including Nikolaos Panigirtzoglou said in a note.

  • The implied allocation to gold has been rising since the pandemic and looks rather high by historical standards
    • “One needs to assume a structural increase in central bank demand beyond historical norms (due to fears of sanctions or general diversification away from G7 government bonds) to be bullish on gold”
    • But that’s being challenged at the moment as there’s evidence of a normalization of central bank gold purchases in Q2 2023 and it remains to be seen if this is temporary or not
  • There’s little doubt the pace of central bank buying is now most important factor for gauging the future trajectory of gold prices
    • It’s taken over from ETF flows, which were the most important before the pandemic
Gold isn’t losing its allure, according to a dozen money managers who all told Bloomberg News they expect to maintain or raise their exposure to the precious metal in the coming 12 months. None of the respondents said they would cut their exposure to gold in the immediate 12 months, and five of them said they expected to boost their allocations. More than two thirds of them see prices rising, and five expect a clear all-time high.

We do anticipate there’s pent-up gold demand from investors waiting for the Fed to finish,” said Darwei Kung, head of commodities and portfolio manager at DWS Group. “That’s a positive set-up from our perspective.” He sees gold reaching a record $2,250 an ounce in the time period.

A separate survey also showed expectations for higher gold prices. Gold will trade at $2,021 per ounce 12 months from now, according to the median of 602 responses to Bloomberg’s Markets Live Pulse online survey of global readers conducted from Aug. 14 to 18.

The continued appetite for gold points to lingering worries about geopolitical tensions and macroeconomic uncertainties — for example, simmering tensions between the US and China, war in Ukraine, or what’s next for China’s property crisis. Other positive factors for gold include continued purchases by global central banks and relatively strong retail demand in emerging markets.

“People are looking for things that really do move differently and gold does that,” the World Gold Council’s head of institutional investor relationships for APAC ex‑China, Jaspar Crawley, said at a panel in Sydney on Tuesday. “Diversification has now become a real thing.”

China added to its gold reserves for a 10th straight month, extending a push to bolster its hefty stockpile as it tries to diversify away from the US dollar. Bullion held by the People’s Bank of China rose by 930,000 troy ounces in August, the central bank said on Thursday. That’s equivalent to about 29 tons. Total reserves now sit at 2,165 tons, with around 217 tons added in a run of purchases that began in November.

For the moment, Beijing’s appetite for bullion remains persistent. The country’s appetite for gold has been linked with the broader global moves to reduce reliance on the US dollar.

The retail price of gold in Japan has jumped to an all-time high as the yen extends its historic slide against the US dollar and cash-laden households rush to find a hedge against inflation. Buying of yen-denominated gold at the nation’s largest dealer has driven the price of the yellow metal above the ¥10,000 per gramme level for the first time in recent days. It was trading at ¥10,100 on Tuesday, according to retail prices published by Tanaka Kikinzoku, one of Japan’s largest gold retailers.

The retail gold price in Japan — the main reference price for the metal in the country — tracks global spot prices, which have been pushed up by the coronavirus pandemic, the war in Ukraine and tensions between China and the US. It also reflects a sharp fall this year in the yen, which recently passed ¥146.5 against the dollar — a level that last year triggered verbal market intervention by the Japanese authorities.

Economists said the move in retail gold prices, which extends an 18-month rally at gold stores around Japan, was part of a rapid shift in household attitudes to risk as years of deflation have given way to rising consumer prices. J

Jesper Koll, an economist and adviser to the Japan Catalyst Fund, an investment fund, said the primary driver for the buying by Japanese households was an urgent search for inflation protection after years without strong incentive to move assets out of cash. “The fact that gold is a non-yen asset helps, but the trigger is inflation,” said Koll.

Eiichiro Kato, a general manager for Tanaka Kikinzoku’s Precious Metals Retail Department, said that gold had become particularly attractive to customers concerned about the yen’s fall to multi-decade lows and their assets being denominated in yen.

Purchases of gold by central banks, news flow on the US economy and central bank policies were all driving the decision to buy gold in yen in the hope that the dollar-denominated gold price would remain high and stable, he said. We do not see many factors that would cause the dollar-denominated price to fall significantly, and we think that the yen-denominated price could rise further if the yen continues to weaken,” said Kato.

