Gold GOLD PRO WEEKLY, September 26 - 30, 2022

Sive Morten

Special Consultant to the FPA
Messages
18,547
Fundamentals

The specific of current moment, guys is a loosing of value by assets that do not deserve this. For example, I would say that AUD, CHF and maybe some other currencies have to cost higher than the US Dollar, because they have incomparable better fundamentals. Just take a look at Australia - strong positive trading balance due big part of commodities in trading, no budget deficit, low national debt, relatively high domestic interest rate, but... AUD is falling. The same we could say about CHF. (Only Russian Ruble is rising now against USD :p ) The Gold also couldn't avoid this, and I think that you could find more examples of this "irrational" behavior. These assets are falling not because investors totally disappointed with their quality and value selling them, but because everybody need US Dollars right now. These good assets now are victims of the structure specific of global economy where US Dollar takes the dominant role, serving around 65%. And any disbalances in the US economy that US authorities (Fed, Treasury) are trying to resolve directly hurt all other markets.

Now you could see impact of structural inflation component. It is not just "raising rates to control inflation", but it is increasing of global expenses. Rising of the rates make money more expensive, it increases financial expenses in balance sheet of all companies, banks etc., who uses loans, credit products, simple debt. etc. Expenses directly increase "Cost of goods/services Sold" and sooner rather than later it goes into the prices of final product. Here is structural component of inflation. That's why, when Fed just has started rate hiking cycle, we've said that it will not help to hold inflation. 17 months has passed since then, but inflation stands above 8% and even has risen in August, despite all Fed efforts and unprecedented pace of rate hiking. And this process is not over yet.

We're living in a century of low rates, when all companies and households are deeply indebted. 70% of all US debt has floating rate, including mortgages with tight relation to 10-year yield. When Fed pushes rate higher - everybody needs more dollars to serve their debts as interest paid due is increasing. So, investors are not doubt Gold, AUD, CHF or whatever - they just need more US Dollars right now. So, we simply have to wait this period out. This is just technical process, because global financial system is just has this type of structure. That's all. At the same time - the resulting lows that might be formed on the assets, and particular on gold might be best entry points in few decades.

This is just "endurance wrestling", guys, a kind of "war of attrition". Whether good assets appear to be strong enough to resist rising rates, holding support areas long enough, until the Fed exhausting? Fed reserves are limited. We know about $2.2 Trln of cash that they have and, as we've estimated yesterday, their intention to reach 4.4-4.5% rate by the end of the year. So what will happen earlier - either gold turns to uncontrolled collapse couldn't bear the interest rates pressure, or Fed comes to the point of the US economy collapse, when more rate hike becomes impossible? This is big dilemma. We already see that the US economy shows the signs of over-tightening, like overblown steam boiler, where steam starts breaking out through the rivets. Especially on Real Estate market. Job market should come next.
As we've mentioned two weeks ago, stock market starts crushing, as households start the sell-off, sending money to the bonds.

What is the sign of breakeven point? It comes when investors understand that current yields jump is not a subject for bargain hunting but the reflection of rising default risks and US Dollar devaluation under impact of uncontrolled inflation. When they stop trusting Moody's and S&P that stubbornly hold AAA US rating, although it is not for a long time already. As I said yesterday in FX report, Venezuela USD bonds have two digits yields but somehow nobody hurry up to buy them, understanding that this is reflection of the default risk. Now we have similar process in the US - rising yields now is a reflection of rising default risk and inflation, although few people understand it. Majority treat it in "classic" way - the by-product of economy cycle, when default risk is not changing, but rates are rising because of Fed activity providing good chances to enchance return. This is illusion by our view. People are still thinking about "Return on the investments" but very soon, they start worry about "Return of the investments". And this has to be the turning point, by our view.

