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Monthly Precious Metals Technical Analysis Report - October 2020

10 November 2020

Gold – In Brief

Gold was dominated by the DXY and of course, by the upcoming Presidential election. And then it was brutally dominated by a vaccine announcement, which did more to the gold range than a mere election. This is the issue with writing a report that is both an attempt at a coherent summary and an assessment of the near-term outlook.
Real interest rates tightened slightly, and that helped to thwart gold’s move higher, as the price spent much of October bumping along the base of the Daily Ichimoku cloud, finding resistance there. With an imminent and highly contested US election right at the end of the month, the Dollar rejected the lows, possibly on safe haven demand, but the DXY hit resistance right at the top of the Monthly Ichimoku cloud and fell dramatically back to trendline support, helping to lift gold at the beginning of the new month, November, and setting the stage for a stronger come-back in the final two months of 2020.
The US Dollar is widely called to go lower. Initially this plays out as a result of a return of risk appetite as the election outcome appears clear enough. The longer-term drivers for a lower Dollar are the twin deficits and a continuation of low US rates, which would favour gold. (See the chart below for the rough but robust interrelation between the Dollar and the budget deficit). However, the arrival of a vaccine in early 2021 (?) and a strong recovery in the real economy could upset that pessimistic outlook.
Both charts suggest a pessimistic outlook for the Dollar – unless the arrival and successful roll-out of a vaccine can galvanise the economy in 2021.
Medium term gold remains bullish as discussed in the following pages.

Money and Interest Rates

Inflation-linked yields traded sideways in October, providing little direction or insight. However nominal yields jumped higher near the end of the month as 10 year. Why? Probably a reassessment of the amount of bond issuance likely as both parties prepare substantial fiscal spending proposals. The five-year forward inflation estimates hit the 2020 high of 1.89 pct before backing off slightly.
Signs of real yields moving higher. Lack of control over both houses might push real yields a little lower if Congress remains unwilling to allow a larger stimulus.

Quick Overview of Managed Money Positioning in Gold

CME Gold Managed Money futures up to the week to the 27th of October experienced a net increase in positioning from the end of September. Shorts retreated perhaps in an effort to de-risk before major event risk. Post 27th, Open Interest has reduced by about 1.50 million Tozs as the price fell, indicating further long liquidation.

Gold Positioning and Volume-Weighted Average Pricing

ETFs ended October about 111 million FTozs long. Managed money longs had a push on the week ending the 20th of October at US$1907.36, but the first reporting week of November revealed that longs reduced by 904,600 Tozs at a VWAP of US$1887.68 as the market moved against them.
CME Open Interest increased by about 2.70 million Tozs in the period 3-6 November as the price rallied hard, suggesting a wholesale return to gold.

Weekly Ichimoku Cloud Chart

The one technical constant through early to mid-October was the way the Weekly Standard Line provided a rock-solid support level for any price declines, until the price spike lower on the 29th and then closed above it once more. Likewise, the red Weekly Turning Line wasn’t quite as resistive, but the gold price couldn’t bring itself to close above it last month. The break higher in early November was highly encouraging, pre-vaccine news. The trend remains bullish, and the vicinity of the Weekly Standard line should remain supportive. Below that US$1838, the 38.20 % Fibonacci retracement of the March-August rally.

Daily Ichimoku Cloud Chart

A great display of the Daily cloud supressing the gold price, and with nowhere to go by the of October, the price fell sharply. Entering October, the price recovered but so far the price hasn’t been able to close above the Daily Cloud top, and the announcement of a vaccine sent gold right back to the bottom of the recent range in a flash. Expect a recovery to US$1902-1908, however.

Gold Hourly Point and Figure – Medium Term

Medium term chart that reversed course in early October. The initial response to the election results was negative as markets assumed that the fiscal response would be muted, however as a Biden win looked increasingly likely, gold staged a recovery, and building targets back to above US$2,000. Some resistance between US$1958-1967.

Price Targets via Point and Figure – Short Term

The price action broke out of the long congestion area from the end of September before the Pfizer meteorite restored things to ‘as they were’. There are now multiple targets on the short-term charts that mainly cluster around the 38.20 % Fibonacci retracement of the overnight move – a natural area to return to. US$1908 is also likely but price action in Asia hasn’t generated anything higher than US$1900 yet…

Gold-Silver Ratio

Silver outperformed eventually but chopped around in the middle – still range-bound, ultimately. A strong band of resistance at the 70 level, however and beware a sudden weakness in silver.

Silver in USD

The macro view of silver. Both the Weekly Standard line and the 38.20 pct Fibonacci retracement remained important supports, and the rally in early November enabled silver to break above the Weekly Turning Line (red) which had provide a barrier all the way through October, before falling back through. Support at US$23.26.

Silver in AUD – Hourly Point and Figure

As mentioned in the 360 Monthly Wrap, here are the targets for the XAGAUD. Although recent price action has turned bearish, there are targets back to A$36/37 plus for Aussie silver.

Equities - the SPX

More bad news on the Coronavirus front knocked the SPX from the middle of October, toward the Weekly Standard Line support. Now the market appears more focussed on earnings and potential recovery – take note though that the options market is pricing in about an almost 20% chance of the index trading at or below 3100 by the end of year. Commentators split on whether Biden would be good for equities – so far the reaction is positive.

SPX Daily Chart with Targets

Bullish. Only re-iterating (post-election) optimism. A powerful downside target to 2,725 still, however the downside target is outweighed by the significant upside targets, some of which look very remote.

The Dollar – DXY

A look at the Monthly Cloud this time, showing the very long-term Dollar trend line and Monthly Cloud supports. Once again, a good hold there.
Support at 92 and 91.50. Below that…?

AUD Weekly Cloud

The AUD pushed higher initially by the Dollar and remains steady. The currency does look expensive on a trade-weighted basis, and the recent cut by the RBA will provide little comfort from the rates differential case, and QE should have an impact via the exchange rate as well as via longer term yields. Short term support at 0.7165 and 0.6967.

The AUD Hourly Point and Figure

The AUD targeting higher. Expect short-term weakness to return after hitting the 75 level?

Where to From Here?

The last few weeks have seen sideways action on real yields then turning into slightly higher yields, and gold spent October lurking under or just within the Daily Cloud, unable to break higher. Even at the highs so far the price could not break more than US$3 above the Daily Cloud top.
The impact of the vaccine news underscored the sensitivity of the market to changes in the economic impact of Covid19: the initial reaction seems to have been overdone and again dips look like buying opportunities.
Asset markets elsewhere underwent a series of value re-appraisals as the dashed expectations of a decisive Biden victory disrupted a rotation that favoured infrastructure spending and dis-favoured bonds. The recent volatility in the 10-year US Treasuries underscores how richly priced that asset is  
target levels
So again, the technical view is medium term and long term bullish – so the current market is about trying to see through the volatility and choosing levels and being mindful of important support and resistance levels.
Until next time,
Nicholas Frappell
Global General Manager, ABC Bullion

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