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PPI and More Tomorrow

Between fresh numbers for US PPI and more tomorrow, there is a good chance that forex and equities traders could encounter increased volatility across financial markets. First, at 8:30 am ET on Friday, tomorrow morning, the United States Bureau of Labor Statistics is scheduled to release the latest increases for the Producer Price Index (PPI; measures changes in the prices of goods and services sold by producers) and Core PPI (which excludes volatile food and energy prices), both month-over-month. These measurements of inflation are both currently forecast to have risen by 0.2% in the month of November; if the real figures fall short of these expectations, this would be bearish news for USD and bullish news for the US stock market, whereas the inverse would be true if the real PPI numbers exceed these expectations.

Second, at 10 am ET tomorrow, the University of Michigan in the US is going to publish the Preliminary release of their Index of Consumer Sentiment report. Released monthly, the index is based on data regarding the economic confidence of consumers gathered via survey; it acts as an indicator for economic optimism or pessimism, which can have big implications for financial markets. With the index anticipated to hit 56.9 this month, a larger number would signal more consumer optimism, which would be bullish news for USD and bearish for stocks. However, if the report fails to hit these forecasts, this could likely be bearish news for USD and bullish for the stock market. This is because, as with the PPI reports, hotter-than-expected growth and demand could cause the Federal Reserve to lean further into monetary tightening and hawkishness, which would fly in the face of investor hopes as reflected in the recent months’ stock market rally. Regardless of bullish or bearish biases, traders would be wise to keep an eye on these releases, as they may have a significant impact on price action tomorrow.

What Assets to Watch

While the EdgeFinder does not currently view the US Dollar in a particularly favorable light, it has generated one such bullish signal for a major pair. That pair is listed below, along with two assets worth watching for potential trade setups if tomorrow’s news is bearish for USD. They are all listed below with their respective ratings, signals/biases, and corresponding charts.

1) USD/CAD - Earns a ‘5’ Rating, or a ‘Buy’ Signal

PPI and More Tomorrow
PPI and More Tomorrow

2) US30 (Dow Jones) - Earns a ‘4’ Rating, or a ‘Buy’ Signal

PPI and More Tomorrow
PPI and More Tomorrow

3) XAU/USD (Gold) - Earns a ‘2’ Rating, or a ‘Neutral’ Signal

PPI and More Tomorrow
PPI and More Tomorrow
3 Top Smart Money Securities

Besides providing and consolidating robust fundamental analysis for retail traders to have on-hand, the A1 EdgeFinder can be especially helpful in the realm of sentiment analysis. By utilizing the software’s sentiment analysis features, traders can routinely keep up with how other traders, both institutional and retail, are allocating their capital. This matters a great deal because price action within financial markets is generated by supply and demand, which means that monitoring the aggregated demand of institutional or ‘smart money’ traders (who often have the most capital to work with) offers valuable insight into price action within these markets. With this context in mind, let's explore 3 top smart money securities as presented to us by the EdgeFinder’s Smart Money Tracker, which gathers and parses the latest Commitments of Traders (COT) data.

3 Top Smart Money Securities
This is the format in which the Smart Money Tracker presents COT data, updated weekly in accordance with the report.

1) USOil – 82.47% Long, 17.53% Short

3 Top Smart Money Securities
Despite the months-long downtrend in oil prices, many oil fundamentals remain strong. Supply is still more limited due to multilateral Russian sanctions and OPEC+ politicking, and global demand is set to spike as winter arrives.

2) USD – 72.9% Long, 27.1% Short

3 Top Smart Money Securities
Although the US Dollar Index has fallen in recent months as the Federal Reserve seems inclined to reduce rate hike size, their net hawkishness remains as economic overheating persists, which reflects in this overall USD bullishness. (USD/CHF is a stand-in here, as there is no DXY chart)

3) Gold – 68.58% Long, 31.42% Short

3 Top Smart Money Securities
While Gold's value has struggled due to the Federal Reserve's competitive rate hikes and shrinking of the money supply, it remains a safe haven asset in a global financial environment where fiat currencies enable rampant money printing.
4 Pairs to Be Wary Of

As many of you already know, the EdgeFinder, A1 Trading’s market scanner software, can be incredibly helpful for discerning which securities are especially worth watching for potential trade setups. Whether you are planning on buying or selling a currency pair, commodity, bond, or more, EdgeFinder analysis is so robust that its ratings and biases can be a go-to supplement for traders. However, one feature of the EdgeFinder’s that is little mentioned, yet quite meaningful, is its generation of ‘0’ ratings and ‘Neutral’ biases. Most days, there are a small handful of pairs or securities that earn these reviews; rather than being irrelevant, these ratings can be quite convenient to keep in mind, as they can alert traders to risks in terms of lack of signals. With that in mind, here are 4 pairs to be wary of next week, as they currently earn such ‘0’ ratings, indicating that an extra measure of caution could be helpful.

