2023-05-07 12:37:47 ET
Summary
- The collapse of First Republic Bank sparks selling among regional banks, signaling a bullish gold market as investors seek safe havens.
- The ISM Manufacturing report shows continued contraction in manufacturing activity, potentially driving investors toward the gold market for stability.
- The gold market's bullish structure remains strongly bullish with the probability of breaking the key level of $2,075.
- The SPDR Gold Trust has successfully breached the bull flag, and the current correction in the gold market presents a robust buying opportunity for GLD at the point of the breakout.
The escalating regional banking crisis is significantly affecting the US economy, prompting investors to seek more secure investment options. Amidst this financial instability, gold price ( XAUUSD:CUR ) has risen as a reliable refuge, displaying heightened fluctuations and expanding momentum. Nevertheless, the gold market confronts a hurdle in surpassing the crucial $2,075 mark, which has been a primary objective based on support levels and has now been attained.
This article extends the previous discussion by exploring the influence of contemporary economic aspects, such as employment and manufacturing, which have been impacted by the recent regional bank collapses. As the gold price is currently confronting a robust resistance level, any downward adjustment in this area could offer a final chance to acquire gold at lower prices. Concurrently, SPDR® Gold Shares ETF ( GLD ) has already surpassed the bull flag, and an upcoming correction in the gold market might put this breakout to the test, providing an exceptional opportunity for gold investors to invest in GLD.
The Regional Banking Crisis and Its Impact on the Gold Market
The recent collapse of First Republic Bank ( FRCB ) has triggered a new wave of selling among regional banks, emphasizing the potential for a shift toward alternative investment opportunities on a broader scale. The S&P Composite 1500 Regional Banks index breaks the support level at 90, signaling a strong decline as shown in the chart below. As a result, this breakdown has significant implications for the banking sector and the overall economy, potentially indicating heightened financial instability and reduced investor confidence. As financial instability continues to affect the banking sector, the gold market is poised to benefit from investors seeking a safe haven for their assets.
The rise in Overnight Reverse Repurchase Agreements to 5.3% and the increase in the Market Yield on U.S. Treasury Securities at 3-Month Constant Maturity to 4.8% can be linked to the Federal Reserve's actions to manage liquidity and regulate short-term interest rates in the face of mounting financial instability. Uninsured deposits, concealed losses on fixed-rate investments, and competition with money market funds have all played a role in these increases, as the central bank strives to preserve financial stability and deter investors from fleeing to safer assets.
In the United States, around $7 trillion in uninsured bank deposits significantly reinforce the bullish prospects for the gold market. Lacking Federal Deposit Insurance Corporation (FDIC) coverage, these deposits are at risk of moving to safer assets during times of financial uncertainty. Making up almost 40% of all bank deposits, these uninsured deposits surpass the FDIC's insurance cap of $250,000, which was increased from $100,000 after the Global Financial Crisis.
To put this into perspective, the $7 trillion figure is nearly three times Apple's market capitalization and roughly equal to 30% of the U.S. GDP. The potential movement of these uninsured deposits toward safer investments, such as gold, is amplified by several factors. First, the uninsured deposits are not protected by FDIC guarantees, making them susceptible to seeking safety at the first sign of financial trouble. Second, rising long-term interest rates have led to large, undisclosed losses on fixed-rate investments held to maturity, which could impact investor confidence and prompt a shift toward gold which is a safe haven investment. Third, rising long-term interest rates also impact client balance sheets, resulting in undisclosed losses from commercial real estate and private equity investments, further contributing to financial uncertainty and making the gold market more attractive to investors seeking stability. Finally, banks face difficulty competing for deposits with money market funds, which can invest in Fed reverse repos or short-term Treasury securities yielding close to 5.0% per annum, potentially exacerbating financial instability and reinforcing the appeal of the gold market as a safe haven.
