With the early failure of the summer rally at around US$1,807, the outlook for the gold market rapidly deteriorated again since mid-August. As a result, the bears managed to push the prices of gold without encountering much resistance below the important support located at US$1,680.
That mark had withstood all attacks for the last two and a half years. In a miserable general market environment, the gold bulls were no longer able to provide a strong defense of this zone; hence the price of gold sold off at US$1,615 at the end of September, reaching its lowest level since April 2021.
From the March high at US$2,070, gold has lost nearly $455 or about 22% in only seven months. In Europe, nonetheless, the picture seems much better. The weak EUR/USD guaranteed that the price of gold in euros can still show a small addition of 3.75% year-to-date. In a severe 2022 for European equity and bond investors, gold brought in at least some stabilization into the highly diversified portfolio.
With the emergency intervention executed by the British central bank to underpin the imploding bond market, gold violently turned around on September 28. The precious metal managed to recover considerably to reach $1,729 within five trading days.
Nevertheless, the recovery did not last long, as the bears pushed gold prices lower once more especially in the past three weeks. Trading very near the September low, a renewed recovery attempt might start any time. Taking into consideration the heavily oversold situation and the beaten-down sentiment, the chances of a bigger recovery are not too bad.
But, nothing has changed in the bigger picture as all industries remain in a severe bear market. The continued strength of the US dollar, integrated with rising US interest rates, is putting all asset classes under massive pressure and further withdrawing liquidity from the markets.
A vicious circle might continue until credit markets freeze. At that point, the Federal Reserve will be compelled to make a radical change in its monetary policy.
Chart Analysis Of Gold In US Dollars
The weekly chart has its support at $1,680 but it has been broken:
As was feared, the support at $1,680 no longer withstood the pressure from the bears on their fifth attempt. Although the breakthrough was not quite rapid, the situation is clear now. The prices of gold are trading at their lowest levels since March 2021 and the bullish signals are not anywhere in sight.
At least, the stochastic oscillator on the weekly chart is currently heavily oversold. But apart from the already broken lower edge of the long-term uptrend, there are no considerable supports down to the region around $1,530 to $1,570. The worst-case scenario remains a pullback towards $1,350.
On the way up, the bulls need to first clear the former support around $1,680 to offer an initial signal of a trend reversal. So far, this has not been quite successful and the resistance zone around $1,680 is now being further strengthened with two crossing trend lines.
In general, the weekly chart is bearish. From a trend follower’s perspective, lower prices below the round number of $1,600 would thus be the next logical step. Simultaneously, nonetheless, the technical situation is extremely oversold and a bet on lower prices no longer has a viable risk/reward ratio.
Daily Chart: Clearly oversold also:
Based on the daily chart, gold has been relentlessly dropping since its high in March at $2,070. Any countertrend movement quickly withered out and gold faces a total loss of about 22%.
Concurrently, gold is trading about $180 below its falling 200-day line (1,815 USD). Therefore, a short squeeze is possible at any given time. Nonetheless, this would also need a pullback into the heavily overbought US-Dollar. Considering the extremely one-sided “long dollar” positioning of a majority of the market participants, it is certainly just a matter of time.
In any case, in case gold can defend the September low at $1,615, chances for a bigger recovery would increase considerably. So far, nonetheless, that is wishful thinking but a decision will be made in the coming several days.
In general, the daily chart appears bearish, but oversold and thus ripe for a renewed recovery. But, gold would need to break out clearly above $1,680 and also clear the last high at $1,730 to send a first bullish signal.
More probably would be a tenacious and tricky bottom-building process above $1,600 or even new lows somewhere between $1,530 and $1,570. However, be prepared that this bear spook may potentially even drag on until mid-December.
Commitments Of Gold Traders
At the end of September, the cumulated net short position of the commercial participants (62,138 contracts) had dropped to its lowest level since April 2019. The result was a steep bounce of about $115. Based on the latest COT report, the short position amounts to 103,728 short-sold contracts and it is thus just above the threshold of 100,000 short contracts. At that point, one can speak of a sustainably bullish COT report
Since gold is once more trading around its September lows, the situation has improved further from the contrarian point of view.
In general, the COT report can be classified as increasingly bullish.
After seven months of nearly non-stop falling prices, the sentiment in the gold market has once more entered “excessively bearish” territory. Nevertheless, when most of the market participants are extremely pessimistic, the opposite mostly tends to happen.
