Gold GOLD PRO WEEKLY, September 21 - 25, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,914
Fundamentals

As all other markets gold was focused on Fed statement. This is the major event of this week. Yesterday, in our FX research we've provided detailed analysis of new Fed strategy and how it could impact on the markets in long-term. Although reaction on Fed statement was mixed on gold market as well, it seems that major points of J. Powell's speech do not hurt major driving factors and should not make negative impact on gold in a long-term perspective.

The Fed signalled on Wednesday it expects the U.S. economic recovery from the coronavirus crisis to accelerate with unemployment falling faster than the central bank expected in June. It also said it would keep rates at near zero levels until inflation is on track to "moderately exceed" its 2% inflation target "for some time. Meanwhile, data showed U.S. consumer spending slowed in August, pointing to a stall in the economic recovery from the effects of the pandemic. U.S. Federal Reserve painted a favourable economic recovery picture but stopped short of offering concrete signals on further stimulus as well.

"Investors across the Asia-Pacific are perhaps not inspired by last night's FOMC (Federal Open Market Committee) meeting, in which the central bank seems to be reluctant to add stimulus in view of improving fundamentals," said Margaret Yang, a strategist with DailyFx, which covers currency, commodity and index trading.
"This led to a stronger U.S. dollar, and a weaker gold price."

“Despite the fact that the Fed was quite dovish, it would seem that for the gold market it wasn’t dovish enough,” said Bart Melek, head of commodity strategies at TD Securities. “There is concern that with no more Quantitative Easing, there might be less momentum for gold.”

At the same time, "Lower-for-longer interest rates, continued quantitative easing by central banks and the U.S. fiscal position potentially debasing the dollar continue to be long-term supportive factors for a higher gold price," said Jeffrey Halley, a senior market analyst at OANDA.

"We're seeing a slightly weaker dollar. Gold prices should do better because the dollar will continue to weaken," said Edward Meir, an analyst at ED&F Man Capital Markets. "The path of least resistance is upwards because of the Fed, all the stimulus coming from global central banks (and) more fiscal stimulus if there's deal in Washington; all the tailwinds are pointing in the direction for higher prices."

"We believe the balance of risks remains to the upside for gold and expect prices to average $2,000 per ounce in Q4-2020 and $2,125 next year," said Standard Chartered analyst Suki Cooper. "Barring short-term corrections, negative real yields and a weaker dollar, alongside the unprecedented stimulus, create a favourable macro environment for gold and are likely to be the key price drivers over the coming months."



Situation with CV19 worsen

The number of newly identified cases of COVID-19 has doubled over the past three months, with first Brazil and the US and then India bearing the brunt of new infections. Cases have been rising in Europe too (including in a number of countries that suffered severe outbreaks in the spring). Much more widespread testing means that identified levels of infection today cannot be compared with identified levels of infection through March and April. Nevertheless, the fact that the reproductive rate appears to have moved back above 1.0 in France, Spain and the UK, among other countries, is cause for some concern.

Israel’s prime minister, Benjamin Netanyahu, announced new measures to counter the spread of coronavirus. Starting on Friday, and lasting initially for three weeks, Israelis will not be allowed to travel more than 500m from their house (except to go to work), or to gather indoors in groups larger than ten. Schools will shut, but supermarkets and pharmacies will remain open. The measures make Israel the first country to impose a second national lockdown. With several European countries seeing an uptick in cases, could France, Spain or the UK be next? For now, leaders elsewhere do not appear to be in any rush to follow Mr Netanyahu’s lead. France’s president, Emmanuel Macron, has come close to ruling out a second confinement, owing to the “considerable” collateral damage from the first one. The British prime minister, Boris Johnson, meanwhile, has said that a second lockdown would be a “nuclear deterrent”.

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Growth signed in Germany, Russia and many other countries as well. British Health Minister Matt Hancock said on Sunday a second national lockdown was one possible step to curb the spread of the coronavirus, but it was not what he wanted to happened.

“If everybody follows the rules then we can avoid further national lockdowns, but we, of course, have to be prepared to take action if that’s what’s necessary,” Hancock told the BBC.“I don’t rule it out, I don’t want to see it.”

The weekly jobless claims report from the U.S. Labor Department, the most timely data on the economy's health, showed nearly 30 million people were on unemployment benefits at the end of August, laying bare the continuing economic and human devastation from the coronavirus crisis.

The Bank of England said it was looking more closely at how it might cut interest rates below zero as Britain's economy faces a triple whammy of rising COVID-19 cases, higher unemployment and a possible new Brexit shock.

