Gold Traders’ Report – September 7, 2018

Gold was a tad firmer overnight, but confined to a narrow range of $1198.40 – $1203.50, with activity a bit muted ahead of the US Payroll Report.

Gold was boosted by a modestly weaker dollar, as the DX slid from 95.05 – 94.87.

The dollar was pressured by early strength in the yen (110.90 – 110.41, stronger Japanese Household Spending, safe haven flows), a gain in the pound ($1.2915 – $1.3028, EU’s chief negotiator Barnier said they are open to discussing other backstops with regards to the Irish border, and that a no deal scenario is “not our scenario”), and some strength in some emerging market currencies (Turkish lira, Indonesian rupiah, South African rand, Mexican peso, and Indian rupee).

Mostly lower global equities were a tailwind for gold, with the NIKKEI off 0.8%, the SCI was up 0.4%, European markets were down from 0.2% to 0.7%, and S&P futures were -0.1%.

At 8:30 AM, the much awaited US Payroll Report was stronger than expected, with Nonfarm Payrolls up 201k (vs. exp. 195K), and with Average Hourly Earnings up a hefty +0.4% (vs. exp. 0.2%). The probability of future Fed 25 bp rate hikes increased markedly on the report according to FedWatch:

Equity futures initially sold off (-15 to 2865), and the US 10-year bond yield leaped from 2.882% to 2.95% (1-month high).

The DX shot up to 95.35, and gold sold off. The yellow metal tripped stops under $1200 and $1196 (yesterday’s low) on the way to $1193.50. However, as we’ve seen time and again in recent weeks, dip buying emerged to bring gold back to the $1200 area.

Later in the morning, US stocks turned positive (S&P +7 to 2884), helped by upbeat comments from White House economic advisor Larry Kudlow. The 10-year yield ticked down to 2.94%, and the DX hovered between 95.25 – 95.30. Gold pulled back in response and slipped to the $1197-98 level.

Early in the afternoon, comments from Trump that he was “ready to go on short notice” on tariffs for another $267B in Chinese goods – on top of the $200B in goods already targeted – and that Japan “knows it’s a big deal” if it can’t reach a trade deal with the US turned US stocks lower.

The S&P was off 12 to 2866, with the materials, utilities, and real estate sectors lagging, and the 10-year yield dipped to 2.926%. However, the dollar advanced – as it has typically as done when trade tensions have escalated – with the DX climbing to 95.46. Gold retreated, but strength from weaker equities limited its downside to $1193.70, with the prior low holding.

Later in the afternoon, US equities pared losses (S&P finished off 5 to 2873), while the 10-year yield recovered to 2.945%. The DX remained steady around 95.40, and gold was stable between $1195.50-$1196.50. Gold was $1196 bid at 4PM with a loss of $3.

Open interest was up 3.6k contracts, showing a net of new longs from yesterday’s advance. Volume was higher with 304k contracts trading.

The CFTC’s Commitment of Traders Report as of 9/4/18 showed the large funds cutting 7.6k contracts of longs and adding 2.8k contracts of shorts to increase their net short position to 14k contracts. This was largely done on gold’s move down from $1214 on 8/28 to $1190 on 9/4. Seeing the large funds get further net short is obviously not good for sentiment.

However, having this group net short – an occurrence that hasn’t happened in 16 years – certainly leaves the gold market set up to move sharply higher as the short side of gold has become an extremely crowded trade. With longs on the sidelines and a massive gross short position having been constructed (213k contracts), gold just needs a spark to unleash a torrent of buying from shorts covering and sidelined long-side players returning.

Bulls were disappointed with gold’s $3 decline today, but some were encouraged that it held up fairly well. It held above the up trendline from the 8/16 $1160 low at $1196 – despite the hot Payroll Report that drove up the yield on the US 10-year bond to a 2-week high at 2.95% and strengthened the DX to just shy of 95.50.

Bulls remain undeterred in their thinking that gold bottomed at $1160 on 8/16 after a $35 2-day capitulation, and will look to either add to long positions on weakness, or on some expected ensuing upside momentum. They maintain the market has been and remains extremely oversold – having dropped $205 (15.0%) since the 4/11 $1365 high, and $149 (11.4%) since the $1309 high on 6/14.

Bulls strongly believe that the dollar’s rally was badly overextended, and expect its correction from 8/15’s 96.99 high (up 9.90% since its 88.25 low on 2/14) to continue, and drive a significant short covering rally in gold. Bulls are looking for gold to consolidate recent gains over $1187 (50% retracement of up move from the 8/16 $1160 low to last week’s $1214 high) and then challenge resistance at $1207-09 (quadruple top – 8/29, 8/30, 8/31, and 9/6 highs), and then $1216-18 (5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10 highs).