New York Federal Reserve publishes the research of the probability of a recession based on the inversion of the yield curve. The graph shows that probability is already 66%, which is higher than it was even in 2008.
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The Crude Oil market is becoming hotter day by day and making new inflation spiral inevitable. In fact, there is "No Plan B" - oil executives sound the alarm about problems in oil refining. ️Lack of free refining capacity due to underinvestment and more frequent shutdowns of refineries postponing planned operations to maximize profits were common themes at the APPEC by S&P Global Insights conference in Singapore this week. This makes fuels such as diesel and gasoline vulnerable to sudden fluctuations in the event of unplanned power outages.

️In Europe, there are unplanned plant shutdowns almost every week or two, Frederic Lasser, head of global research and analysis at Gunvor Group Ltd., said in an interview. Many refineries have postponed regular maintenance, he said, which could lead to technical issues that lead to unexpected downtime.

In general it is a big lack of heavy oil from Russia that can't be replaced and it is vital for production of heavy fuel such as Diesel and Heating oil. And now there is another news - Russia plans to reduce diesel exports from its key western ports by a quarter this month amid seasonal refinery maintenance and government efforts to keep more fuel at home to ease growth in domestic prices.
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National Security Advisor Jake Sullivan said that President Biden is “doing everything within his toolkit to be able to get lower prices for consumers at the gas pump.” But that toolkit is about empty. Biden tried to mitigate soaring gasoline prices in 2022 by selling oil from the strategic reserve. But even as oil prices fell, the Biden administration never replenished those reserves.

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The bottom line is oil prices are continuing to rise, taking gasoline prices up with them. This will impact the CPI moving forward. Americans are about to be smacked in the face with an ugly reality. Disinflation — cooling CPI — was transitory. This is one of the reasons why Peter Schiff says the Fed is in a no-win situation.

I’ve been saying to take your eyes off the rearview mirror and look at everything that’s happening in the windshield. Forget about the fact that the CPI has gone down from nine to three. We’re now going back up.”

The Big Political Game

Few recent events need to be commented, because if we just watch on the sequence it is not quite clear what is going on. But recently we've got a big hint - the US officially have acknowledged that their own domestic market (i.e. consumption) can't restart and resurrect industrial sector. Other words speaking - as the US domestic market as EU market are exhausted and do not consume enough to let US production grow. It means that US vitally needs new consumption market, that is large enough to guarantee successful growth to national economy in few decades, at least. As you understand this market exists only in one place on a planet - Middle Asia. India, Pakistan and other countries, where living 50% population of the planet. By the way, recent J. Biden statements on G20 briefly hint on this. It seems they want to make a China 2.0 as it was in 1980's.

This is where all the US efforts are coming now - building new military bases on Philippines, increasing troops on Guam, visits to Japan and S. Korea etc. All these stuff is preparation for coming fight for the region with China that now dominates there. Hindis are also not stupid and preparing and studying Options for Any China-Taiwan War. Don't forget that India has long lasting conflict with China around arguable Tibet territories. We've talked about the US steps in this region many times, and a hot stage of war with China around Taiwan as formal reason is not too far from now.

But we're mostly with some other things. The US are leaving out from EU and Middle East by two reasons. First is they just can't control these regions and fight with China for Middle Asia at the same time. Second - EU and MIddle East markets are not sufficient for the US, besides, they could return back later, if they keep their global dominance and defeat China. Indirectly we see some signs, such as Soros fund is closing its activity, opposite political forces are taking higher value in Eastern Europe, such as in Hungary and now in Slovakia. Surprisingly Pope Francis praised for Russia’s historic empire. All these events are the parts of the same game. Vatican is clashing with UK for the control over EU. But don't think that Hungary, Slovakia and Vatican surprisingly start supporting Russia. They are not. They are just the followers of former "Austro-Hungary" Empire, but they understand that they can't re-build it without Russia and they can't struggle with UK alone. That's what is going on in EU. Even in Germany political background is changing slowly. Now the whole EU gradually is starting understand what is going on.