Major Gold driving factors

Last week we've taken in depth view on fundamental gold price calculation and come to conclusion that currently there are two major driving factors for gold - real interest rates (i.e. nominal rates excluding inflation rate) and Central Bank's liquidity measures of different kind. First driving factor remains friendly to gold as Fed policy suggests holding rates at zero level while keeping 120Bln. bond monthly purchasing programme holds real interest rates low and force them to fall.

Next week a lot of new debt issues will happen and overall sentiment suggests that investors intend to sweep everything that the could. Investors are gearing up for the year’s record-breaking pace of corporate bond issuance to continue in the coming week, even after the U.S. Federal Reserve rattled nerves at its September meeting with a gloomier-than-expected economic outlook.

The breakneck pace of fresh issuance illustrates how the Fed’s late March pledge to backstop credit markets and its policy of holding interest rates near zero have spurred borrowing by corporations this year. Companies had already issued $1.7 trillion in debt through the end of August, according to SIFMA, compared with $944 billion in the same period last year.

Demand is likely to stay elevated in the next few weeks, investors said, as historically low rates continue to drive a hunt for yield despite a cluster of economic and political concerns. Those include the Fed’s downbeat economic projections as well as worries over waning fiscal support and potential uncertainty around the U.S. presidential election.

“You have low interest rates, you have tight credit spreads: If I’m an issuer, I’m going to issue as much as humanly possible because it’s cheap debt,” said Nick Maroutsos, head of global bonds at Janus Henderson Investors. “That demand is there because people are craving any sort of return.”

“Companies will come to market and buy back higher-priced debt just to lower their interest expense.” As a result, a slowdown in M&A and share buybacks - expected to continue through the end of the year - is less likely to dent issuance. Flows into both high-yield and investment grade funds rose in the last week and are up 45% and 18% respectively since the start of April, according to Lipper. “I don’t see this stopping anytime soon,” said Maroutsos of Janus Henderson.

Despite that this is information on corporate debt but it has tight relation to US national debt via credit spread. As a result, real interest rates continue to dropping:

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The only thing that market has not got is new stimulus from the Fed. QE programme also has not been increased and remains the same. So, overall upside pace could slow down temporally, but this is question of time. Definitely new measures will be provided sometime in the future. October is probable month for this as US political elite will try to make people happy before elections and use different stimulus measures as self-advertisement provided either by Democrats or Republicans.

COT Report

Recent CFTC numbers also show that interest to gold is returning. This week open interest has increased for ~34K contracts and speculators have opened significant amount of new long positions. Hedgers do the same, but in opposite direction as they hedge against the growth of the metal:

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So, let's try to put everything together. First - we have to exclude downside reversal on gold by far, as major driving factors stand positive. Lasting decrease of real interest rates tells that gold should climb higher. With this driving factor everything is OK. Still, lack of new liquidity measures and holding without increasing bond purchasing programme by the Fed could reduce the pace of upward action. Still we treat it as temporal effect as measures will come sooner rather than later probably. Measures are needed to both sides of President's run to get the loyalty of electorate and October seems as the month where these measures could be announced again.
Finally, situation with CV19 keeps investors in tension as more an more headlines appears on this subject we suggest that new wave of lockdowns across the Globe is very likely. Maybe not as strict as previous and not as long as they were, but still, it is possible. Besides, now we're entering in winter time that is risky period for any virus infections. Currently this factor is not totally priced-in, but as soon as few more countries announce the lockdown - gold could start climbing higher as new negative impact on global economy will follow. All these stuff makes us to keep our positive view on Gold market for perspective of 8-12 months or even longer. Still, as our technical view suggests, Gold stands not in new bullish cycle but in last stage of long lasting cycle that has started in 80's. Thus, our targeting now suggests action in 2200-2700$ area.


Risk sources

At the same time, overall situation is not as cloudless as it seems at first glance. Risk factors exist and we also have to keep an eye on them. Options investors are positioning for rising Treasury yields, as improving data and rising hopes for a COVID-19 vaccine fuel bets on U.S. economic growth.

The average one-month put-call ratio on the iShares 20+ Year Treasury Bond ETF stands near its highest level since the beginning of the year, according to data from Trade Alert, reflecting expectations that longer-dated bond prices will fall in coming months. Bond yields move inversely to prices. The bets stem from growing confidence among some investors that the nascent rebound in the U.S. economy will continue, diminishing the allure of longer-dated government bonds while boosting economically sensitive assets such as small-cap stocks, financials and industrials.

A budding U.S. recovery “is giving some asset allocators the idea that it’s time to start nibbling at tremendously undervalued sectors,” said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group, who has recommended TLT puts to clients. “It’s a macro call on a reasonable economic outcome.”