1) GBP/CAD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Most institutional traders are shorting both GBP and CAD while Canada wrestles with low inflation and the UK contends with potential stagflation.

2) USD/CHF - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Though most institutional traders currently favor USD over CHF, US Dollar bullish momentum remains in limbo while CHF retains safe haven status.

3) XAU/USD (Gold) - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Gold warrants a similar commentary to that given for USD/CHF above. Uncertainty about the Fed's next moves makes this battle between safe havens complicated.

4) GBP/USD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal

4 Pairs to Be Wary Of
Though this pair earned a 'Strong Sell' signal not too long ago (and well could again), GBP's historic rally amid the UK's return to fiscal responsibility currently offsets USD's myriad advantages over GBP.
NFP and More Tomorrow

Tomorrow morning at 8:30 am Eastern Time, the Bureau of Labor Statistics (BLS) will be reporting the latest data for three major measures of US labor market activity. Average Hourly Earnings is forecast to increase by 0.3% month-over-month, Non-Farm Employment Change (NFP) is expected to see net 197,000 jobs added last month, and the new unemployment rate is anticipated to clock in at 3.6%, increasing by 0.1%. However, these market expectations are thrown into question by the Automatic Data Processing NFP estimates released yesterday: 178,000 jobs were forecast, whereas the final estimation was a whopping 239,000 Non-Farm Payrolls added last month. If this same hot labor upset plays out in the BLS’ data on NFP and more tomorrow, we could experience yet another bullish fundamental catalyst for USD, lending even more credibility to the Fed’s concerns that high inflation is far from dealt with.

Three Potential Pairs to Sell

For those interested in going long on USD, here are three pairs to watch for selling opportunities. They are reviewed favorably for USD bulls by the EdgeFinder, A1 Trading’s handy market scanner. They are listed below in order of favorability, along with their respective ratings, signals/biases, and corresponding charts.

1) XAU/USD (Gold) - Earns a -8, or ‘Strong Sell’ Rating

NFP and More Tomorrow
NFP and More Tomorrow

2) AUD/USD - Earns a -6, or ‘Strong Sell’ Rating

NFP and More Tomorrow
NFP and More Tomorrow

3) EUR/USD - Earns a -6, or ‘Strong Sell’ Rating

NFP and More Tomorrow
NFP and More Tomorrow
What Today's CPI News Means

At 8:30 am ET this morning, the United States Bureau of Labor Statistics released a new set of shocking Consumer Price Index (CPI; a proxy for inflation) data. Month-over-month CPI and Core CPI (which excludes volatile food and energy prices) both rose far more sharply than expected in September. Month-over-month inflation had been forecast to rise at 0.2%; instead, it jumped by twice that at 0.4%, equating to 8.2% year-over-year. Likewise, core inflation was anticipated to hit 0.4% month-over-month, instead rising by a staggering 0.6%. Though today’s market activity did not reflect as such, this is incredibly bullish news for USD, as it further validates the Federal Reserve’s hawkish agenda, paving the way for more rate hikes. Let’s discuss what today's CPI news means, and several potential options for trading it.

Second Wind for Stocks?

The Dow Jones Industrial Average soared over 800 points today, or nearly 3%, on the inflation news. There is a chance this could be a bit of a reflexive fluke on the part of institutional traders (due to annual inflation technically decreasing from 8.3%), because current market conditions in the US remain holistically bearish for equities as the Fed slows economic output. However, there is also a possibility that the CPI news made stock traders more optimistic in the short term; after all, the Fed’s continued rate hikes were already all but certain, but consumer spending has evidently remained resilient despite monetary tightening. Thus, it could be the case that we see a stock market rally on a stronger-than-expected economy, however brief it may be.

Even More USD Strength

Similar to a jump scare in a horror movie revealing that the monster isn’t truly dead at the end, high inflation has once again reared its ugly head. The Federal Reserve will almost certainly feel ever more emboldened in their efforts to slow the economy, perhaps now further into the future as well, since Fed Chair Powell has made it clear he wants to err on the side of caution due to lagging indicators. Because USD has primarily surged in value in conjunction with the Fed’s interest rate aggression, it seems likely that demand for the US Dollar will yet again continue en masse.