Considering these factors, the gold market stands to benefit significantly as investors seek a secure and stable investment option amid financial turbulence and uncertainty. The potential movement of uninsured deposits, coupled with undisclosed losses and heightened competition for deposits, strengthens the case for a bullish gold market.
Impact of Employment and Manufacturing Sector on Gold Prices
A comprehensive understanding of the gold market can be achieved by examining employment and manufacturing market conditions. According to the Bureau of Labor Statistics ((BLS)) report, job growth in April 2023 reached 253K, a significant increase from the 165K jobs added in March 2023. This positive job growth, indicative of a robust economy, could raise concerns regarding inflationary pressures. Higher employment rates may lead to increased consumer spending, driving demand and causing prices to rise. Inflationary pressures can negatively affect traditional currency and other financial assets, prompting investors to consider gold as a hedge against inflation. Consequently, the heightened demand for gold as a safe-haven asset and an inflation hedge supports a bullish gold market.
In addition, the 0.386% increase in average hourly earnings in April, amounting to an annualized rate of 4.6%, points to higher disposable income and increased consumer spending, potentially contributing to inflationary pressures. For the 12 months leading to March 2023, the core PCE inflation, the Federal Reserve's preferred long-term inflation measure, has eased to 4.6%, still far from the Fed's 2.0% target. This suggests that the inflation rate remains above the central bank's preferred level, potentially influencing monetary policy decisions. The strong job growth in April might initiate a new wave of inflation, affecting the Fed's decision to continue hiking interest rates.
The Employment Cost Index, another tool for measuring long-term inflationary pressure, declined to 5.1% for the 12 months leading to March 2023 from its peak of 5.7% in 2022, as shown in the chart below. Despite this decrease, quarterly data demonstrates that employment costs have consistently hovered around 1.2% over the last three quarters, implying that inflationary pressure persists. This data suggests that even if consumer prices fall and drag the core PCE to lower levels, the underlying pressure on wages and positive job growth may indicate a swift resurgence of inflation, which is a bullish factor for the gold market.
Conversely, the ISM April Manufacturing report reveals a continuous contraction in manufacturing activity for the sixth consecutive month, potentially impacting the gold market positively. The PMI's slight increase to 47.1% signifies that the contraction rate has merely slowed down, and a reading above 50% is required for expansion. The new orders component, a leading indicator, anticipates further contraction in the manufacturing sector.
The ongoing decline in manufacturing activity could intensify concerns about the economy's overall health, increase financial uncertainty, and affect investor sentiment. As a result, investors consider gold as a safe-haven asset to protect their wealth and hedge against potential economic downturns. The continued contraction in manufacturing and the new orders component's warning signs bolster the appeal of a bullish gold market as investors seek stable and secure investment options amid economic uncertainty.
Investigating the Key Breakout in the Gold Market
A Brief Recap
In recent articles , the bullish structure of the gold market has been discussed, with a primary target of $2,075. This structure is characterized by strong bullish price action, as evidenced by the inverted head and shoulders pattern and bull phases. The price has formed a robust bottom at the neckline of the inverted head and shoulders pattern and reached the target of $2,075. Amid ongoing global economic uncertainty, concerns of higher prices in the market could potentially break the key level of $2,075. The yearly candles for 2021 and 2022 are inside bars, indicating price compression within tight ranges, which further strengthens the bullish view. A potential break above the 2022 highs could signify a breakout from this price compression to the upside.
Key Factors to Confirm the Breakout
The chart below showcases another bullish price action, represented by the inverted head and shoulders pattern and the rising trendline acting as the neckline. The significance of current price levels is observed using this chart. The price exceeds the line and then quickly reverses to close back below the line, faking out traders each time. However, this time, the price is marking a bottom below the inflection point of $1,680.
The price has been in a long-term consolidation between $1,680 and $2,075, and the gold market faked out a break below $1,680 before reversing higher, signaling that the price is ready to break $2,075. The key factors for this breakout to validate are as follows:
- The price must close above the $2,075 level on a quarterly basis. Investors should watch for this number as the next quarterly candle closes on June 30, 2023.