Just above we've explained the structural component of inflation - it is not under control of the Fed. By rising rate they could control only monetary component of the inflation. And we said that Job market should be the next that come under the impact of structural crisis. Indeed, right now we see some decrease in energy prices and reducing of global shipping costs, that initially were in vanguard of inflationary pressure. As Phantom consulting tells - " not only has demand outstripped supply — the composition of demand has changed too, with consumers pivoting away from spending on services and towards spending on goods. This led to a surge in shipping costs as supply chains were squeezed. However, the peak impact of this shock on inflation has now passed. A similar thing can also be said of the inflationary impacts of higher commodity prices.
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Still, the one thing that could provoke these second-round effects is tightness in the labour market. This risk appears especially pronounced in the US, where unemployment has fallen dramatically from its peak in 2020. Cyclical tightness in the labour market can amplify existing inflationary pressures, as it gives workers increased bargaining power in wage negotiations (leading to a so-called ‘wage-price spiral’). The ratio of job vacancies to unemployed workers is one metric through which labour market tightness can be judged. In the US, this ratio is at historic highs (there are roughly two vacancies for every unemployed person).

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The scatter chart below plots how wage and consumer price inflation have evolved over time. As can be seen, there is very little evidence of a relationship between these two concepts when consumer price inflation is low. However, when it rises substantially above target, we start to see evidence of wages rising in response. The orange dot plots the latest data point. As can be seen, the US appears to be in the early stages of a wage-price spiral. Wages have responded to higher inflation. However, they have done so by less than they might.

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Wage-price spirals are an example of a ‘second-round effect’ that could keep inflation higher for longer. Dependent on the extent of the second-round effects, a more significant tightening of monetary policy may be required to bring inflation back under control. Indeed, the last time US inflation was this high and the US economy managed to avoid recession was in the 1950s. This simple observation suggests that there is a high likelihood that all the major advanced economies will experience a recession soon.

Democratic Sen. Elizabeth Warren of Massachusetts on Sunday slammed Federal Reserve Chairman Jerome Powell for suggesting interest rates should go up to combat inflation in the US, saying he could “tip this economy into recession.”

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said. You know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work,” she told Powell. “I hope you consider that before you drive this economy off a cliff.”

In general, it can be noted that the summer season, despite the decline in business activity, did not bring relief in terms of the development of crisis processes. Well, the business season that has begun clearly shows that these processes are actively developing. And it is possible that as the temperature in the Northern Hemisphere decreases and, accordingly, the need for fuel and energy increases, the situation will worsen even more. And, of course, the US policy of destroying the EU's economic complex has become even more pronounced. Increasingly, German industrialists are beginning to think where to move their production. The USA, Turkey and some other countries are being considered.

We're at the edge of big gitter, guys. Everything still stands ahead. The VIX Index is ready to explode - take a look at comparison with 2008:
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Fed confirmed that their target rate for 2022 is 4.5%, which is almost double the level before the pandemic. The markets are entering what we call as "liquidation mode":
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On the currency market the noose around the US Dollar neck is becoming tighter. If previously, China, Japan have bought a lot of US Dollar to keep their own currencies weak, as it was useful for international trading - now they have to reverse this tendency and sell their US Dollar reserves, to support reminbi and JPY. Other countries do the same. Japan already has made first intervention this year. But - nobody holds reserves in cash. If foreign central banks start selling US dollars as a reserve during a reverse currency war, they also sell US Treasury bonds, thereby raising dollar yields again, which in turn leads to a strengthening of the dollar, a real disastrous noose - The US Federal Reserve and the People's Bank of China are on a collision course. Fed sees inflation, and PBoC sees deflation. This week was the lowest exchange rate of the yuan against the US dollar since March 2020:

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If we take a look at S&P dynamic above 200 MA - the last time when it was so high above it was in 2008 at the eve of Lehman crush. Now the history repeats. Following collapses were interrupted by Fed step-in, that has started easing policy. That has prevented more stock market collapses in the past. This time it probably should step in as well, but the question is - at what level this should happen. The only one thing is clear - Fed is not too far from the interest rate ceil. 4.5% will become the ceil not because it should be enough to hold inflation, but because the US economy can't carry higher rate.
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Bond funds recorded outflows of $6.9 billion during the week to Wednesday, while $7.8 billion was removed from equity funds and investors plowed $30.3 billion into cash, BofA said in a research note citing EPFR data. Investor sentiment is the worst it has been since the 2008 global financial crash, the note said. The bond crash “threatens liquidation of (the) world's most crowded trades” including long dollar and long U.S. tech, BofA wrote. BofA said investors faced more inflation, interest rates and recession shocks, adding a bond crash meant that a high in credit spreads and low in stocks had not yet been reached.