Four Pairs to Trade

Here are four of the best forex pairs to keep an eye on for USD bulls, according to the EdgeFinder, A1 Trading’s handy market scanner. They are listed below with their respective ratings, signals/biases, and corresponding charts. The US Dollar's strange drop in value today may make for some optimal points of entry for those planning to go long on USD.

1) EUR/USD (Earns a -6, or ‘Strong Sell’ Signal)

What Today's CPI News Means
What Today's CPI News Means

2) XAU/USD (Earns a -6, or ‘Strong Sell’ Signal)

What Today's CPI News Means
What Today's CPI News Means

3) GBP/USD (Earns a -5, or ‘Sell’ Signal)

What Today's CPI News Means
What Today's CPI News Means

4) USD/JPY (Earns a 4, or ‘Buy’ Signal)

What Today's CPI News Means
What Today's CPI News Means
Is Gold's Value a Myth?

The past two years have been historic for gold against the US Dollar (XAU/USD), as XAU/USD crossed above the 2000 level for the first time in history in 2020, and then again in early 2022. However, shortly after touching resistance in March this year, the pair began trending downward, recently hitting key support at 1700. With year-over-year inflation still roaring at 8.5% as the US experiences a technical recession (two consecutive quarters of negative GDP growth), it may seem strange that gold, renowned as a perennial safe haven asset, has not been performing well. Now is the perfect time for us to discuss, and ask: is gold's value a myth?

Gold’s Reputation

Gold has a revered status among many traders and investors, with some economists and financial gurus even believing gold’s fundamentals guarantee its value as a sort of ultimate security. Some of this is rooted in nostalgia for the gold standard, and the belief that USD only had real value when it was backed by gold. This belief is an instance of a monetary theory called metallism.

However, even those who don’t subscribe to metallism still have reason to be concerned about the risk inherent to today’s fiat currencies, which are backed by governments rather than commodities. Worries about fiat money are often central for gold bulls, as they consider gold to be a perfect alternative to the waning purchasing power of cash. For the sake of evaluating these biases, let’s consider compelling arguments for both gold bullishness and bearishness.

The Bullish Case for Gold

Although there are many reasons to be bullish on gold, there appear to be three primary ones. First, gold is a scarce resource; there is a finite amount of gold in the earth, and unlike certain commodities like lumber and grain, the total amount of gold in existence cannot (practically) be manually increased. This inherently limited supply reinforces gold’s millennia-long precious metal status.

Second, demand for gold has persisted since the earliest recordings of human civilization, only increasing exponentially as the earth’s population grows. While much of consumer spending on gold is still grounded in demand for jewelry and other luxury items, gold is also used across many industries to create computer chips, dental crowns, and more. Much of this demand also comes from gold investors, of which there are many, including the Federal Reserve.

Third, gold is a store of value, retaining purchasing power while a fiat currency’s purchasing power gradually (or rapidly) declines over time. This is because, as governments and central banks coordinate economic growth and expansion, increasing a given country’s money supply accordingly, inflation occurs as consumer demand outpaces the supply of goods and services. Gold is exempt from this process since it cannot be printed ad infinitum, and its purchasing power is bolstered with time as investors seek a hedge against inflation.

The Bearish Case for Gold

There are also many reasons to be skeptical of gold as an investment, including these three. First, while gold is indeed scarce, this does not mean the supply of gold is static, as mining production increases over time. According to Statista, global gold production has even surpassed 3000 metric tons per year several times this past decade, which means increasing availability for consumers.

Second, though there is indeed consistent demand for gold, over 33% of this demand comes from investors, including central banks. While gold is certainly a store of value to some degree, the fact that approximately one-third of spending on gold comes from investors seems troubling, as some of this could be reducible to speculation. This is especially worth considering since central banks are effectively subsidizing the gold markets with additional demand, which may not last.

Third, although fiat currencies and the foreign exchange market lend permanent precariousness to the value of money, XAU/USD’s performance has also been volatile and erratic. While XAU/USD is up 5000% since 1971, it has been a rocky road getting there, with many consecutive years of stagnation and decline as well as jumps. Considering the effect of monetary policy on XAU/USD, as well as dips following historic highs, there is reason to believe gold’s value will continue dropping amid the Fed’s aggressive rate hikes.

Conclusion: Truth, or Fiction?

