Gold GOLD PRO WEEKLY, September 27 - 01, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,329
Fundamentals

So gold was moving with the same trend as other markets and driven by Fed statement and story around Chinese giant Evergrade. Yesterday we've discussed in details the content of Fed statement and opinion of FX traders. But it is also interesting what gold traders think about recent statement and how it could impact on gold performance in near term.

Market overview

At the eve of Fed statement on Wednesday, traders try to value the hawkish scenario.

In the absence of an official taper signal, gold could get some relief for the near term, DailyFX Currency Strategist Ilya Spivak said, adding that the downtrend for the month would hold. If it looks like over the course of the coming years, basically through the end of 2024, the Fed envisions more than 100 basis points in cumulative rate hikes, that would be hawkish, and a negative catalyst for gold,” Spivak said.

Gold prices dipped on Thursday after the U.S. Federal Reserve signalled easing its monthly bond purchases by next year and a sooner-than-expected interest rate hike, which could increase the opportunity cost of holding the non-yielding bullion. In its policy statement on Wednesday, the U.S. central bank said it could start paring bond purchases as soon as November and that half of the Fed officials were ready to raise interest rates next year in response to inflation.

Fed Chairman Jerome Powell said the central bank could begin withdrawing its asset purchases after its November policy meeting as long as U.S. job growth through September is “reasonably strong.”

New projections from the Fed’s policy meeting showed half of the officials were ready to raise interest rates next year in response to heating inflation.

“Everyone is going to be focused on how persistent these inflation pressures are and whether the Fed needs to be hastier in hiking the Fed funds rate in response... Once we start talking about rate hikes that’s going to be really bad for gold prices,” IG Market analyst Kyle Rodda said.

Gold could find support at these levels with developments around China Evergrande and an upcoming debt ceiling debate in the United States potentially causing some market volatility, said Harshal Barot, a senior research consultant for South Asia at Metals Focus.

On the technical front, spot gold may revisit its Sept. 20 low of $1,741.86, as the drop on Wednesday confirmed completion of the bounce from this level, according to Reuters technical analyst Wang Tao.

Gold firmed on Thursday as the dollar gave up some gains that were driven by the U.S. central bank signalling faster-than-expected interest rate hikes, but receding fears over the Evergrande crisis limited interest for safe-haven bullion.

The dollar retreated from a one-month high as investors processed the outcome of this week's Federal Reserve meeting and subsequent statement by Fed chair Jerome Powell that a tapering of stimulus here measures was not far away.

Gold has stabilized as Powell didn’t give any firm dates for the beginning of tapering or raising interest rates, cancelling the dollar’s gains, said Ricardo Evangelista, senior analyst at ActivTrades. But “until something more concrete happens in terms of direction for the dollar, gold will be impacted more by the level of risk appetite or risk aversion,” he added.

The Fed statement did not surprise investors, but once reductions in asset purchases start, gold could face moderate headwinds, with prices moving towards $1,700 or even lower, said Xiao Fu, head of commodities markets strategy at Bank of China International.

Gold prices bounced off 1-1/2-month lows on Friday, buoyed by safe-haven demand as investors grew wary over cash-strapped China Evergrande’s fate while a softer dollar also lifted the metal’s allure for holders of other currencies.

The number of Americans filing new claims for unemployment benefits unexpectedly rose last week, but the underlying trend remained consistent with a steadily recovering labour market.

Fed Chairman Jerome Powell said tapering process could conclude around the middle of next year, as long as the recovery remains on track, after the central bank’s policy statement this week suggested it may lift interest rates earlier-than-expected.

“Asian investors could be building gold to protect against undesirable developments in the Evergrande saga over the weekend,” said Jeffrey Halley, a senior market analyst for Asia Pacific at OANDA, adding the metal was likely to trade in a $1,740-$1,780 range in the near term.

Asian stock markets were on edge, hurt by persistent uncertainty around the fate of debt-ridden China Evergrande .

Peter Fung, head of dealing at Wing Fung Precious Metals, said uncertainty around Evergrande’s debt also spurred demand for physical gold in top consumer China, near the $1,750 level.

