ETrustFinancial

The dollar is hovering near 20-year highs ahead of tdoay's US CPI release, which the Federal Reserve may respond to with a fourth consecutive jumbo interest rate hike.

James Ashley, head of international market strategy at Goldman Sachs said on Bloomberg Television that "the Fed is not going to blink." Adding, "if they're going to make a mistake, they would far rather err on the side of being too hawkish."

The ever-rising interest rate is siphoning investors away from non-yielding gold.

Gold 4-Hour

The 4-hour pennant's downside breakout will signal a resumption of the selloff within the falling channel.

Here are the presumed drivers of the continuation pattern.

Short sellers are locking in profits after eight straight 4-hour session plunges. The preceding H&S top or reversal triangle—the difference is academic—triggered a selloff that caused bears' hearts to skip a beat. Sellers added to demand when covering shorts, while ongoing selling by either new or short sellers with stronger convictions keeps the price from rebounding. If supply continues once short sellers complete covering, gold will fall below the pattern. This downside breakout will signal interest to all—ex and current bears, wounded bulls, and undecided—order flows will push the price down another leg.

The preceding pattern developed at the falling channel's top, confirming its marked medium-term downtrend since the Mar. 7, $2,078.70 all-time high. Gold has been negatively correlated to rising yields, following the Fed's persistent tightening, to the detriment of fund managers, like Ark's Cathie Wood.

Target Measuring

Short sellers disrupted the short-term downtrend since the channel top, as they were catching their breath after the dizzying selloff. Now that they have regained composure, the downside pe*******on will reverse fear back to greed, pulling them back in. Therefore, the previous selloff statistically repeats itself.

The series of red candles began at the $1,722 high, ending $50 lower at $1,672. Therefore, traders expect another $50 fall from the pennant's breakout point, aiming at around $1,625, retesting a much larger potential bearish pattern.

Gold Weekly

Last month, gold fell below its 2021 lows, which were also the lows between the two record peaks of 2020 and this year. In other words, the yellow metal completed a massive double top.

Last week, the price rebounded above the neckline. However, as I outlined, the price failed to hold onto gains and is back down at the neckline levels.

Gold will reinforce the double-top outlook if the price falls below its Sept. 28, $1,618 low. Given that the pattern's height is $40, the breakout could test $1,300, as all the invested interest within the structure repeats itself with the previous floor turning into a ceiling. The length of time to achieve the double-top's target could be as little as six months, the length of time it took gold to fall each time it reached its record, and as long as two years, the time it took the pattern to develop.

Trading Strategies - Short

Conservative traders should wait for the price to close below the pennant's $1,667.90 low, which would include at least three 4-hour candles to remain below the pattern, then for a return move that retests its integrity.

Moderate traders would be content with a close below $1,670 and two 4-hour candles to remain below the range, then for a throwback for a closer entry, if not for trend confirmation.

Aggressive traders could short upon the first close below the pattern.

Aggressive Trade Sample

Entry: $1,672
Stop-Loss: $1,682
Risk: $10
Target: $1,632
Reward: $40
Risk-Reward Ratio: 1:4

Gold back at $1,700, first time since Sept. 14 after near 2% gain over five days
Monday’s rally in gold fired by poor US factory activity
Gold bulls hope US data gets worse throwing Fed off jumbo-sized hikes
In a world where bad news will likely get you good news from the US Federal Reserve, gold bulls are probably hoping things get significantly uncomfortable in the United States—not on the inflation front but on the economy itself—that the central bank will be dissuaded from using jumbo-sized rate hikes to hammer markets.

The long-only crowd in bullion seemed as enthusiastic as investors in stocks to oil who celebrated on Monday a drop in the Institute of Supply Management's gauge of US factory activity that indicated a faltering economy. Stocks rose about 3%, crude oil jumped as much as 5% and gold rose almost 2%, returning to the key $1,700 per ounce region for the first time since Sept. 14.

The Fed’s potential to keep doing outsized rate hikes to fight inflation has been the main catalyst for the year-to-date plunge of 20%-30% in the Wall Street’s Dow, S&P 500 and Nasdaq indexes. Benchmark Brent oil is showing an annual gain of less than 15% now, from highs of around 50% in March. Gold, meanwhile, finished the third quarter down 7% after gaining 13% in the first-quarter.

Gold Daily

Charts by SKCharting.com

Investors are assessing the likelihood of the Fed imposing another 75 basis point (bp) rate hike—its fourth in a row—at its November policy meeting. The central bank’s so-called fed funds rate that determines the national lending rate is now in a 3.00%-3.25% range—a full 3 percentage points higher than where it began 2022. After November, officials have penciled in another increase in December—making that the final hike of the year, though by no means will it be the last in the Fed’s campaign as the central bank has eyes as well on hikes throughout 2023.