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In its policy statement on Wednesday, the Federal Reserve projected that it would keep rates near zero through at least 2023, as part of its efforts to help the economy recover from the damage caused by the novel coronavirus pandemic.

While that will likely keep yields on the shorter end of the curve anchored near historic lows, longer-dated bonds may be more susceptible to shifting expectations for inflation and economic growth. Longer-dated yields rose after the Fed’s statement, in which it forecast a smaller shrinkage in U.S. GDP for 2020 than it had in June. The yield curve between 2-year and 10-year Treasuries also steepened.

Yields on 30-year Treasuries last stood at 1.4518% on Wednesday, up from a record low of 0.702% in March, a move that has been partially driven by gains in the labor market and other evidence of economic healing as well as hopes that a breakthrough on a COVID-19 vaccine is close.

Some investors also see asymmetric risk in government bonds. The Federal Reserve’s aversion to negative rates has left little upside in bond prices, said Mark Cabana, head of U.S. interest rates strategy at BofA Global Research. Bank of America’s equity derivative strategists have recommended options strategies involving TLT puts. By contrast, factors like a COVID-19 vaccine and additional U.S. fiscal stimulus could push yields higher, he said.

“Everyone is convinced that interest rates will be anchored to zero for eternity,” he said. “But if we get a vaccine and everything’s heating up and it forces the Fed’s hand to raise the Fed funds rate, that’s going to spill over to the 10-year Treasury.”

As you can see, markets start building strategy with early bet on positive result, trying to take best places in suggested rally. Mostly this strategy is based on providing more liquidity measures that is good for gold as well, but also on vaccine release. Thus, potentially it could be as negative as positive for gold. For example, in the case of new lockdown and delay with vaccine - all this new positions will be unwind that lead to new drop of the yields and rally on gold. In a case of positive scenario, gold rally could stumble totally. This makes us to pay attention to this subject and just use the common sense and keep nose to the wind, and don't relax totally relying on positive moments.

Techincals
Monthly


We've dedicated a lot of time to consider long-term view, involving Stag's view and his Elliot Waves analysis that suggests new top on Gold but at the same time suggesting fade out of long-term upside action as Gold might be in 5th upside wave that has limited upside potential. In general everything stands the same as market turns to contracting type of action, showing no progress yet after reaching of monthly COP target.

In particular, Stag's view suggests temporal pullback to 1400-1600$ levels (depending on strength of downside thrust) and then upside action to new top around 2700$+ level. As this is really long-term picture (for years), downside action could be extended in time and developed differently, depending on fundamental background picture.

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Our monthly chart is just a small part of Stag's one and indicates AB-CD pattern started in 90's. COP is hit at monthly Overbought area and now we're waiting for reaction that already stands in progress. Here we do not have any signs that long term tendency is over already. It is interesting that OP target stands around the same 2600-2700$ area.
September brings nothing new to the picture as it is inside month and we need to keep an eye on lower time frames, trying to not miss the signals of upside continuation (or deeper retracement).
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Weekly

Weekly chart provides more questions rather than answers. Price for the 5 weeks stands in the range of downside candle. As longer it stands flat as more bullish situation is becoming. Fear works fast. When market is driven by fear - sell-off becomes furious breaking everything on its way. But here we have different situation. No fear, then what - position accumulation?
Additionally gold has technical floor in a way of oversold level here that stands around 1900 and price stands very close to it. It makes more easy to consider long positions, if coming events will be friendly. We have a kind of "insurance" from deep drop.

Finally, earlier in the month we've mentioned big weekly butterfly that has target slightly above monthly COP - around 2.160 area. What if market is forming upside butterfly here? Later, potentially it could turn to DRPO "Sell", once target will be reached. Now we have a close below 3x3 DMA already.

So, keep watching closely as weekly picture potentially could be very important and provide multiple trading setups. Triangle pattern keeps door open for both scenarios but its nature is bullish and with Oversold level around 1900, bullish scenario could be easier to start.

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Daily

So Friday session has become absolutely useless for us as it stands inside one. Volatility has dropped so significantly that makes oversold level to come closer and coincide with weekly. And now for us doesn't make sense to consider 1825-1836 K-support where potential OP target stands. The only bearish scenario that we could take into consideration is drop to 1880 COP target. This is alternative bearish scenario.

It is interesting that if price drops to COP but stands above "B" point lows - it keeps bullish scenario valid as well, as weekly butterfly will not be hurt in this case.

