Looking for reasons to get long the precious metals as a bet against inflation scares and instability in the markets is one thing. Trying to guess what the Fed may or may not do is another. This week, the shorter time frames will work with technical analysis, but the overall macro theme is dependent on the larger fiscal and monetary policy decisions from the likes of the Fed and the US treasury.
Gold Technical Analysis
The ActivTrades sentiment indicator for the current gold spot price is balanced with 49% of traders on the platform bearish the yellow metal and 51% of them feeling it will go higher.
The recent trend in gold was to the downside with a major sell-off occurring at the beginning of electronic trading a few weeks ago. Since then, we have had the FOMC meeting minutes which saw the equities have a sell-off and rebound and the US treasury yields have also all kept the bearish momentum.
The reason for bringing Treasury yields into the gold analysis is because this week we have the Jackson Hole Symposium which the Federal Reserve will hold virtually for the 2nd year running due to the coronavirus. The Jackson Hole Symposium has been where key monetary policy decisions have been made for the US Federal Reserve but also for co-ordinating central banks global monetary policy, so traders are expecting the Fed to make some key announcements this year, which could include either a timetable of asset purchase tapering or something to do with central bank digital currencies. Maybe both. If Chair Powell announces a tapering of asset purchases this is likely to see US yields move higher and if that happens there is likely to be a sell-ff in the price of Gold.
For several years the price of gold has closely followed an inverse relationship with the US10 year treasury yield and recently as the yields dropped, we saw an overall uptick in the price of Gold.
If the Fed starts talking more seriously around the topic of a central bank digital currency (CBDC) there could be some disruptions in the banking system as a lot of commercial banks would see a Fed coin as a direct attack on their business. A CBDC would effectively cut out the middleman between the currency issuer and the currency user. A lot of traders and investors have been moving into the crypto and digital currency either in an asset like Bitcoin or stable coins, this has been a move into protecting their wealth against inflation. A function that Gold has traditionally taken on. Gold is the 5000-year-old traditional store of wealth and if you can hold a certain portion of your wealth in physical gold you are going some way to protect yourself from the monetary debasement and diminishing purchasing power that comes from monetary inflation. Where more money is put into the system.
A company like Palantir Technologies builds software and has revenues into the billions each year recently bought up $50 million worth of 100oz gold bars. The company is debt-free and instead of using cash to leverage up positions assuming inflation would help wipe out their debt they are protecting themselves from ‘Black Swan events. Something like a market crash due to a global pandemic, or maybe a taper tantrum if the fed goes for the asset taper this year. Other companies would be looking to cryptocurrencies for similar reasons, and some would say that a bitcoin is even more of an inflation hedge as gold is currently inflated by around 2% each year, meaning your gold is worth around 2% less each year. Whereas a bitcoin is limited in number, so has a scarcity greater than gold.
Hedge funds and managed money also moved into gold more according to the Commitment of Traders report. leveraged speculators in Comex gold futures and options grew their bullish betting by 9% on gold as a group in the week ending 17th August and cut their bearish betting by 21% from a 26-month high. So if we are to hold onto their coat tails, we should be looking for reasons to get longer too.
The weekly chart shows that the $1800 level is within a small balance area, which is going to make it hard for the speculators to push through without some sort of catalyst. The most obvious catalyst is the movement of US Treasuries lower following the Jackson Hole Symposium, which would come about due to a more dovish Fed. The Fed could be more dovish as were the RBNZ due to the uncertainties around the Covid-19 delta variant but for those that like to think a bit different, the Fed could be more dovish in actions rather than words because Chair Powell doesn’t want to risk not getting re-elected. In the last couple of days, Treasury Secretary Yellen gave her backing to Powell getting another 4 years, and if the markets keep melting up as they have been recent, President Biden won’t want the Fed to do anything that could ruin the mid-term elections as that would be problematic for things like spending and other policies.
Gold generally moves inverse to the US dollar but for the last year, the US dollar index has been trading within a $5 range between $94.50 and the $89.50 levels. The consensus is that the US dollar should be trading lower long-term, due to the widening trade deficit, the fiscal spending, and fiscal deficit. One thing that could scupper the US markets would be the debt ceiling and how the congress and Biden administration deal with this. The Trump administration canceled the debt ceiling for 2 years, which allowed them to cover all expenses that the coronavirus created. President Biden and his team would like to get a $1trln infrastructure bill passed along with a further $3.5trln spending bill which some may see as a couple of trillions too far. This all needs to be sorted by October or the Treasury runs the risk of defaulting on payments and the US government runs the risk of shutting down. Current figures show that this year government spending has added another $1trln to the economy which goes some way to explaining the net transfer to the non-government and 100% gains in the stock markets in 2021 from the lows of 2020.
Looking at the above daily chart for gold, I am of the belief that the run-up to $1916 in late May from the lows of April was an impulsive move and the subsequent price action to the emotional sell-off a couple of weeks ago was a 3-wave corrective move. If this is correct the next stage should be higher, whether it be within a larger corrective 3 wave move or the next impulsive move. Obviously, if this is the start of the next impulsive move higher, we should be targeting above $2000. My current idea is to either wait for a break higher than $1834 and wait for a retest of support before continuing to the June swing highs. Or for a dip down to the recent balance area formed during last week before yesterday’s pop to the $1800 level. I would have been more confident in much greater higher highs if we had swept the lows of the double bottom that formed back in March but as that didn’t happen, I just must be mindful that they are still present, and others will be looking for ways to getting down there to test them. Lower prices will occur if this current price action fails to get above $1834 again this week or early next week.
On an hourly chart, the gold price action clearly broke out of a bullish wedge as the price bounced off the 20,50, and 200-period moving averages. If the H4 and Daily could also all turn bullish on the 3 averages this would be a good indicator for longer-term momentum traders that they could join in. For now, the speculators and hedge funds can ride the hourly 50-period ema, using the 200 as a gauge for where to put risk stops.
Things to keep an eye on this week and next are the Jackson Hole Symposium announcements and treasury yields as this will probably dictate the price of gold for the foreseeable future.