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XAUUSD: Bear Orders for Uncompleted Tests Have Led to Premiums on the Spot, while Gold Prices Are Expected to Return to the Average

CommodityInflation and RecessionCentral Bank Policy TrendsThe Fed
Summary:

Gold fell slightly on Tuesday for the second day in a row, remaining sluggish as it entered the European session and further away from the previous day's high of US$1,928 since April. Gold is expected to return soon as there are bear orders for unfinished tests at US$1,842. Nevertheless, gold prices have started the year strongly; With the support of China's reopening, both investment and physical demand supported the gold price in 2023.

Sell XAUUSD
End Time
CLOSED

1907.58

ENTRY PRICE

1840.00

TGT PRICE

1930.00

SL PRICE

1933.18 +5.21 +0.27%

532

Points

Profit

1840.00

TGT PRICE

1902.26

CLOSING

1907.58

ENTRY PRICE

1930.00

SL PRICE

Fundamentals

Gold prices were strong at the beginning of 2023, up 3.5% in the first two weeks. Gold will continue to be favored as inflation falls and interest rates approach their peak. We have a constructive view on gold over the next 12 months, but if the Fed acts unexpectedly hawkish, there could be an adjustment in the near term.
The recent rally in gold prices still looks vulnerable to price adjustments, as it is largely driven by expectations that the Fed will turn to doves. We expect the Fed's interest rate hike cycle to stop in the second quarter of 2023 as there are signs that inflation has exceeded its peak. At its meeting in December, the Fed raised its target interest rate band by 50 basis points, raising the cap to 4.5%. This is a modest adjustment after four consecutive 75 basis point rate hikes.
U.S. headline inflation fell to 6.5% in December from a peak of 9.1% in June. Inflation is expected to continue to fall this year as cardinal utility and commodity supply improve. However, the Fed could find it difficult to bring inflation back to its 2% target, as service sector inflation remains high and will take some time to subside. We believe that the Fed will not give up its efforts to control inflation expectations, so it should keep interest rates at 5% until 2024. This runs counter to market expectations of a rate cut by the end of 2023 and leaves room for price adjustments. We believe that the simultaneous easing cycle will begin in 2024.
With higher interest rates and lower inflation, real interest rates may rise in the near term, but we do not think this will constitute a strong resistance to gold prices, as the inverse relationship between gold and real interest rates has been weakening over the past year.
Since 2000, the price of gold has fallen by 13% for every 100 basis points increase in the real yield on U.S. 10-year Treasury Securities. Since 2018 and 2020, this sensitivity has been reduced to 3% and 1% respectively for a 100-basis-point change in the 10-year real yield. By 2022, the 10-year real yield had increased by 260 basis points, while gold remained largely unchanged. This can be explained by various shocks such as the U.S.-China trade war, the COVID-19 pandemic, and the Russian-Ukrainian war.
On the physical demand side, strong physical demand has been mitigating the impact of the institutional sell-off over the past two years as stagflation and geopolitical risks encouraged investors to buy.
With the reopening of China, we expect this demand to continue to grow in 2023. In the first three quarters of 2022, the lockdown reduced jewelry and retail investment demand by 15% YoY. With the easing of the lockdown and restrictions, we saw a moderate recovery in the third quarter, which created a favorable background for the recovery of physical gold demand this year.
In the short term, due to the replenishment before the Chinese New Year, the trading volume of gold on the Shanghai Futures Exchange showed a seasonal increase, but the trading volume was still lower than the seasonality in recent years. At the same time, net bulls of speculators increased their holdings to a 12-month high. China's traffic looks strong, well reflected in the spot premium of US$47-63.
XAUUSD: Bear Orders for Uncompleted Tests Have Led to Premiums on the Spot, while Gold Prices Are Expected to Return to the Average_1

Technical Analysis

Gold unexpectedly rebounded to US$1,928 after breaking the resistance levels of US$1,900 and US$1,878 and was well above the 200-day SMA; Before that, the momentum appeared to be quite strong before the price topped US$1,800. However, prices need to remain stable above US$1,900 to maintain this momentum. We believe that the current macro environment is not sufficient to maintain the current price level.
In the technical charts, the price shows the pattern of a rising wedge. A large part of the reason for this pattern is the increase in premiums caused by forced purchases by institutions. The upward trend was further broken after prices stabilized above US$1,900 last Friday, pushing up the premium. Before that, the bear orders of US$1,842 failed to complete the test, indicating that there is still much room for a price adjustment. We would not be surprised if the price dropped from its current to US$1,842. With the price falling below US$1,824, we expect the trend to reverse. When it is below US$1,800, it is further confirmed that a downward trend is formed. It is recommended to go short at the highs for the current premiums, thus confirming the price to fall back to US$1,730.

Trading Recommendations

Trading direction: Short
Entry price: 1912
Target price: 1840
Stop loss: 1930
Deadline: 2023-01-31 23:55:00
Support: 1902, 1891, 1886, 1865
Resistance: 1918, 1921, 1929
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Eva Chen

Analyst

Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.

Rank

5

Articles

480

Win Rate

65.12%

P/L Ratio

0.62

Focus on

XAUUSD, WTI, USDCAD

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