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Intraday

Changes come so slow that we have the same picture on 4H chart that represents our central bearish scenario:

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H&S pattern on 1H chart, that we've discussed on Friday should help us to clarify situation. If pattern works as it should - gold could reach 1880 area and give us excellent chance to buy. Conversely if it fails - it could mean that gold is going to start rally immediately and no deeper retracement happens.

Now price stands at the top of the right arm, as we've suggested. Downside action has started precisely as we've said, slightly above 5/8 level as we've warned about small ab=cd pattern with op around 1960. Now we consider downside H&S targets. OP at 1918 looks too close while XOP almost coincides with 4H targets. Thus, this could be good intraday trade with solid potential.

Failure of H&S pattern will be early signal that gold could start upside rally immediately.
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Sive Morten

Special Consultant to the FPA
Messages
13,914
Greetings everybody,

So, following the crowd panic yesterday, gold has dropped to predefined level. This is one of the turning points for us, because it could be the place where upside weekly butterfly starts to form. For this setup 1860 daily lows are crucial. Currently situation looks relatively stable as we have few targets, support area and daily/weekly oversold levels that support the price. If nothing outstanding happens - gold should show some bounce at least:
gold_d_22_09_20.png


On 4H chart as OP as butterfly extension mostly is done:
gold_4h_22_09_20.png

As well as XOP target of our H&S pattern. Now, as you can see price already has formed minor "222" Buy pattern, that could put the background for upside action. Thus - everything that we've planned is completed. Now we need just few sessions to see whether our plan will work or not. In a case of failure, we will have to change daily/weekly suggestions as well...
Keep an eye on Powell testimony in Senate, starting today...
gold_1h_22_09_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,914
Greetings everybody,

So, gold mostly stands in the same area of 1880, and now we could do nothing but wait for clarity whether we're correct and market really has bullish potential or we need to change short-term trading plan and be prepared to see 1800-1830 support area.

Thus, market has no choice but to reverse up right here. Otherwise, it tells that it is not bullish. On daily chart price stands at COP target, daily+weekly oversold area and this is enough o push supposedly bullish market higher:
gold_d_23_09_20.png


On 4H chart we have another couple extensions that also have been reached recently and we've mentioned them even two weeks ago:
gold_4h_23_09_20.png


Finally, on 1H chart we could keep an eye on butterfly pattern, that theoretically should put the foundation for reversal. If price returns back to 1920 area - treat it as a good start, as we could get H&S pattern here. Minor pullback and downside continuation will increase chances on downside breakout and erasing of short-term bullish scenario...
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netbusinessman

Private, 1st Class
Messages
40
$XAUUSD moving out of a triangle. Watch the 1765-1820 area

(Copy Paste)
 

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Sive Morten

Special Consultant to the FPA
Messages
13,914
Greetings everybody,

As we've said yesterday, the ultimate point for "light" version of bearish action is low of "B" point. As it is broken, we need to adjust short-term view on gold market. As price has dropped below COP - it seems that only oversold level holds it from stronger direct downside action and price just creeps with OS level down. Now, as "B" lows are broken, reaching of 1800 area looks probable. Maybe not this week, but within next week or so.
Still, by taking a look on stock market, now we do not exclude the scenario, when after minor relief around 1800, market could show even deeper retracement, somewhere to 1600-1650 area. We will discuss this in weekend.
gold_d_24_09_20.png


On 4H chart, price stands at second, 1.618 butterfly extension level. But probably this is temporal pause as we do not see any reaction there yet. Using the same AB-CD here, we consider XOP that agrees with daily support and shows 1811 target level. Thus, maybe downside action will not be as fast as it was this week, but currently market is tending lower:
gold_4h_24_09_20.png


Some phantom chances exist that it might a kind of W&R of daily lows, but now it is unclear what the reasons could be for sharp upside reversal. That's why, it would be better to follow the chart and do not take any long positions until we do not see clear bullish patterns or signs of reversal. Currently nothing exists of this kind.
 

Sive Morten

Special Consultant to the FPA
Messages
13,914
Greetings everybody,

So, as we've prepared extended update on AUD today - I will not bother you with gold long reading. ;) Actually not much to add here, maybe just one thing - market confirms that downside action should continue. Yesterday we've mentioned that some phantom chances exist on W&R and following fast reversal, but now price shows that this is not the case.
gold_d_25_09_20.png


Temporal stop that we see here is mostly due oversold level and intraday target. Reaction totally corresponds - it is slow and choppy. This tells us that this is not the W&R and not the reversal. This is just short-term pause before downside continuation.
gold_4h_25_09_20.png


It means that 1800-1825 area become our primary range where we intend to look for possible bullish signs on next week.
 
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