Political situation is becoming hot


Last time we already have mentioned Poland-Germany piking on a background of WWII reparations. People are becoming grumpy, feeling constant stress due unstoppable deteriorating of households' wealth. Feeling this, the EU leaders start giving clear hints that they are ready to resolve this problem by force. For example,
European Commission chief Ursula von der Leyen has warned Italy of consequences should it veer away from democratic principles, issuing a barely veiled threat ahead of Sunday's election that a rightist bloc led by Giorgia Meloni is expected to win.

"My approach is that whatever democratic government is willing to work with us, we're working together," von der Leyen said at Princeton University in the United States on Thursday, responding to a question on whether there were any concerns with regard to the upcoming elections in Italy. If things go in a difficult direction, I've spoken about Hungary and Poland, we have tools," she added.

Matteo Salvini, the head of the League and a part of Meloni's conservative alliance, denounced her comments as "shameful arrogance".

"What is this, a threat?" he wrote on Twitter. "Respect the free, democratic and sovereign vote of the Italian people!"

In response to U. Leyen comments - Italians take off EU flag and replace them on Italian one. And this situation is not unique to Italy. Massive protests are heard already in Germany, Austria, France and other countries. Meantime they are not as massive as to represent big problems to the governments, but

[media]

With coming EU crude oil price cap imposing on Russian oil, the political situation might get out of the control. The point is winter-spring 2023 may be full of interesting events in Europe, because a very intriguing question is the limit of the stability of the European population in financial and political terms. The fact is electricity and gas prices have not yet begun to rise in Europe for the population.

In two years, electricity prices for the European population have increased by 53% and by 40% in a year – this is the most significant price increase in history. For comparison, from 1995 to 2020, electricity prices increased by 74%. Gas prices have increased by 87% in two years, by 63% in a year, and from 1995 to 2020 the accumulated growth was 96%.

Does it seem like an impressive jump? However, taking into account current wholesale prices, by the end of 2022, the two-year change in gas and electricity prices may be comparable to the price increase over 25 years (from 1995 to 2020). Therefore, the main momentum is still ahead. At the moment, the costs are carried by electricity, electric power, industrial companies and governments of European countries.

But this cannot last for too long, and sooner rather than later the costs will be directly or indirectly put upon the entire chain of intermediaries and will reach the population. It's a question of time, maybe faster, maybe slower, but the process is inevitable. Given the significant change in the cost structure, Eurostat will have to revise the weights of electricity and gas in the CPI structure, probably double them at least. This should lead to a strong rise of official inflation in the next 6-12 months.

So far, everything is developing quite dramatically. Euro-politicians deftly discount all these processes by "Russia", but how long will they last when households' bank accounts start dominate over TV populism? There is no definite answer, but potentially the situation can be explosive, because the European population goes into a mode of discomfort from all this geopolitical fuss. It's one thing to flaunt slogans, but it's another thing when energy bills explode balances.

Situation with crude oil supply also remains tough, as we've discussed last time.

For the fans of conspiracy theory old "The Economist" cover brings no optimism either. It is dated summer 2020, pointing on vulcan explosure and showing it is five minutes until the event on the clock. Now we easily could recognize Covid picture and take a look what's next - nuclear boom...
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Conclusion:

In general we've put conclusion in the beginning of the research. Now it is the time when we have to be patient. Gold is not loosing its value, it is just a victim of global economy structure and US Dollar dominance. Actually, the fact that gold stands around 1600 which is nearest 3/8 support level, but not at 1400 or even lower - is a great sign of resistance to external pressure. Based on the process that we see in EU and the US - it is not too long to wait when the tale will be over. As Fed stands not too far from final rate change up to 4.5% and Gold stands around very strong support, we do not exclude short-term breakouts but still hope that it will be able to stay around it, especially now, when new Fed rate level mostly is priced-in. Beside, more talkings now concerning US Dollar overvaluation so we're optimistic on gold stubborn around current support levels. We still think current levels attractive for long-term investments, better in a physical way, like coins and bullions, but futures with no more than 1:2 leverage is also acceptable. We just call to invest gradually, buying small part from time to time, extending process up to the end of the year.

