Two steps forward one step back: The worst is over for gold
16 July 2021
Friday 16 July 2021
In this week's market report:
Thoughts from the trading desk
Technical tool gives us good news
PBoC lowers banks cash stash
Interview: Is the bottom in for gold?
Shae Russell,
Group Communications Manager
Dear Investor,
That’s a nice bounce, I thought to myself at the start of the working week.
On Monday, the US dollar price of gold eked above US$1,800.
Last Friday’s end of week rebound held…
…and persisted throughout this week.
Gold’s up, platinum’s up and even silver’s a skerrick higher.
For us precious metal enthusiasts, it’s been a good news week. Perhaps it’s time for some optimism?
Why? The US dollar gold price just hit a very important Fibonacci level…
Thoughts from the Trading Desk
Fresh from the trading desk and into your inbox.
Today’s thoughts look at the support forming for gold:
Powell clearly accommodative hence gold and bonds doing well.
We are at the 50 % retracement of the drop from the US$1,909 2nd June high to the 29 June US$1,750.75 low.
Exchange traded funds (ETFs) have added 90,000 troy ounces (tozs) since Thursday 8th July 2021.
The US Dollar Index (DXY) rally stalled a little bit as it bumps into the Weekly Cloud from below.
Silver getting a lift, but open interest (OI) is shrinking. The implication is that shorts which grew recently might be buying back. The reduction in OI is only 12-13 million (tozs) from what we can see.
There’s a lot in there, so let’s get cracking.
First, let’s get a look at what this 50% retracement means...
Technical tool gives us good news
For years I’ve used a Fibonacci Retracement as part of my technical analysis when the price of an asset is stuck between a previous high and low.
Fibonacci’s can be useful to look for potential support, resistance and turning points.
Or in today’s example, the 50% Fibonacci Retracement level is showing that this recent gold rally ‘has legs’.
US dollar gold price
Daily bar chart
Source: Bloomberg data; Updata
What’s so good about this?
It tells us the US dollar gold price is clawing back half of its losses since the 2nd June high. Essentially, it’s a ‘swing’ up and gets the spot price of gold to a higher level of support.
Global General Manager of ABC Bullion, Nick Frappell, told Kitco News last week that there is resistance around the US$1,820 level but ‘Gold is still in a rangebound consolidation phase after the recent drop. But it is beginning to trade constructively, suggestive of recovery.’
Though be warned, the 50% retracement level can be considered a ‘two steps forward one step back’ signal. A dip down is likely, but perhaps the worst is behind us.
If we take a quick look at Big Money, we can see that many investors remained steady during the June and July selling.
Investors flock to gold related ETFs
Source: Bloomberg; Updata
The fact that gold backed ETFs kept their nerve during the recent sell off confirms — again — it was mostly algorithmic trading keeping the price low, not sentiment. Something Nick suggested as the clear out was happening.
Managing Director of Sprott Asset Management, John Hathaway, recently confirmed Nick’s thesis too, writing:
‘The June selling was almost entirely a knee-jerk synthetic affair driven by algorithmic, headline scanning robotic macro funds.
‘On June 18, investors bought US$630 million of 100% gold-backed GLD shares (SPDR Gold Shares ETF), the largest one-day inflow since January 15, 2021. Central banks bought US$6.3 billion of the yellow metal during the second quarter (according to the World Gold Council). Virtually no physical gold was dumped in the rout. What was sold was almost exclusively futures or derivatives.’
Short version? Big Money knows when the bottom is in.
PBoC lowers banks cash stash
In a move that surprised market analysts this week, the People’s Bank of China (PBoC) lowered the reserve requirements banks need to have on hand, by 0.50%.
Of course, that doesn’t sound like a lot. Yet it does boost the amount of credit a bank can provide.
Source: People’s Bank of China; Bloomberg
China is arguably ‘easing’ their policy whilst the Federal Reserve Bank is talking about tapering, which is a ‘tightening’ of monetary policy.
We don’t have insight to the inner workings of the PBoC. However, I suspect there are few reasons why the Middle Kingdom’s central bank may have made this move.
One is, it’s an admission that some state backed enterprises are in a financial spot of bother. This report from Bloomberg notes the lower reserve requirements are aimed at firms who are struggling to meet their loan obligations, make sure they meet their obligations.
In other words, using credit to pay for credit.
Another thought is that rising input costs are putting pressure on Chinese producer margins. A little more room to lend may give some of these companies a buffer, via access to credit.
A third idea was the PBoC were preparing to offset the predicted fall in gross domestic product (GDP).
How this plays out remains to be seen.
Though as Nick and I discussed on camera this week, the moves form the PBoC aren’t dire. Rather Nick highlighted it’s reflection of the ‘softening’ in growth and demand within China.
Today, Nick and I dig into inflation fears, the ghosts of our money printing past, what the softening in Chinese policy means for markets — and of course — we ask, is the bottom
in for gold.
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Until next time,
Shae Russell
Group Communications Manager,
For ABC Bullion