However, bullion prices were expected to come under pressure in the medium term with major central banks signalling tapering of pandemic-era stimulus, analysts said. The U.S. Federal Reserve signalled an earlier-than-expected rate hike this week.

“The Fed has announced that tapering is ahead, the next step is when it’s implemented, that will push real rates even further up, and that should be negative for the gold,” said UBS analyst Giovanni Staunovo, adding it would cause day-to-day volatility. We anticipate greater outflows from ETFs and non-commercial gold futures,” UBS wrote in a note, adding it expected gold prices at $1,600 by mid-2022.

Gold is taking support from a weaker dollar, with the warning from China to local authorities over a possible collapse of Evergrande serving as “another reminder that the risk still prevails,” said Quantitative Commodity Research Analyst Peter Fertig. But prospects of rate hikes from several central banks are “a negative mix for gold,” Fertig added.

Although gold recovered some ground after Thursday’s 1% fall, OANDA analyst Craig Erlam expected gold to weaken again.
“We’ll see a continuation of the downward trend driven by the Fed’s stance, especially as some of the fears surrounding Evergrande have subsided,” he said.

Cleveland Fed President Loretta Mester said on Friday the central bank should start reducing its support for the economy in November and could start raising interest rates by the end of next year should labour markets continue to improve.

Where do we go from here?
(By Fathom Consulting)

The global economic recovery is complete and world GDP is expected to converge on the pre-pandemic trend within a few months. How long the cyclical momentum lasts depends on how rapidly firms and households spend the excess savings built up during the recession, and how long the rise in inflation lasts. The speed of this recovery contrasts to that of the Global Financial Crisis (GFC); GDP has still not yet recovered to the pre-GFC trend and probably never will.

World-GDP.jpg


The longer-term trend in growth is likely to be subdued, especially in developed economies, in part thanks to deteriorating demographics. The rate of increase in the number of participants in the US labour market has gradually slowed, contributing reducing rates of growth to US annual GDP. Similar trends are in place across most advanced and many emerging economies, including China. With working-age populations in decline and dependency ratios increasing, the future is likely to hold much weaker growth than in previous decades.
Deteriorating demographics are to be expected in developed economies where the average standard of living is already high. They could prove more problematic in emerging economies like China — but, unfortunately, the same trends are in place there, as the chart below illustrates. If current trends persist, as seems likely, China will get old before it gets rich. And it is not just demographics that present a headwind for China. The evidence suggests that relative lack of political freedom is a long-term constraint on growth. It would be a global first if China were to succeed in breaking the trend towards slower growth without changing its political settlement.

Standard-of-living-and-dependency-ratio.jpg


There are other scenarios to consider. The deciding factor in how long the cyclical momentum will last is inflation: will the current increase in inflation prove to be transitory or will it require a significant policy tightening, or (explicit or implicit) accommodation of higher inflation in steady state? Fathom’s forecast central case sees inflation as transitory, but with 50% weight to scenarios in which inflation will be much stickier.

OECD-core-consumer-price-index.jpg


The risk of persistently higher inflation arises in part from the labour market. Since the pandemic, the US has experienced a higher level of unemployment for any given level of vacancies: the Beveridge curve has shifted out to the right. That shift reflects an increase in labour mark ‘rigidities’, probably, in this case, deriving from a mismatch between the type or location of vacancies that have arisen and the labour force available to fill those opportunities: a laid-off barista in a coffee shop in Detroit cannot readily take up a position as a software engineer in San Francisco, for example. The greater the labour market mismatch, the higher is the structural rate of unemployment, and the greater the potential impact on inflation arising from running the economy hot. It remains to be seen, of course, whether the Beveridge curve will shift back to the left, which is what Fathom assumes in central case — a great deal hinges on that question.

US-Beveridge-curve.jpg


Another factor that would lead to persistent inflation would be a change in inflation expectations. Inflation, simply stated, equals expected inflation plus surprise inflation. If expectations are not anchored, it could encourage the Fed (and other central banks) to try, opportunistically, to shift the anchor of the inflation target upwards. They would need to get a couple of years of higher inflation under their belt first, so to speak, but at that point a move to a higher inflation target would be supported by many macroeconomists, including Fathom Consulting. In that scenario, inflation remains anchored but at a higher level in steady state. We would attach around a 40% weight to a scenario in which inflation stays higher through 2022 and potentially beyond. The remaining scenario is where inflation expectations are elevated, so above-target price rises stick, but central banks respond by tightening monetary policy, leading to a sharp slowdown in growth and a big fall in asset prices.