On Monday, as trading for October and the third quarter began, the Fed embarked on another noisy campaign of wanting to rein in inflation with tighter policy. The airwaves of the financial markets were chock-full of headlines on how price pressures were still too high and that rates needed to be “restrictive enough”—the new buzzword of Fed policy-makers—to balance things out.

If there’s one thing Fed folk have been good at the past year, it’s in talking the US economy towards a recession. For the record though, officials at the central bank keep denying that they want a recession, adding that the US economy is too strong to have a bad or prolonged downturn. True enough, the only reason the economy hasn’t bombed is because of a tough-as-nails job market that just refuses to give up.

But as the saying goes, “you reap what you sow”

On Friday, Cleveland Fed President Loretta Mester said the central bank will not stop its rate hikes even in a recession. Inflation remains “very high” and could continue to shock as the Federal Reserve works on subduing the worst price pressures in four decades for Americans, Fed Vice Chair Lael Brainard said Friday. “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target,” Brainard said.

Thus, it isn’t surprising that some data have started to give in to the Fed’s ministrations.

Monday’s ISM manufacturing data, for instance, showed a drop to 50.9 in September from August’s reading of 52.8. It was well below economists’ forecasts for a drop to 52.2. A reading above 50 in the ISM index indicates an expansion in manufacturing, which accounts for about 12% of the US economy.

Beyond the ISM data, investors will be looking closely at Friday’s US jobs report to assess how much impact the Fed’s rate hikes are having on the economy. Economists are expecting the US economy to have created 250,000 jobs last month, with the unemployment rate holding steady at 3.7% and wage growth staying elevated.

And despite the bravado of policy-makers like Mester—unwavering in their mission to bring inflation back to 2% a year from a current 8%, even if the economy goes to hell in a handbasket—the majority of Fed officials say data will determine the direction of policy.

That’s what’s feeding the hope of the long crowd in gold, oil and stocks now—that the data will get “progressively bad,” suppressing both the dollar and bonds yields and throwing the Fed off course from more 75-basis point—or, God forbid, full percentage point—increases from here.

Gold’s comeback rally since last week has been pinged on the weakness in the Dollar Index. Pitting the US currency against the euro and four other rivals, the index hit a more than a week low of 111.40, losing some 2.2% over a four-day span.

The yield on the US 10-year Treasury note, meanwhile, tumbled to a Sept. 22 low of 3.587%.

Ed Moya, analyst at online trading platform OANDA, said:

“Investors are starting to doubt central banks globally will remain aggressive with fighting inflation as financial stability risks are growing.”

“It is premature to say that the Fed is almost done with [monetary policy] tightening, but it seems Wall Street is growing confident that they could be done in December”.

Sevens Report Research said in a Monday research note that “the fundamental backdrop is getting less bearish” for gold “as Treasury yields and the dollar may be approaching a peak.”

But it did caution that “if we do not see a peak in yields and the buck,” then investors should expect the precious metal to tumble to new lows.

Downside risks remain for gold as “major central banks are expected to continue raising interest rates aggressively to combat surging inflation,” ICICI Bank said in a separate outlook.

Data aside, where does gold stand technically in its bid to encroach further into $1,700-territory, even cross into $1,800?

Gold Weekly

In a blog that ran Monday, precious metals strategist James Stanley broke it down to two outlooks—one for the longer-term and another for the nearer one.

The longer-term perspective, he said, has “continued bearish scenarios, putting focus on the $1,567 level and perhaps more to the point, an area around $1,454 which is confluent with a batch of swing lows from November 2019 to March 2020 that aligns with the 61.8% Fibonacci retracement of the 2016-2020 major move.”

In the nearer-term, traders are “looking to sell resistance and buy support”, Stanley said, adding:

“Of course, there are breakout strategies that look to do the opposite—selling at prints of fresh lows or buying on pushes up to fresh highs. But, in gold of late, that breakout style has seemed especially perilous to my eyes during this recent downside run. So, patience is a priority for gold bears as the pullbacks can be especially brutal to sit through, such as we saw in the first two weeks of September when gold ran up to $1,746 after an earlier-month support test at the $1,700 psychological level.”

“There’s a short-term falling wedge in-play to start the week and this has leanings of a bull flag as well. This puts the focus on a push up to resistance levels around 1690 or perhaps even 1700. A move up to either of those resistance levels could potentially re-open the door for longer-term bears but, again, traders are going to want to read price action to get a feel that sellers may be using that bounce to position-in to longer-term trends.”