And now to the most interesting stuff. How UK (and US) could keep control over EU if they take off military occupation? Only by controlling supply of hydrocarbons. They already have blasted Baltic pipelines, Ukraine and Poland easily could blast another ones that are by land, if it will be necessary. But now it is another problem appears - Turkey. What you could do with coming Turkish gas hub and South stream to Bulgaria? They need to make a Coup and explode the Turkey to make there Ukraine 2.0. It is obvious that if the US leaves Iraq - in few years Iranian oil and gas through Syria will flow to EU and control will be lost. It was a big challenge for Erdogan to win elections, now West presses on Turkey with astronomic inflation. As a result, Erdogan comes to Putin, supposedly asking him to do the same that V. Lenin did, saving Ataturk in 1922. But Erdogan has to offer something, but what?

Meantime, UK and west forces actively try to enter this region through minor players, such as Georgia and Armenia. If Armenia joins NATO then Erdogan will be doomed. At the same time Erdogan and Azerbaijan tricks against Armenia makes Iran nervous... and.... right - Erdogan goes to Iran. Taking it all together we could suggest that Russia, Turkey and Iran makes some ally, at least temporary to prevent west entry in the region and block export of hydrocarbons to EU. Turkey stops muddy water around Iran and should get some political protection or military assistance for its services. This makes significantly more difficult any UK efforts to take control over Europe and helps Vatican or, let's call it better as "old European aristocrats" to return control over EU but with assistance and under supervision of Russia.

Simultaneously the political background around Ukraine is changing. Only lazy politician does not speak around negotiations. If even Sweden starts speaking about it, then the conflict is coming to its final. Many Western countries disagree about Ukraine’s territorial integrity and political sovereignty. Due to the coming big political events, Ukrainian conflict should be over within a year approximately.

So, as you could see, we're at the eve of epic events and tectonic shifts. Everybody in the world are preparing, buying gold. And we talk once again - buy physical gold, especially now, when price has decreased slightly under short-term technical factors. Economical situation that we've discussed yesterday also leaves no chances to the dollar in perspective above the year - everything just falling apart in our eyes.

Why all Fed efforts to defeat inflation are doomed

It is not a secret that J. Powell is a big fan of P. Volcker and want to repeat his heroic victory over inflationary spiral of 1980's. It is understandable - apart from Volcker's policy, by and large there were no successful examples of curbing inflation through raising rates. Even in the USA. But your will, all these stories are very similar to the "lives of saints" - an honorable genre, but somewhat outdated, we still live in the 21st century and not in the time of Blessed Augustine.
But who said that definitely P. Volcker did it and his policy? What if we tell you that inflation in the US has been defeated by... China?

Let's look at the plot dispassionately. We have the following key points:

  • December 1979 - the conclusion of a strategic alliance between the United States and China, which eventually crowned the process of globalization of the world economy;
  • 1980-1983 - inflationary crisis in the USA
  • 1984 - liberalization of offshore legislation and the beginning of oil production from the Gulf of Mexico, which was one of the reasons for the fall in oil prices in 1986-1988 and a decrease in inflation;
  • Finally, in September 1985, the Plaza Agreements were signed and the US dollar was devalued.
After the "Plaza Agreements", China was fully fired up (investments went there not only from the USA but also from Japan) and in general, things went quite briskly.

Now let's see what happened to finances during this period.

M2 supply:
December 1979 - $1.479 trillion.
December 1983 - $2.134 trillion. (+44.3% or $655 billion )
December 1985 - $2.504 trillion (+69.3% or $1.078 trillion)

Inflation (CPI):
December 1983 to December 1979 + 31.7%
December 1985 to December 1979 +40.7% (by December 1983 - +7%)

Exchange rate (Dollar index):
December 1979 - 86
December 1983 - 133.84
December 1985 - 123.6 (the Plaza Agreement has already begun to operate)

Fed Rate (major milestones):

1.11. 1979 - 12%
1.06.1981 - 14%
1.09.1982 - 10%
1.10. 1983 - 8,5%
1.06.1985 - 7,5%

So, what do we have:
1. Until December 1983, M2 grew by 44.3%, inflation by 31.7%. That is, more than 3/4 of the increase in the money supply went into inflation, the real money supply increased by 9.6%. The rate was already being lowered, and by the end of 1983 it was lower than in 1978-1979. At that time, China was just accelerating and could not absorb a lot of American cash, giving out marketable products on the mountain. The internal growth of investments also did not begin (they did not solve with the shelf), but the dollar went up - high rates washed out resources from Europe and Japan, well, in a word, everything is as it is now.