COT Report

Recent CFTC report shows drop of long positions and contraction of open interest reflecting the impact of boost in Retails Sales week before. Not only speculators have shown the sell-off but hedgers have decreased positions against gold appreciation as well.

1632651029758.png


Reuters reports that investors purchased precious metals funds for a second straight week, worth a net $172 million but this is too small amount. As it is followed from the chart below - holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell to the lowest level since April 2020 on Thursday - to 992.65 tonnes.
1632650995769.png

To make correct conclusion of recent events we just need to use the common sense. Recall, what we had before Fed statement - gold was ignoring any supportive statistics, investors were showing no reaction on any positive news and interest to the gold was relatively weak. What do we have now? Fed said that tapering stands right around the corner and should be over to the mid of 2022. First rate hike is anticipated as early as September - November 2022. It is not necessary to be a prophet to conclude that this is more tough background than before. Hence gold appears to be under stronger pressure despite temporal demand due Evergrande turmoil. Recent sentiment data based on SPDR and CFTC statistics also look not very inspiring.
Indirectly UBS analysts confirm our position telling that gold average price is 1600 for 2022 and suggest that it should go lower. The same was told by Bank of China analysts who suggests that gold could come below 1700. This is the answer on the question and it should hold us aside from any long term bullish positions on gold market.

Technicals

Monthly

Monthly picture mostly stands the same. On a technical side, we have few bearish moments that suggest deeper action, but, in general, market stands in very small pullback from ATH comparing to the scale of the rally. Market again shows problems with breaking through YPP. We have three equal tops month by month around YPP. It means that somewhere around 1835-1836 big selling orders hold gold from further upward action.

In a shorter-term everything is based on August huge trading range. With the more information from the Fed, we suggest that sentiment becomes more bearish and action to 1650 support area gets more chances to happen in near term. Next target is YPS1 at 1540$.

At the same time, as we've mentioned before, in long term scale price action has the features of retracement, forming big flag consolidation with choppy action inside and standing above nearest 3/8 Fib level. This type of action is difficult to call as strong bearish reversal, at least for now.

gold_m_27_09_21.png


Weekly

Weekly time frame shows our major patterns and scenarios that we suppose here. Trend has turned bearish and gold very accurately follows to scenario that we've suggested a month ago. Here we have two important details. First is - gold inability to reach the upper border of triangle and early turn down. Since the drop is strong, we could say that this is real early reversal and hardly gold returns back to hit the triangle line. Second - it follows accurately to the butterfly shape. With bullish grabber on weekly Dollar Index - gold remains under pressure, which suggests possible deeper action.

gold_w_27_09_21.png


Daily

Here is mostly the same picture as on Friday that we've discussed already. As we have no progress here, we could repeat only the same things - H&S pattern stands in place, it is valid but it has the sign of weakness - too fast drop as on the head's slope as on the right arm. This is not good for potentially bullish reversal pattern. Taking in consideration everything that stands around and what we've discussed above - it is no desire to buy gold, based on this pattern. It seems that it stands above 1740 only because Evergrande situation. Besides, recall that this is reaction on COP Agreement resistance. But for COP it stands deeper than usual, suggesting market's weakness.
But, of course, it would be better if you make your own judgement about this situation. It is not forbidden to buy, if you wish and if you rely on Evergrande situation worsening.

gold_d_27_09_21.png


Intraday

On 4H chart market keeps major AB-CD pattern valid. By the market mechanics current action has to be continuation to the XOP as major pullback and reaction to OP has happened already. And, indeed, market shows very small pullback that agrees with this conception.

gold_4h_27_09_21.png


On 1H chart it seems that gold instead of major bounce is turning to some consolidation that should take the shape of flag or pennant. Whatever it will be, if gold remains in tight range - this is bearish consolidation and another worrying moment for bullish scenario.

gold_1h_27_09_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Greetings everybody,