The bad news is the world has seldom encountered a financial situation like the one we are currently in. Conventional Keynesian wisdom prescribes that governments and central banks spend their way out of recessions, and tax and tighten amid high inflation; however, this doesn’t take supply-side issues into account, or consider these two phenomena occurring simultaneously. Thus, we are in uncharted waters, and it is unclear what effect this will have on XAU/USD.

The good news is we still have recent historical data to work with, and new circumstances don’t render it altogether worthless. On top of this, these bullish and bearish arguments for gold are not mutually exclusive, as both can be helpful regardless of bias. While short-term bearish momentum seems to be more likely amid contractionary monetary policy over the next few years, this doesn’t negate existing demand for gold, and presents myriad buying opportunities for long-term bulls who may look forward to the eventual return of expansionary monetary policy. A1 Trading's EdgeFinder tool is also a helpful way to keeps tabs on XAU/USD sentiment and fundamentals going forward.

Key Takeaways

• After soaring in value over the course of the pandemic, XAU/USD experienced a sharp bearish reversal in 2022. With such mixed results in a time of high inflation and technical recession, it is worth wondering whether gold’s mythical safe haven status is outdated.
• Gold has a prominent reputation among traders and investors as being perhaps the most promising of all financial assets, destined to appreciate amid the inevitable uncertainty brought by fiat currencies. There are compelling arguments both for, and against, this.
• Three reasons to subscribe to XAU/USD bullishness are 1) gold’s scarcity, 2) persisting demand for gold, and 3) the depreciating value of fiat currencies, including USD.
• Three reasons to subscribe to XAU/USD bearishness are 1) gold’s increased availability, 2) subsidized demand for gold, and 3) XAU/USD’s erratic historical performance.
• Unfortunately, given the experimental nature of today’s monetary systems, it is impossible to know what gold’s value will eventually be. However, when money supplies continue expanding, there is reason to believe gold’s value will grow in correlation.
• As the Federal Reserve pursues monetary policy hawkishness in the face of 8.5% year-over-year US inflation, the XAU/USD downtrend seems likely to continue due to USD strength. Once the end of Fed tightening is near, buying opportunities may abound.

Hey everybody, this is a breakdown of some of the macro trends around Gold and some of the pressures it is facing from inflation and the Fed's potential rate hikes.

Overview

As of 09/26/2021, the Gold Continuous Contract is down -0.75% this week, and -3.79% for the month. Gold is currently caught in a limbo between rising inflation and rate hikes from the Federal Reserve. Inflation is positively correlated with the price of Gold, but there isn't much inflation despite all the liquidity introduced by the Fed.

The Fed

Bank of America/Merrill Lynch theorizes that Chairmen Powell will announce that QE tapering on November 3rd. The first rate hike to occur in 3Q23 and continue on a quarterly basis. The Fed currently wants inflation as it will juice the economy. If inflation pushes beyond that zone, they may decide to increase rates. Short term inflation is a large concern because of supply line disruptions in the market. If the supply chain cannot meet the demand, then the prices of goods could kick off a bout of inflation that shoots us past the 'Troublesome Zone'.

The key variable is time. If inflation rapidly increases, the fed will move up their 3Q23 plan. If this occurs, the market could react by buying Gold to hedge against a sudden inflationary episode that grew out of the Fed’s control.

Gold Stocks are Undervalued

The Gold Mining sector is trading below the 10 year Net Asset Valuation, which indicates that the miners themselves are currently undervalued, particularly the Jr. mining stocks. If the price of gold were to swing in favor of the miners, there is more pressure to revert to the mean

A New Way to Track the Price of Gold?

After a little digging, I found a Bloomberg Index fund that tracks the price of Gold with incredible accuracy. The following chart shows the top 7 major market indices with the strongest correlation to gold.

SOURCE: World Gold Council

The index with the highest correlation is the Bloomberg Barclays Global Treasury Index, which is pegged to the Global bond market, excluding US bonds and other treasuries. Both foreign bonds and Gold have an inverse relationship with the dollar, but the BBG Global Index is useful for forecasting the overall trend of gold as it offers a less volatile perspective. Due to its high correlation to gold and it’s relatively low volatility, one can chart the overall direction of gold with near 70% correlation. This correlation holds back to 2015.

The benefit of having only a .70 correlation coefficient as opposed to 100% correlation, is that it allows us to see through the "static" of Gold's volatility. The best example is near the end of the chart: GLD moves up near 6.00%, but eventually corrects down to conform with the overall downtrend signal given by the index fund.

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