To better understand the problem, we recommend the article by Emmanuel Tod who explains the fiction of US GDP. He takes in comparison Russia and Belarus, but it could be applied to any emerging market economy, except China, maybe. Tod tells:
The most surprising, in the war between the West, Russia, is that our opponent was supposed to no longer exist. Compare the gross domestic products (GDP) of the two opponents in 2021. According to data from the world Bank, the GDP combined of Russia and Belarus represent only 3.3% of the GDP of the combined United States, Canada, Australia, New Zealand, the United Kingdom, the European Union, Norway, Switzerland, Japan and South Korea. How this Russian tiny dared to challenge us? But, above all, why the Russian economy does not collapse, does it not, after all the penalties which it was the object ? Why is that the european economy is threatened, on the threshold of winter, of a collapse, what announces the flight of inflation ?

And he explains -

The economic power measured on the basis of the GDP calculated according to the current rules is fictitious. This tool for measuring the economic success of a country is outdated. It no longer measures the aggregate production of steel, cars, refrigerators and televisions, that is, real goods. It measures primarily the production of intangible assets, which some sometimes (and others very often) they are considered useless. And therefore they represent only nominal value.

As an example of the fictitiousness of the GDP indicator, Marianne cites the example of the US economy, whose GDP is 40% of the GDP of the entire West. Healthcare in the United States "sucks in" 18% of "national production", which is almost 2 times more than in other Western countries. And the fact that more than half of American health care costs (from 10 to 13% of the total GDP) are the unreasonable incomes of their doctors (which account for fewer residents than in France), as well as the insane cost of medicines offered to Americans (half of world spending).

Reverence for the dollar and reverence for the euro make the West mistake to treat banknotes equal to the real wealth. But these money bags will not change the fact that wheat production in America fell from 65 to 47 million tons between 1980 and 2021, and production in Russia increased from 36.9 to 80 million tons from 1987 to 2020. Wheat together with gas give Russia more power than the notorious "intangible assets" give the United States, Marianne believes.

The false system of assessing economic potential leads to the fact that now we resemble a military pilot who flew on faulty instruments and thought he was flying at an altitude of 10,000 m. Until I saw that it was actually at an altitude of 350 m. And there is no runway visible on the horizon," Marianne concludes.

Just to add some optimism - here is the latest Economist cover. Whether it means the rise of a golden standard?
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Technicals
Monthly

Price is going down with good pace. Target levels have been achieved and price now stands slightly below them. Monthly oversold stands around $1620, which suggests that 1600-1620$ area should provide some support. Besides, market has completed few targets on lower time frames. So, we need to be patient and watch for possible reaction.

Based on our fundamental view, gold has more chances to stay around 1600 rather than keep going to next strong support area of 1400-1420, but it would be naive to promise something now.
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Weekly

Meantime, weekly chart shows that nearest targets stand around 1570 - 1595$ area. Oversold level doesn't prevent to reach them here. No bullish signs here just yet.
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Daily

Here trend also stands bearish, no bullish signs by far. Market hits first butterfly 1.27 target, breaking flag - what we've discussed through the previous week... Now we actually could do only two things - for the long entry we should watch for bullish patterns on intraday charts. Maybe some response follows. Second thing - probably it is possible to keep shorts by far.
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Intraday

Bulls could wait for H&S performance on 4H chart, for example. The head's bottom could be set in 1630-1640$ range. Also you could recognize the butterfly shape on a left arm.
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On 1H chart the local butterfly could finalize downside action, so it could be the part of short-term bullish context.
gold_1h_26_09_22.png


If it is more or less clear with the bullish context. For the bears, situation is not as clear. Currently it is not good area for new position taking, but maybe it makes sense to keep some part of existent one. It is not clear yet, whether bullish setup works or not...
 