- The gold market must not close any month below the 20-month exponential moving average ($1,851) in any correction.
As long as these key factors align, the gold market is likely to continue its upward trajectory.
Identifying Key Targets in the Gold Market
The long-term bullish price action is observed in the quarterly chart below. The updated chart suggests that the significance of the $2,075 level may be diminished, as the price is already in a bullish phase. The blue lines from the start of the 1970s, 1975s, and 2000s indicate significant upward rallies. The recent strong rally, which began in the 2019s, is still gaining momentum, and the consolidation phases between $1,680 and $2,075 are considered part of the broader bullish development. Based on this analysis, the bull-bear line has already been broken, and the price is on its way to much higher levels.
As the price compresses within wide ranges, it forms a strong bullish price action in the form of a cup and handles pattern on a broader scale, as seen in the quarterly chart below. The price is currently testing the neckline of this cup at $2,075, and if the target of this breakout is measured from the cup's lows based on the last historical move, the 700% move lies above $8,000. This implies that a breakout from this region will initiate a strong rally to higher levels, regardless of overbought conditions. It is also observed that rallies typically begin when the RSI becomes overbought.
With a persistently optimistic long-term perspective, the price is currently confronting a crucial and robust key level, indicating that a short-term adjustment is imminent. This brief correction from resistance could remain confined within the ascending channel , which is supported by the $1900-$1950 levels in the gold market. Investors can view this price range as a significant support area for the short term, enabling them to accumulate long positions in the gold market.
Why GLD is the Best Investment Option
Investing in the GLD has become the most convenient and accessible method for investors to gain exposure to the gold market. As the largest and most liquid gold-backed ETF globally, GLD offers an attractive investment opportunity for both institutional and individual investors. The chart below presents the Assets Under Management ((AUM)) of GLD, iShares Gold Trust ( IAU ), VanEck Gold Miners ETF ( GDX ), VanEck Junior Gold Miners ETF ( GDXJ ), and SPDR Gold MiniShares ( GLDM ). With the highest AUM of $59.92 billion among its competitors, GLD's dominant position is attributed to its strong reputation, superior liquidity, and accessibility to a diverse investor base. Being the first gold-backed ETF, GLD has solidified its market leadership, drawing interest from both institutional and retail investors. The accelerated growth in AUM outpaces other gold ETFs, demonstrating the market's preference for GLD as a gold investment vehicle, which in turn boosts its liquidity and trading volumes. This consistent AUM growth has bullish implications for GLD, signaling robust investor confidence and sustained demand for gold exposure, potentially driving GLD's price upwards and reinforcing its status as the preferred gold investment option in the market.
The chart below illustrates the relationship between GLD's price and its 30-day average trading volume. Notably, the GLD price has risen rapidly over the last few weeks amid increased uncertainty in the banking sector, accompanied by a surge in the 30-day average trading volume. Although the volume has slightly receded from its peak, the price currently trades at the edge of a breakout. This decreased trading volume might suggest waning interest from market participants, indicating that investors are awaiting a clear signal before committing capital. The proximity to a breakout implies that GLD is nearing a critical technical level, potentially signifying a continuation of the existing trend. Concurrently, the combination of reduced trading volume and the price trading at the edge of a breakout could denote a potential "spring" setup, where the market consolidates before a strong move in either direction. As low-volume pullbacks often precede surges in volume and decisive price moves, investors should monitor technical indicators and price action closely to anticipate a potential breakout.
