Gold Traders' Report - August 10, 2018

Jim Pogoda, Trader, Gold Bullion International 
AUG 10, 2018

Markets were roiled overnight and through the NY morning hours by a further collapse in the Turkish lira (5.53 – 6.80), after negotiations between US and Turkish officials over the detention of a US Pastor yielded no progress.

Turkish President Erdogan, in response to the lira’s fall, put kerosene on the fire by calling for citizens to convert euros, dollars and gold “beneath your pillows” to lira, and dismissed concerns over the plummeting currency, saying “if they have their dollars, we have our people, our God”. Trump added more fuel to the fire by tweeting the following:

I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!

8:47 AM - Aug 10, 2018

Global equities tumbled, with the NIKKEI off 1.3%, the SCI was unchanged, Eurozone shares were off from 0.7% to 1.6%, and S&P futures were -0.4%.

The euro was slammed lower ($1.1535 - $1.1415 fresh 1-year low), as fear of heavy Eurozone bank exposure to Turkey weighed on the common currency. Investors flocked to the usual safe havens, with the yen advancing to a 2-week high (111.15 – 110.50), and the yield on the US 10-year bond sank from 2.93% to 2.87%.

The US dollar rallied strongly, blowing through stops over 95.66 (7/19 high) to reach 96.30. Gold initially sold off on the dollar strength, slumping down to $1205.80 where support at the 8-bottom low from $1205-08 held. However, safe haven bids joined the bargain hunters, and drove gold to back through $1209 (down trendline from 6/14 $1309 high).

Gold picked up some short covering bids as well - despite the climbing dollar – as many didn’t want to stay short ahead of the weekend with a crisis potentially brewing. Gold reached $1217, where resistance at the quadruple top at $1216-18 (8/6, 8/7, 8/8, and 8/9 highs) capped the advance.

Into the late morning, the Turkish lira had a modest recovery (6.40), and its 10-year yield dipped from 22.8% down to 20.67%. US stocks came off of their earlier lows (S&P from 2831 to 2842, off 12), and the US 10-year yield ticked up to 2.88%. The DX pulled back, but was choppy between 96.10-96.25. Gold retreated to $1210.50, finding support ahead of the $1209 down trendline.

In the afternoon, reports from Trump legal advisor Sekulow that the US was close to a resolution on the Turkey-Pastor case took the lira up to 6.30, and helped US stocks to pare losses (S&P -20 to 2833). The US 10-year bond yield rebounded from 2.853% to 2.879%, while the DX remained nervous and choppy between 96.22 – 96.36. Gold traded narrowly between $1210.50 - $1212.50 and was $1211 bid at 4PM with a $1 loss.

Open interest was up 1.9k contracts, showing a combination of early new shorts and bottom fishing longs from yesterday’s dip to $1206. Volume was lower with 239k contracts trading. The CFTC’s Commitment of Traders Report as of 8/7 showed the large funds cutting 1k contracts of longs and adding another large amount of shorts - 22k contracts - to cut their net long position to just 12k contracts.

This was largely done on gold’s move down from $1225 on 8/1 to $1205 on 8/3. It is the lowest NFLP since December 2015 when gold just began to bounce off of its $1046 low. Given this historically and relatively low NFLP and the hefty amount of gross spec shorts (196k contracts) in the market, gold is certainly set up to move higher if and when these shorts are forced to cover, and the sidelined longs get back in.

Some bulls were discouraged that gold couldn’t advance strongly today – given the currency crisis and the reverberations throughout the global financial markets. However, other bulls were pleased that despite the dollar’s massive gain 0.85 (0.89%), gold was able to hold as well as it did, and finally managed to close over $1209 (down trendline from 6/14 $1309 high).

They remain steadfast that gold has or is very close to putting in a major bottom. They maintain the market has been extremely oversold - having dropped $160 (11.7%) since 4/11, and $104 (7.94%) since 6/14. Also, its 14-day RSI has spent only 6 sessions north of 35 since 6/14. Bulls strongly believe that the dollar’s rally is badly overextended, and expect a meaningful correction in the greenback from today’s high (up 9.29% since its 88.25 low on 2/14) to help trigger a significant short covering rally in gold.

Bulls are looking for a breach of $1216-18 (5 tops from last 5 sessions) to trip some buy stops to test next resistance levels at the double top at $1220-21, the $1225 options strike, the double top at $1228-29, and then $1235-38 (old support level, and triple top) – and some believe that this can be done in a cascading fashion.

They expect a significant correction to at least $1257 – the 50% retracement its move down from $1309 (4/11 high) to last week’s $1205 low. In addition, bulls maintain that today’s Commitment of Traders Report with a historically and relatively very low Net Fund Long Position (12k contracts, low since Dec ‘15) and a massive and growing gross short position (+22k to 196k contracts –short side of gold becoming 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.

Some bears were disappointed that today’s massive up move in the dollar wasn’t enough to breach support in gold at the $1205-08. Many ran for cover on gold’s rebound up to $1217 ahead of the weekend, but others used the opportunity to rebuild short positions, and will patiently wait for further strength to sell into scale-up.

However, other bears are still looking for gold to decline significantly more, as witnessed by today’s COT Report showing another large build in fund gross shorts (+22k contracts to 196k contracts). They feel fuel from a firmer dollar will continue to provide downside pressure on gold, and that the dollar’s ability to strengthen against other currency majors still has legs.

In addition, they feel that continued strength in US equities will put additional pressure on gold. They will be gunning for stops below $1205-08 (9 bottoms) to lead to a test of $1200 followed by $1195-98.

All markets will continue to focus on geopolitical events (especially with Turkey), developments with the Trump Administration (especially on US-China trade), Q2 corporate earnings, oil prices, and will have an extremely light day of economic reports Monday - only a German Wholesale Price Index Report – to provide near-term direction.

In the news:

Resistance levels: 

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

$1220-21 – 8/2 and 8/3 highs

$1223 – 20-day moving average

$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

$1241 – 40 day moving average

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

$1250  - options

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

$1252 – 50 day moving average

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

$1266 – 7/9 high

$1268 – 6/26 high

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

$1275 – options

$1278 – up trendline from 1/9/17 $1171 low

$1275 – 6/15 low

$1275 – 50% retracement of down move from 6/14 $1309 high to 7/2 $1240 low

$1276 – 6/20 high

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

$1282 – 6/18 high

$1284 – 6/19 high

$1287 – 100-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

$1295 - up trendline from 12/15/16 $1123 low

$1295 – down trendline from 5/15 $1315 top

$1296– 200-day moving average

$1299 – 6/13 high

$1300 – psychological level, options

$1300 – 6/12 high

$1300 -03–7 tops 6/1, 6/5,6/6, 6/7, 6/8, 6/11, and 6/12 highs

$1301 – 50% retracement of up move from 12/12/17 $1236 low to 1/25/18 $1366 high

$1301 – down trendline from 4/11 $1365 high

$1305 – down trendline from 4/23 $1336 high

$1306 -08 – quadruple top, 5/24, 5/25, 5/29, and 5/31 highs

$1315 – 5/15 high

$1318 -19 – quadruple top 5/3, 5/7, 5/8 and 5/9 highs

 Support levels:

$1209 – down trendline from 6/14 $1309 high

*$1205-08 – 9 bottoms – 8/2, 8/3, 8/6, 8/7, 8/8, 8/10 7/7/17, 7/10/17 and 7/11/17 lows

$1200 – psychological level, options

$1195-98   - 5 bottoms1/31/17, 2/1/17, 3/9/17, 3/13/17, 3/15/17 lows

$1188 – 1/30/17 low

$1181 – 1/17/17 low