Gold Monthly

Sunil Kumar Dixit, chief technical strategist at SKCharting.com, concurs with that, adding:

“At above $1,680, spot gold’s short-term price action remains bullish with a caveat, of course, that this strength should not be mistaken as an overall bullish trend.”

“The strong rebound which started from $1,615 low, indicates two things. First, there has been substantial buying from $1,615 lows.”

“Second, the bears have preferred to reposition their shorts to a higher resistance of $1,704-$1,712 for better risk-versus-reward management as broader targets on the downside $1,600 psychological handle and 50% Fibonacci level of $1,560 remain on the radar of bears. If the upside breaks above $1,712, the next resistance would be $1,735 and $1,758.”

Dixit said it was important to note that a strong consolidation and acceptance above $1,680 on the daily close can provide bulls with additional fuel for going that extra mile to the next decisive resistance zone of $1,750-$1,760.

“Failing this, prices can tumble back to $1,660-$1,640.”

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Russia Puts The Squeeze on Europe’s Gas;

Europe’s economic war with Russia over Ukraine has taken a sharp turn for the worse. It will take a miracle to stop it deteriorating further – and to protect the rest of the world from the fallout.

Over the last week, Russia has steadily turned off the gas taps to Europe, its biggest customer for the last 40 years. Germany has seen its supplies cut by 60%, Italy by 50%, France by 100%.

A relationship that has often been uneasy but always mutually beneficial is now in tatters. Moscow is making no secret of the fact that it considers the weaponization of energy supplies not only legitimate but expedient.

Indeed, Russia seems happy to leverage its position as a key exporter in many global commodities markets, confident that it can shift the blame for suffering to others. Margarita Simonyan, editor in chief of the RT news channel that has now been effectively shut down in Europe and the U.S., joked at a conference last week that “everyone is pinning their hopes famine now, because when famine strikes, they will realize that they have to be friends with us and the sanctions will be lifted.”

For its part, Europe is signalling that it has given up on any hope of economic relations with what had been its biggest energy supplier until March. The outlook for its economy is withering accordingly, and the euro's exchange rate has started to reflect fears of stagflation. Europe has accepted that it will not only have to pay higher prices for its energy for the foreseeable future, but also effectively suspend its contribution to slowing global climate change, a serious blow to the - admittedly narcissistic - self-image it has cultivated for the last three decades.

Germany, Austria and the Netherlands have all signalled they will restart coal-fired power stations this year in order to replace gas-fired generation. German Vice Chancellor Robert Habeck – who owes his place in government largely to a successful pressure campaign to shut down coal-fired power in Germany – called the move “bitter.” The news only just took the edge off benchmark European gas prices this week, which remain at over five times their level of early 2021.

As the market reaction suggests, even that may not be enough to avoid outright gas rationing in Europe later this year. Gazprom’s action forced European utilities last week to burn gas that they had put into storage for the winter, putting an abrupt end to the usual injection season. According to data from Gas Infrastructure Europe, EU storage facilities were currently 54.7% full at the weekend. That’s more or less in line with seasonal norms, but still means a lot of gas needs to be found by September if Gazprom (MCX:GAZP) – which usually supplies 25% of the bloc’s needs – isn’t playing ball.

The escalation has continued into this week, as Lithuania – with the explicit backing of the EU - has stopped the transit of sanctioned goods by rail across its territory between the Baltic enclave of Kaliningrad and the rest of the Russian Federation, dealing a serious blow to a local economy already hit hard by the collapse of trade with its neighbors. The force of that action will increase as the EU’s list of sanctions extends to such goods as coal and fuel later in the year.

Many in the Kremlin – let alone the pundits on Russian state television’s toxic talk shows redolent with puerile bravado - would see that as a brazen challenge, an invitation to restore links by force. Nikolay Patrushev, the former FSB head who now chairs Russia’s Security Council, promised a response that would have “serious negative consequences for the population of Lithuania.”

However, Lithuania – in contrast to Ukraine – is both a member of the European Union and, more importantly, NATO, its sovereignty guaranteed ultimately by the nuclear arsenals of three permanent members of the UN Security Council. For all the reckless miscalculations of Vladimir Putin’s regime over recent years, an outright attack on NATO is still – at least for now – unthinkable.

One ought, perhaps, to be grateful for small mercies. However, what has happened over the last week has entrenched divisions. Both sides obviously remain determined to securing something they can call victory. That means months, if not years, more misery for the people of Ukraine, and economic distress for Europe and all those in Africa and Asia who need grain from the Black Sea basin to feed their populations. Cold comfort indeed.