Beyond this, bulls are looking for a move to at least $1262 – the 50% retracement of the move down from the 4/11 $1365 high to the 8/16 $1160 low. In addition, bulls maintain that today’s Commitment of Traders Report showing the large funds adding to their net short position (turned short two weeks ago for the first time since 2002) and with a massive gross short position (213k contracts –short side of gold an extremely crowded trade) leaves this market set up in a highly favorable position to move up from potential heavy short covering and sidelined longs returning to the market.

Bears have been using gold’s recent bounce off of $1160 to rebuild short positions scale up, and are comfortable to continue to sell into any strength. Many bears believe that gold’s recovery rally ($1160 – $1214) has been completed and are looking for the yellow metal to resume its decline. This is witnessed by today’s COT Report showing the large funds added to their net short, with a massive 210k contract gross short position.

They feel fuel from a rebound in the dollar from its recent correction will provide downside pressure on gold, and that the dollar’s ability to strengthen against other currency majors (and emerging market currencies) still has legs. They will be gunning for stops below key support levels in the mid $1180’s – $1188 (up trendline from 10/19/08 $682 low), $1187 (50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high), and $1183 – 84 (triple bottom – 8/20, 8/23, and 8/24 lows) to lead to a test of $1175 (options strike) and then $1171-73 (quadruple bottom – 8/15, 8/17, 1/6/17 and 1/9/17 lows).

All markets will continue to focus on geopolitical events (especially emerging markets), developments with the Trump Administration (especially on US-China and US-Canada trade, potential legal issues), oil prices, and will turn to reports Monday on Japan’s GDP, Trade Balance, Economy Watchers Survey, and Machine Tool Orders, Chinese New Yuan Loans, PPI, and CPI, UK’s GDP, Trade Balance, and Industrial Production, Eurozone Sentix Investor Confidence Index, US Consumer Credit, and comments from the Fed’s Bostic for near-term direction.

In the news:

Resistance levels: 

$1198 – 9/5 high

$1200 – psychological level, options

$1202-04 – triple top – 9/3, 9/4, and 9/7 highs

$1207 – 9 – quadruple top , 8/29, 8/30, 8/31, and 9/6  highs

$1208 – 40 day moving average

$1209 – double top, 8/24, 8/31 highs

$1214 – double top – 8/13 and 8/28 highs

$1216-18 – 5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10 highs

$1217 – 50 day moving average

$1220-21 – 8/2 and 8/3 highs

$1225 – 7/30 high

$1225  – options

$1227-28 – 7/27, 7/31 highs

$1234-35 – triple top, 7/23, 7/25, and 7/26 highs

$1235 -38 – 6 bottoms –7/16/18, 7/13/18, 12/12/17, 7/18/17, 7/19/17, 7/20/17 lows

$1245-46 – double top – 7/16 and 7/17 highs

$1250  – options

$1251-53 – triple bottom 7/4, 7/5, and 7/6 lows

$1257 – 100-day moving average

$1259-61 – quadruple top – 6/27, 7/4, 7/5, and 7/6 highs

$1262 – 50% retracement from 4/11 $1365 high to the 8/16 $1160 low

$1266 – 7/9 high

$1268 – 6/26 high

$1270-73 – triple top, 6/21, 6/22, and 6/25 highs

$1275 – options

$1275 – 6/15 low

$1276 – 6/20 high

$1281-82 – double bottom, 5/21  and 12/27 lows

$1282 – 6/18 high

$1284 – 6/19 high

$1287– 200-day moving average

$1288 – double bottom, 5/22 and 5/23 lows

$1292-95 –5 bottoms – 6/6, 6/7, 6/8, 6/11, 6/12, and 6/13

Support levels:

$1196 – 9/6 low

$1195 – 20-day moving average

$1193 – 9/7 low

$1190-91 – double bottom, 9/4 and 9/5 lows

$1188 – up trendline from 10/19/08 $682 low

$1187 – 50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high

$1183 – 84 – triple bottom – 8/20, 8/23, and 8/24  lows

$1175 – options strike

$1171-73– quadruple bottom – 8/15, 8/17, 1/6/17 and 1/9/17 lows

$1166 – 1/5/17 low

$1160 – 8/16  low

$1156 – 1/4/17 low

$1150 – options

$1146 – 1/4/17 low

 


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