Monthly Precious Metals Technical Analysis - March 2021
04 March 2021
Gold – In Brief
At these levels, it is likely that most gold-valuation models are showing gold as undervalued.
The principal driver - bond yields - were driven higher for several reasons. Markets appraised higher levels of issuance in 2021 and with poor auction results last week, notably in the 7-year US issue. Primary Dealers left with excess holdings post-auction offloaded in a market with a sudden reduction in appetite – bearing in mind March issuance is expected to reach US$414 billion alone, twice as high as the previous record.
As inflation expectations moved to the highest levels in over a decade, with five-year break-evens sailing past 2.40 %, the shorter end of the curve started to tighten. This hurt participants positioned for curve steepening and possibly added to the selling of bonds in the shorter end of the curve. The result was a notable and rapid tightening. Considering the tremendous fiscal boost to the US economy, yields are likely to rise through the year.
US ISM Prices paid suggests CPI will take off?
Can gold benefit from this evolving environment?
An outcome of rapidly weakening correlations between bond yields and the S & P 500, a change that may be driven by evolving inflation expectations (https://www.cfm.fr/assets/Uploads/Bond-Equity-Correlations.pdf) may result in both bond and equity markets underperforming together, an outcome which would favour gold as a risk-diversification play and inflation hedge.
Additionally, if inflation does ramp up, bonds will face further pressure, heightening gold (and silver) appeal as hard assets.
Money and Interest Rates
The take-away about yields is that there is no talk of a Fed-managed ‘taper’: this is about changing expectations over growth and inflation. The Fed's verbal intervention may be supplemented by another ‘Operation Twist’ as the Fed buys longer-dated and sells shorter-dated paper. That (hopefully) controls the rise in the cost of longer-term debt whilst addressing the issue that short-term liquidity might be too plentiful and hard for the Fed to manage.
The chart on the right suggests US banks don’t have a huge appetite for holding, even more, US govt. debt as holdings have grown from 2.20 billion to just over 3.80 billion in the last half-decade, meaning more upwards pressure on yields?
10-year US Yields
Two things: the rally in yields has reached the 23. 6 % retracement of the 2007-2020 decline and stopped at the Monthly Standard Line. It has closed above the 38.20 % retracement of the 2009-2020 down-move. Long term point and figure targets to 1.5038 and 1.5648 have been reached. The move has been powerful, but the foregoing suggests a pause in the cycle.
Quick Overview of Managed Money Positioning in Gold
Gold Positioning and Volume-Weighted Average Pricing
Weekly Ichimoku Cloud Chart
Breaking down through the Weekly cloud takes gold out of the medium-term uptrend. The price has retested the weekly cloud (now resistance). Support at the 61.80 % retracement (US$1691) and the June 2020 low (US$1670). Resistance at US$1761, US$1789 (Weekly Turning Line) and US$1834 (Weekly Standard Line) and US$1908 (Cloud top in mid-March).
Daily Ichimoku Cloud Chart
Band of support running below the current price. Resistance at US$1760 and US$1789.
Gold Hourly Point and Figure – Medium Term
Medium-term Chart: many of the downside targets shown in the Feb report have been reached. The targets to US$1694 and US$1676 look high in confidence.
Price Targets via Point and Figure – Short Term
Above the recent low, look for a recovery – perhaps one that extends right to the Weekly Ichimoku cloud top resistance?
The ratio suggests consolidation around 63-65, ranging to 70. The deeper targets to 60 remain in place. Short term, it is hard for silver to move beyond 60. However, given a relatively bullish outlook for silver, that target of 55 is worth looking at.
Silver in USD (Weekly)
The macro view of silver. The price is compressed between the Weekly Standard and Weekly Turning lines, and a test of Weekly cloud top support at US$23.91 could be playing out. A break above US$30 opens the way to US$40.
Silver in USD – Hourly Point and Figure
Targets for the XAGUUSD medium term. The trend flips to bearish with moderate downside targets to US$23.22 and US$21.64. Above US$22, the target of US$30.55 remains in place.
Equities - the SPX
Despite the moves in the fixed income environment, the S & P remains supported at 3,806 by the Weekly Turning Line. Also, significant option strikes around the 3,900 level may help keep the price stuck near that level in the short term, barring another significant shock.
SPX Hourly Chart with Targets
Reflecting confidence of a rebound, irrespective of earnings metrics et cetera... Sub 3,700 important.
The Dollar – DXY
A break of the recent high targets 91.75-92.40. Shorts remain very short though, confident of their view.
The DXY making a slow-motion re-test of the break-down in December. Look for 92.40-60, aided by rising Dollar yields impacting EM currencies.
AUD Weekly Ichimoku Cloud
The push higher in the AUD received a knock from Chinese PMI data. Support at 0.75 from the Weekly Standard Line. The key resistance is 0.8136, the January 2018 high.
Research from ANZ suggests AUD strength helped in March from strong FX inflows from the conversion of substantial USD dividends from commodity producers.
The AUD Hourly Point and Figure
The AUD rolling over in the short term – again. Limited scope on the downside – 0.725 looks a long way away unless there is some horrible data out of China.
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