Although a bottoming process may drag on for months, the remaining downside risk appears rather limited given the current sentiment. In the medium and above all in the long term, the bombed-out sentiment is now laying the foundation for the next fulminant rise in the market price of gold.
In general, the sentiment traffic light is now green and offers a strong contrarian buy signal.
Looking at the space from a seasonal perspective, the gold market still faces two challenging months ahead. Only with the United States interest rate decision on December 14 will the worst of the season be over. Until that day, the price of gold should, theoretically, trade sideways to lower.
Hence, seasonality for the gold and silver markets is bearish until mid-December.
Macro Highlights – Miserable Stock Market Causes Massive Pessimism
Historically, September and October are the worst months of the year for financial markets. So far, the current year has confirmed the statistics quite well. Since September 1, stock markets, gold, and bitcoin indicate a negative result. In general, the important asset classes have continued with their sell-off and stock indices particularly dropped to new lows.
The growing inflation numbers have not given the markets any break and are compelling central bankers in the major economies to raise interest rates more. While the United States central bankers are attempting to get inflation under control with “quantitative tightening” and interest rate hikes on an unexpected scale, consumer prices in Germany are still surging.
In recent times, German producer prices surged by 45.8% in September, the highest year-over-year rate since 1949.
Therefore, the fight against inflation is not showing any success for now, mostly in the eurozone. On the other hand, the European Central Bank (ECB) continues pouring fuel into the fire while the balance sheet total has recently grown by 6.1 billion EUR to 8,778.1 billion EUR due to “quantitative easing”.
Since reaching a record high in June, the ECB’s total assets have dropped by just 57 billion EUR and today still represent nearly 81% of the euro zone’s GDP. Therefore, the EUR remains under heavy pressure against the US dollar and continues to power inflation because of the rising import prices. Nobody knows how long the monetary experiment in the Eurozone and Japan coupled with the restrictive monetary policy in the United States can carry on.
A sustainable end to the geopolitical tensions between the USA/NATO/Eurozone and Russia/China is also not in sight. Because of that, there is no end to the energy crisis in Europe in the near term.
Thus, nothing has changed in the negative big-picture assessment of the international financial markets. The hot air is gradually and painfully escaping from the largest bubble of all time. In that process, the strong US dollar integrated with rising US interest rates is guaranteeing that liquidity in the global financial system continues to dwindle, resulting in additional stress and more margin calls.
Sadly, the vicious circle will continue until the US Federal Reserve will be compelled to radically change directions because of imploding credit markets and a dramatic surge in US unemployment rates by then. There are some expected jolting interest rate cuts and huge liquidity measurements before the end of the first half of 2023.
Concurrently, nevertheless, options traders have now amassed more than $20 billion worth of put options to hedge against an equity market crash. Never in the history of the United States financial markets has the put/call ratio been at 3:1.
Panic and fear are thus extremely high and market participants are maybe too bearishly positioned currently. Therefore, a temporary yet steep recovery (bear market rally) is possible by the end of this year.
Even if most gold investors are now dissatisfied with the weak gold price development in US dollars, there is no way around gold in these volatile and crazy times given the turbulence in financial markets, many hot spots, historically high inflation rates, and many (geo)political risks coupled with the looming equalization of burdens/load balancing.
Fundamentally, the physical demand for the precious metals remains very huge and has resulted in sometimes considerably high premiums, mainly for silver.
In the bigger picture, gold appears to be on its way to its normal 8-year low, due sometime between December 2022 and December 2023. With some luck, the United States interest rate decision on December 14 may bring the reversal of the downtrend and the start of the next huge upside wave in the gold market.
Even if the final low does not materialize until later next year, the long-term outlook for gold remains quite promising. It is possible that in the next bull market wave, price increases of 100% to 600% are highly possible.
Nonetheless, all that is still pie in the sky, since in the near term, all the markets remain under huge selling pressure. Gold is now looking for a bottom just above $1,600. If the zone between $1,600 and $1,625 can fend off the current bearish attacks, a double low might initiate a bigger recovery towards $1,680 and maybe even $1,800.
Both sentiment and COT data, and the oversold market conditions, argue in favor of this. On the other hand, there will be a drop below $1,600 until mid-December, although the prices of gold are then unlikely to drop considerably below $1,550.
In the long term, a remaining downward risk of around $100 is now standing against a possible reward of at least $1,000 and much more.]