2. The revival started already when the rate stopped being shaggy - in 1984 and 1985, the effective Fed rate was even slightly higher than in 1983, but a strategic agreement with China started working (the agrarian reform ended there in 1984 and the industrial boom began) plus cheap oil from Cantarelle and other offshore projects went, which It also spurred Chinese industrial development, destroying the OPEC monopoly.

3. In other words, inflation was defeated mainly due to a strategic agreement with China, and not manipulation of the rate. As soon as China reached serious volumes in the production of industrial products, inflation immediately fell and printed dollars received commodity security and the transfer of "dirty" productions began. It was all after Volcker's policy, but not because of it.

4. Strangely enough, the main reason for the success of globalization in the 1980s was:
4.1. The Sino-Vietnamese War of 1978, during which the PRC received a cradle, finally quarreled with the USSR and came under the wing of the United States.
4.2. The beginning of offshore oil production in 1984-1986, which provided the American and Chinese industries with cheap energy resources (oil prices in the period from 1979 to 1986 then fell three times. The Iran-Iraq War also played a role there, but a little less)

Volker, of course, also helped, but more indirectly. For example, by driving capital from Europe and OPEC to the United States and raising the dollar through high rates. Although here the question is debatable, whether it depended on Volker. And most importantly, now the US is doing exactly the same thing: raising the stakes, pumping the dollar. But they don't have a second China. And therefore, it will be almost impossible to repeat the "miracle of Volker". India, that we've mentioned above is pretended on the role of China 2.0? In current level of India independence in own foreign policy and lack of time (US doesn't have another 5-6 years) this scenario looks hardly possible. Buy gold....
 
Technicals
Monthly

Here picture barely has changed. September price action stands inside of August and makes no impact on the chart. We could just repeat the signs of strength of gold market. 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:

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Weekly

Gold has shown sharp reversal last week, keeping bearish context valid on weekly chart. Trend remains bearish and we get a kind of engulfing pattern here. This gold performance fits to our fundamental view as well - time of weaker dollar is yet to come but not now. In nearest 6-8 months demand for US Dollar should raise, as well as inflation and possibly the Fed rate. All these factors are negative for gold. This makes us think that time for reversal has not come yet. Technically we also have bearish context here.

OP target that we have around 1800$ should be treated as theoretically possible by far. With any new bearish trade we choose another, closer ones that first to our trading scale:
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Daily

Trend has turned bearish on daily chart. Weekly engulfing is formed right around K-resistance area. Second grabber has not been formed - all these moments are bearish. Currently we still have a minor grabber valid and a kind of B&B "Buy" setup. Despite that we're looking down, we need to be sure that these patterns either fail or complete targets before taking short positions:
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Intraday

Friday's action gives small chances to the bulls, H&S shape is damaged. But anyway - everything depends on current lows, as it is vital short-term point. Downside breakout destroys all bullish patterns here and with the weekly engulfing on the back suggests downside continuation. If somehow gold holds above the lows, retracement could be higher, giving better price for short entry later in the week.

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Greetings everybody,

So, it seems we've made correct decision to wait and not take short position right on Monday - gold has shown upside bounce. Now situation is gradually changing. Bearish sentiment is raising - we already have discussed situation on EUR, on 10-year yields market is consolidating near the top, expecting upside breakout. A lot of publications have appeared concerning coming higher CPI level, etc...
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On daily chart, despite that bullish grabber is still valid, market is taking the same shape of bearish flag as on EUR. Monday long upper shadow also hints on bearish nature of the action:
gold_d_12_09_23.png


Nature of market swings on 1H chart also looks bearish. First is we've got "222" Sell pattern as upside OP has been completed. Take a look that CD leg shows solid acceleration, but now market totally erases this action, showing drastic change in sentiment. This is bearish sign:
gold_1h_12_09_23.png


Still, despite all bearish signs any position taking right now is an anticipation of strong CPI numbers. Not everybody is ready to take this risk. That's why, conservative approach suggests position taking after CPI report, or, at least take compromised decision to split position in parts. Based on current performance we do not consider any long positions, because of lack of technical bullish context. Long entry could be justified by expectations of soft CPI only.
 
