Monthly Precious Metals Technical Analysis Report - August 2020

Gold – In Brief

In last month’s ‘Where to from here?’ section, I wrote that “recent targets to US$2,060 levels may indicate where a nearby top may form”. The market made a high at US$2,075.50 on Friday the 7th of August before retreating more than US$200 by the following Wednesday, as momentum dissipated once a major price target had been achieved, and upward energy receded from the market. After falling slightly over halfway from the June-August upswing, to US$1,863, the market oscillated in a US$1,900-2,000 range for the remainder of the month. The monthly price candle has closed at or very near the month’s open – a key sign of price uncertainty.

Gold made all-time highs in August as the Dollar Index continued its decline, real yields lowered and (at the Jackson Hole Symposium at the end of the month) the Fed Chair announced an evolution of its twin mandate that caused a month-end drop in the Dollar Index (DXY) as the market interpreted that change as inflationary and Dollar-weakening, allowing gold to end the month on a firm note. More on all of that in detail later.

It is worth repeating in part Mohamed El-Erian’s comments: the  new policies “…will reinforce the faith investors have in ample and predictable liquidity support, further decoupling asset prices from economic and corporate fundamentals” whilst noting that “they formalize…increasing activism by the central bank to…promote employment as a means to making economic recoveries more inclusive while also noting the importance of maintaining financial stability” which if nothing else tells you something of the unresponsive nature of Congress on that front.  Throughout the month evidence emerged of stagnating Eurozone growth, in contrast with firmer US Flash Manufacturing and Services PMI, and solid US housing starts. Despite positive signs from the States, there are expectations of a double-dip recession.\

Money and Interest Rates

The debate over inflation targeting and the likelihood of inflation continues apace. Commentators have suggested that adopting ‘Average Inflation Targeting’ will reduce the Fed’s ability to raise rates, and therefore some asset prices will inevitably float higher. That depends on a few factors, just one of which is how long the backwards-looking period, or what the Fed calls the ‘make-up’ window is. In other words, how long a window does the Fed choose to capture the period(s) of undershooting? Markets look like they have drawn the conclusion that the Fed’s evolving policy can be viewed as: “remaining low for longer”.

Quick Overview of Managed Money Positioning in Gold

Managed Money gold longs decline again. Shorts repurchased 870,000.

Gold Positioning and Volume-Weighted Average Pricing

August recorded strong outflows on the CME futures side – perhaps too early for some, but given the great entry levels, the longs would have captured significant profit in aggregate.  Shorts are clearly extending their positions at high US$ levels.

ETF flows appears to have stabilised at very high levels.

Weekly Ichimoku Cloud Chart

Still great support from the Weekly Turning Line until the close. In fact, the price has not closed below the Turning Line since March the 20th. The cautionary note about moves looking ‘rather parabolic, which suggests caution’ on the August 7th report was perhaps a little under-stated – that was the local high.

The Red Turning line continues to be a good guide to medium-term support. Be careful that a close below it this week or next would be a strong caution signal.  Do combine this view with my comments on the DXY – Dollar index later on in the report.

Daily Ichimoku Cloud Chart

The 50% Fibonacci retracement of the June-August move was a great support level, with the price dipping US$13 below for a very brief moment before staging a substantial rally. The price now rides on trend-line support. A dip below that should see support emerge in the vicinity of the top of the cloud, initially.

Support at US$1,927, US$1,891, US$1873 & US$1826.

Gold Daily Point and Figure – Long Term

The US$20 box size reveals a major downside target after the large ‘down’ column formed by the rapid retreat from the recent high. The major downside target only takes gold to the levels in March.

Gold Hourly Point and Figure – Medium Term

Key targets hit and now the market trends lower medium term. US$1,900 remains key. Below that level the recent upside targets (on this chart) are knocked out. Downside targets below take gold to some strong supports.

Price Targets via Point and Figure – Short Term

Short term targets take gold back to the congestion zone within the blue box. US$1,915 is the important level in this short term view.