Technicals
Monthly

Price is going down with good pace. Target levels have been achieved and price now stands slightly below them. Monthly oversold stands around $1620, which suggests that 1600-1620$ area should provide some support. Besides, market has completed few targets on lower time frames. So, we need to be patient and watch for possible reaction.

Based on our fundamental view, gold has more chances to stay around 1600 rather than keep going to next strong support area of 1400-1420, but it would be naive to promise something now.
View attachment 79829

Weekly

Meantime, weekly chart shows that nearest targets stand around 1570 - 1595$ area. Oversold level doesn't prevent to reach them here. No bullish signs here just yet.
View attachment 79830

Daily

Here trend also stands bearish, no bullish signs by far. Market hits first butterfly 1.27 target, breaking flag - what we've discussed through the previous week... Now we actually could do only two things - for the long entry we should watch for bullish patterns on intraday charts. Maybe some response follows. Second thing - probably it is possible to keep shorts by far.
View attachment 79831

Intraday

Bulls could wait for H&S performance on 4H chart, for example. The head's bottom could be set in 1630-1640$ range. Also you could recognize the butterfly shape on a left arm.
View attachment 79832

On 1H chart the local butterfly could finalize downside action, so it could be the part of short-term bullish context.
View attachment 79833

If it is more or less clear with the bullish context. For the bears, situation is not as clear. Currently it is not good area for new position taking, but maybe it makes sense to keep some part of existent one. It is not clear yet, whether bullish setup works or not...
Great analysis as always Master Sive,I always look to read through your market analysis .well done for your wonderful insight and foresight on gold market et al.
 
Greetings everybody,

All markets have reached some overextended levels, falling into oversold and overbought areas, like gold on monthly chart. This is the technical reason why it is bouncing up from 1620 level - recall we've mentioned it in weekend. Meantime, dollar index also has reached monthly overbought and hit 113 XOP target, that also creates some background to tactical retracement.
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Thus, particular on Gold market we could consider something of this sort - potential H&S. Divergence is also here. Once it will be completed - it could be better levels for short positions, while here, on intraday chart, scalp bullish trades also might be considered, as soon as pattern will take the final shape.
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Greetings everybody,

As activity stands slow - just minor update today. In fact, gold is aiming weekly targets - 1560 and 1600 that we've discussed in weekend. Since it stands very close and not at oversold, there is no barrier on a way down by far. And daily picture shows the same. Very small consolidation on a way to 1.618 butterfly target, which is also 1600 by the way
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On intraday chart we recently have discussed reverse H&S pattern but market was not able to form it, even not reached the neckline. Now price is testing the lows, with intention to go down further. It seems that hardly we get any more or less significant pullback until weekly targets will be reached.

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Good morning,

Yesterday we've discussed gradual downside motion to 1570-1600 major targets but later in the session BoE surprisingly announced QE as bond market and interest yields start moving out of the control. This is worrying sign as other central banks could follow later when the same problems start in EU and the US. As a result gold has formed a bounce in a way of reversal bar. It suggests that pullback could be a bit higher. THus, it makes sense to consider 1690 area of daily overbought as potential destination point:
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Usually when market forms reversal swing we watch for 5/8 retracement. Thus, if you consider taking scalp long position it seems that 1633 area could be suitable for that:
gold_1h_29_09_22.png
 
Greetings everybody,

So, as we've said yesterday Gold has the same upside reversal session on daily chart as EUR that suggests more extended pullback, supposedly to 1688-1690 area - just because we have overbought there:
gold_d_30_09_22.png


Besides, if EUR and GBP already has reached predefined AB-CD targets, gold is still under way to it. And if action has started perfect, with good thrust, now gold has lost momentum, CD leg looks much slower and choppy.
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At the same time, gold was able to return back in previous trading range, which eliminates all barriers inside of it, and reaching of OP target should not become very difficult task. So, for short entry it makes sense to wait for OP and overbought area around 1690. If you have longs - it is possible to hold them, just control the risk
 
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