Greetings everybody,

So, as Gold is more sensitive to CPI level and rumors around it, it has dropped yesterday together with upside action on 10-year yields, confirming our suggestion on drastic change of sentiment, especially on 1H chart.
gold_d_13_09_23.png


Now price hits COP target and Agreement with 1910 Fib level, that technically is background from upside bounce.
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Depending on the strength of bounce it could bring different results. For the bears the perfect one is no bounce or the one that below 1920 resistance. Because move above 1920 will bring price back into daily flag and this will be bullish sign, that could trigger stronger upside action and appearing here, on 1H the reverse H&S pattern:
gold_1h_13_09_23.png


Conversely for the bulls the opposite is welcome - action above 1920. Thus, if you have short position, taken yesterday - think about profit booking, at least partially. As I've explained in the videos today - CPI could be below expectations, because inflation has started to raise not from right the beginning of the August. Although it means nothing in fact, but it definitely will impact the sentiment and people who just watching for the numbers will start buying.
If you do not have any positions - wait for CPI release...
 
Greetings everybody,

Gold market has shown weak reaction on CPI numbers and mostly it stands aside from the hype around ECB and PPI as it has significantly less meaning for the gold than for other markets. Currently we do not have clear patterns, so could make some conclusions based on some indirect signs and overall price behavior. And it looks bearish.

Maybe CPI jump was a bit smaller than market was prepared for, but, this jump was at 5.5% Fed rate, at the end of supposed rate cycle. This is definitely bearish sign for gold market. We expect that CPI will speed up in October and November.

On daily chart Gold shows bearish performance, MACD stands bearish at all time frames except monthly:
gold_d_14_09_23.png


Sharp reversal after huge W&R on 10-year yields doesn't help too much. Gold is breaking down COP agreement support. AB-CD looks very harmonic, so, here we also do not have any reasons to suggest that 1895 OP can't be reached...
gold_4h_14_09_23.png


Finally on 1H chart gold has kept bearish context valid, price has not exceeded vital 1920 area and turns down. Only 3/8 retracement has happened:
gold_1h_14_09_23.png


Thus, despite that we have no clear patterns, but all these moments make us think that context on Gold market is bearish, at least for now. And we do not consider any long positions by far. Speaking about short entry, the only thing that you need to decide - wether to take position before all these data releases, or after that. PPI hardly makes any impact but poor Retail Sales could provide short-term support.
 
Greetings everybody,

Market has excited and starts solid upside bounce, although technically it has no big reasons to happen. Media explains this by positive data from China, yuan growth and Asian stock market, but we do not see any pullback on dollar index, US 10 year yields still stand around the top, so I suspect that reasons are different, but for now it is unclear what they are. If you know something - please share with others here.

On daily chart bounce looks decent and here we have to watch whether price goes back into flag. If this will happen, this will be bad for bearish scenario, as potentially we could get upside AB-CD back to 1960 area:
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If price remains outside, downside action has chances to continue. On 4H chart price is coming to strong 1920 K-resistance area, so definitely this is not the point for new longs:
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And if you consider long intraday trades, I would consider a kind of H&S pattern, or lets call it just the pullback to 1907-1910 area.
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For short positions this is not good background, especially because it is unclear reasons of the rally by far. Only if you trade on very small time frames, 5-min, maybe it is possible to find some bearish reversal pattern around 1920 K-resistance for short-term downside pullback. On 4H chart we have to see first, whether price remains outside of the flag to make a decision on another short entry.

If daily bearish context will be broken, it might become the starting point of Gold rally that we were talking in weekly reports, our long term view is bullish. We just need a bit more confirming signs to be sure...
 
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