On the other hand, the net demand for gold ETFs is negative, with a modest decline of -29t in the first quarter of 2023, however, the overall gold demand, inclusive of OTC investments, experienced a 1% year-over-year increase to 1,174t, indicating that gold remains a sought-after asset for investors. This recovery in OTC investment aligns with investor positioning in the futures market, which can contribute to the demand for gold ETFs, specifically GLD in the long term. Moreover, the continued momentum in central bank buying , resurgent Chinese consumer demand, and stable global jewelry consumption underscore the enduring value of gold as an investment and a store of value. As the largest and most liquid gold-backed ETF, GLD is well-positioned to benefit from the positive sentiment towards gold, attracting investors seeking a convenient way to gain exposure to the gold market. Consequently, the current decline in ETF demand may represent a temporary shift in market dynamics, with the potential for future growth in GLD, as investor interest and market conditions evolve.
Furthermore, the technical chart discussed in the previous article concerning the GLD has already surpassed the $182 mark, and the price is trending toward higher levels. This chart is well-supported by the inverted head and shoulders pattern, followed by the breakout of the bull flag. The updated price structure suggests that if any correction occurs in GLD due to the presence of a strong pivot in the spot gold market at $2,075, GLD might likely find strong support at the $182 level. This could potentially represent the final opportunity to enter the GLD at a lower level.
Market Risks Associated with Gold Investment
In the first quarter of 2023, the gold market witnessed a net negative demand for ETFs at -29t, indicating a potential weakening of investor sentiment toward gold. Should this trend continue or worsen, it could adversely affect the gold market. Concurrently, flat jewelry consumption at 478t, along with the stock building that added over 30t to global inventories, could signal an oversupply in the jewelry sector. If demand fails to pick up, this could result in downward pressure on gold prices.
Furthermore, the gold demand in the technology sector slumped to 70t, marking the second-lowest quarter since 2000. This suggests the possibility of long-term weakness in this area. If the challenging economic climate persists in hampering gold usage in technology, it may contribute to the gold market's downside momentum. In the first quarter of 2023, modest growth in both mine production (+2%) and recycling (+5%) led to a slight increase in the total gold supply, reaching 1,174t. If gold demand cannot keep up with this increased supply, it could lead to downward pressure on gold prices.
From a technical perspective, the gold market's current levels, as seen in the chart below, highlight their significance. The buy signal target at $2075 has been achieved, which has been the target in recent updates. This buy signal was generated due to the strong bullish development attributed to the inverted head and shoulders pattern and RSI support at 50. A robust barrier at $2075 can be observed, where the price previously dropped from this region, and overbought RSI levels suggest a market correction. However, it is important to note that any correction in the gold market should be bought back, and the likelihood of breaking higher from current levels is high as global financial uncertainty accelerates.
Final Thoughts
From the above discussion, it is evident that the gold market is well-positioned to benefit from the prevailing financial instability affecting the banking sector. The Federal Reserve's efforts to regulate liquidity and manage short-term interest rates in the face of increasing financial uncertainty support the bullish outlook for the gold market. Additionally, the substantial uninsured bank deposits in the United States emphasize the potential for a shift towards more secure investments, reinforcing the argument for a bullish gold market as investors seek stability amid financial turbulence. Moreover, the job growth in April 2023 could raise concerns about higher inflation and influence the Federal Reserve's decision on rate hikes, while the ongoing decline in manufacturing activity heightens concerns about the economy's health and increases financial uncertainty, further bolstering investor sentiment towards gold.
The bullish price development of the gold market suggests significant potential for a breakout from the critical level of $2,075. Despite a net negative demand for gold ETFs in the first quarter, the enduring appeal of gold as an investment vehicle and store of value, coupled with GLD's status as the most liquid gold-backed ETF, indicates the possibility of future growth in GLD as a market conditions and investor interest evolve. Technical analysis suggests that any short-term market correction could offer a buying opportunity in the gold market ahead of a robust rally breaking the crucial level of $2,075 during the next advance, amid continuing global financial uncertainty, which could propel gold prices upwards in the long term. Investors might explore the $1,900-$1,950 range as a potential buying zone in anticipation of the breakout beyond the $2,075 threshold.
For further details see:
Gold On The Verge Of Breakout Amid Financial Instability