So, currently we have no questions to gold as it follows accurately in the direction that we've discussed in weekend. On daily chart we're getting more bearish signs as market stands near the right arm's bottom for the 2nd week and this is not the type of reaction that you expect around the point where major rally should start. So, daily price shape now looks weak and support idea of downside continuation:
gold_d_28_09_21.png


Besides, take a look at US 10-year yield that definitely stands not in favor of the gold:
1632800330836.png


On intraday chart the flag pattern that we've suggested might be formed - now is taking definite shape and once again stands in favor of bearish action. Besides, appearing of the flag at the point where major bullish reversal should start works like bearish sign per se. Thus, here on 4H chart price action to XOP should start sooner rather than later:
gold_4h_28_09_21.png


On 1H chart market was able to form "222" Sell and AB-CD retracement inside the flag, as we've suggested in weekly report. So, if you have shorts positions already - just keep them. Those who just think to step - in, there are two common ways to do it. First is just sell while market stands inside the flag with stops above the K-area. Another one is a bit more difficult and not as common - use the Stop "Sell" order around 1740 area. So, if you think about short entry, maybe these scenarios could be interesting to consider:
gold_1h_28_09_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Greetings everybody,

So, gold keeps bearish context accurately by far. On daily chart actually we could recognize wedge shape at the bottom of the right arm, but it is too few to treat it as a bullish context. Besides, in modern markets wedges fail too often with fast downside acceleration. With the performance that we see here, and on US yields - we do not consider any long positions by far:
gold_d_29_09_21.png


On 4H chart the flag consolidation has been broken. Those who have shorts - could keep them, just manage the stops. If you consider the new entry, here is what might be interesting. First is - potential bearish grabber here:
gold_4h_29_09_21.png


Additionally, we could keep an eye on "222" Sell on 1H chart, and if market hits 1745 area - it might be interesting for short entry with stops above the K-area, especially 4H grabber will be formed as well:
gold_1h_29_09_21.png


In general, as 10-year yields haven't reached the XOP yet as gold as well - we wait when this happens. Currently it is temporal pause and yields are struggling with Stretch pattern that is formed there. Once reaction will be over - action should continue:
1632899859404.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Greetings everybody,

So, short-term gold setup is completed accurately. Now is a question what could happen next as our XOP @1720 is completed. Although DXY stands at strong resistance area that should provide some relief to the gold, it still seems that market could drift slightly lower. From technical point of view H&S saga is not over yet and market should finalize it by dropping below the head lows.
Performance inside of wedge pattern has no bullish signs, which means that it could lead to downside acceleration:
gold_d_30_09_21.png


Besides, interest rate is not completed XOP yet, and in a moment of upside jump gold could get bearish shot:
1632986606276.png


So, currently it is not time to consider new bullish positions. On 4H chart we've got minor bearish grabber, so some minor drop here also could happen:
gold_4h_30_09_21.png


So, it could be direct downside action or again - in a shape of "222" Sell, if here we get minor bullish grabber. Anyway, if you consider short entry 1735 area looks suitable for this, with stops above 1745 top. For the short-term setup it makes no sense to set higher stop. If price moves above it - it forms bullish reversal swing and it tells that short-term tendency is over.
gold_1h_30_09_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Greetings everybody,

Although we had doubts but gold still was able to show classic exit from the wedge pattern with solid upside breakout. Gold now has strong external support as North of China is living the energy collapse due lack of coal that leads to production breaks and energy problems in social sphere. This, in turn press on stock market and gold get more stimulus to grow.
Still, I wouldn't overestimate the importance of recent jump, as it still needs to be tested. 10-year interest rates shows minor pullback which is supportive to the gold, but they stand aimed on 1.62% XOP target.
Finally, today we also should keep an eye on potential bearish grabber here...
gold_d_01_10_21.png


On 4H chart reaction looks reasonable as it stands from XOP target. Now it is difficult to say whether it leads daily H&S pattern to work. But maybe we get some upside continuation on intraday time frames.
gold_4h_01_10_21.png


On 1H chart it is most easy to recognize the same H&S. After a bullish reversal swing market usually shows deep retracement, which is also correspond to H&S shape. Thus, let's keep watching for 1740$ area and then make a decision with long entry:
gold_1h_01_10_21.png
 
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