Inflation-linked bond yields & gold

Yield continue to decline as inflation expectations rise and nominal yields remains trapped in a range. The five year forward-forward inflation index shows average expected inflation five years hence, and while not high, is breaking out of the downward trend.

Gold-Silver Ratio

The ratio could not make it through 69. Silver underperformance was supported around 80. The nearby outlook implies silver underperformance back to 80.

A breakthrough 69 suggests outperformance to around 65, where I think the recent strong recovery of silver versus gold will hit a serious wall. If silver outperforms beyond the 64 level, then ‘58’ might beckon for a brief moment in time.

Silver Weekly Ichimoku Cloud

Silver consolidating below the recent high. If the price does not exceed the recent high, look for a move lower to clear out some recent entrants. Support US$23.90, US$22.92 and US$20.75.

Quick Overview of Managed Money Positioning in Silver

Managed Money longs are by no means overextended relative to former positions. They have added 19.48 million Tozs since the 28th of July. Shorts have purchased 4.58 million Tozs over the same period. Short positioning is around 70% of the 2019-2020 average.

Silver Daily Point and Figure – Long Term

The targets on the 2% chart have also been achieved, and as is so often the case, these giant macro targets act as a fulcrum with the price unwinding afterwards. So far, the decline has been very orderly, and quite limited, and a ‘mere’ 10% rally can take silver to a fresh high.

If the price does not make it above the high, there is a substantial downside target to US$15.38 to bear in mind.

Equities - the SPX

The SPX reached fresh highs, which appear to have been driven by substantial call option buying. There are signs that the price has been chased higher by short term options buyers, which compels option writers to buy the underlying stocks, chasing the price higher. That works in reverse as option shorts de-hedge on falling prices…

Support at 3,351. A close below that on a weekly basis would be worrying for the index and could pose a substantial threat to other risk assets, with the SPX showing a 0.404 positive correlation to XAUUSD.  The S&P 500 earnings yield is around 3.25%, basis trailing 12-month earnings, but trailing earnings should weaken substantially going forward, undermining that metric? Too early to say whether the drop this week is the first depth charge going off, or merely the sound of the propellers from a passing Destroyer…

SPX Hourly Chart with Targets

3,539 achieved. The drop back created a target to 2,986 which lies at the 38.20% Fibonacci retracement of the huge drive higher since March, and which is still consistent with the SPX remaining long-term bullish.

The Dollar – DXY

CAUTION: The DXY is oversold and has hit substantial downside targets. Decent US data could swing the index higher quite quickly, despite the prevailing narrative of low rates and the possibility of the Fed allowing inflation to overshoot to ‘average out’ periods of undershooting, which, combined with heavy (but declining) rate of Coronavirus infections, has been pushing the Dollar Index lower.

AUD Weekly Cloud

The AUD very slightly on the defensive with the DXY.  Support at 0.7168. Resistance at 0.751 and 0.757.

The AUD Hourly Point and Figure

Trending higher but recent price action raises a target to 0.696.

Where to from Here?

The intermediate gold target of ‘around US$2,060’ - achieved. The longer-term target is US$2,395.

The market remains in a bullish uptrend on most counts. However, it would be reasonable to expect a short-term cycle back as the array of supporting factors re-configure, with a possible counter-rally in the Dollar Index, and weakness in US equities. Weekly correlations with the SPX (S&P 500) run at +0.409, after being mildly negative until February of 2020. Gold is negatively correlated with the DXY with a -0.534 weekly correlations spanning July 2018 to present, and the Dollar Index is oversold. Things can remain oversold for a long time; however, it is worth being vigilant.

The same approach applies to silver, which has hit major targets in both USD and AUD terms.

All target probabilities basis spot US$1,940 for 3 months.

To read the full report in PDF format, please click here.

Until next time,
Nicholas Frappell, Global General Manager, ABC Bullion

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