Jim Pogoda, Senior Gold Trader, Gold Bullion International
AUG 16, 2019
Gold softened last night, retreating in a range of $1506 - $1528. It briefly broke support at $1510 (up trendline from 8/1 $1401 low, double top – 8/7 and 8/8 highs), but once again, decent dip buying took the market back to the $1510 level. The yellow metal was pressured by a bounce in the US 10-year bond yield (1.497% - 1.569%, 2-10 year spread out to +4bp from the inversion two days prior, yesterday’s strong US data helping to lessen recession fears), and mostly firmer global equities. While the NIKKEI was off 0.2%, the SCI rose 0.3%, European shares were up from 0.6% to 1%, and S&P futures were up 1% (strong earnings report last night from Nvidia). Gold was also weighed from an increase in the US dollar (DX to 98.31, 2-week highs), which was lifted by a further decline in the euro ($1.1113 - $1.1073, 2-week low). The common currency was under pressure from a weaker report on the Eurozone Trade Balance, with yesterday’s dovish comments from the ECB’s Olli Rehn still resonating, and with the German 10-year bund yield making yet another all-time low (-0.727%).
At 8:30 AM, a miss on US Housing Starts (1.190M vs. exp. 1.270M) was largely offset by a stronger than anticipated report on Building Permits 1.336M vs. exp. 1.270M). At 10 AM, a much weaker than expected reading the University of Michigan Consumer Sentiment (92.1 vs. exp. 97) tugged US stocks lower (S&P +19 to 2867), with a decline in oil (WTI to $54.24, OPEC’s monthly report cut its forecast for oil demand growth in 2019, indicates mkt in surplus in 2020) contributing to the move. The US 10-year yield was brought down to 1.542%, the DX fell to 98.17, and gold climbed to $1516.
Later in the morning, US stocks turned higher (S&P +40 to 2888), helped by gains in Nvidia and GE (CEO calls Markopolos claim market manipulation, bought GE shares) and with the Financials, IT, and Industrials sectors leading the advance. The gains were also fueled a rise in bond yields on reports that Germany (extremely fiscally conservative) would deficit spend during a recession. The US 10-year yield rose to 1.589%, and the German 10-year bund yield recovered to -0.645%. The DX was caught in the cross currents – weighed by a bounce in the euro ($1.1105) - and declined a bit further (98.15). Gold softened in response and took out its overnight low to reach $1504. However, as we’ve seen time and time again, aggressive bargain hunting bids emerged to bring the market back to $1510.
In the afternoon, US stocks were steady and held their gains as the S&P closed +41 to 2889. The US 10-year yield remained choppy and finished at 1.561%, and the 2-10 year spread remained positive (6.8bp). The DX was fairly stable between 98.10 – 98.20, and gold traded narrowly between $1511 - $1516. It was $1513 bid at 4PM with a loss of $9.
Open interest was up 7.0k contracts, showing a net of new longs from yesterday’s advance. Volume was lower but still very healthy with 454k contracts trading. The CFTC’s Commitment of Traders Report as of 8/13 showed the large funds trimming 4.3k contracts of longs (surprisingly) and cutting 1.9k contracts of shorts, to slightly reduce the Net Fund Long Position to 290k contracts. This was done on gold’s strong advance from $1474 on 8/6 to the $1535 6-year high on 8/13. This NFLP remains very large, and reflects how very crowded the long side of gold is currently. It will begin to be an impediment for further upside gains, and the swelling of gross longs (346k contracts) can hasten and exaggerate downside moves – if / when the longs are forced to liquidate.
Though bulls were disappointed with today’s $9 decline, many were relieved that the pullback wasn’t more severe – given the strength in stocks and the US dollar, and the recovery in the US 10-year and German 10-year bund yields. Bulls were encouraged that the market finished over $1510 (up trendline from 8/1 $1401 low, former double top – 8/7 and 8/8 highs) - though that level was breached intraday – pleased with the ongoing strength and regularity of bargain hunting buying. They remain ecstatic with gold’s sharp advance that has extended to $265 (20.4%) from the $1275 low on May 30 to the $1535 6-year high on Tuesday. Despite Powell’s somewhat hawkish comments of the recent rate cut being just a “mid-cycle adjustment” and was not the start of a longer running rate cutting cycle, bulls feel that Trump’s surprise additional tariffs on China two weeks ago along with ongoing tough rhetoric from both sides (US accused China of manipulating their currency as the yuan fell below 7 to the USD, China accused the US of destroying the international order with unilateralism and protectionism) continues to escalate the ongoing trade war, further uncertainty, and increased the probability of a more severe global economic slowdown – which only increased chances the Fed would need to cut again and more aggressively. Fed Fund Futures continue to reflect high probabilities of future Fed rate cuts with a 100% chance of at least a 25bp cut at the September meeting (18.8% chance of a 50bp cut), an 81.3% probability of another 25bp cut at the October meeting, and a 55.9% chance of a third future cut at the December meeting. This, bull argue, will continue to put downside pressure on the entire rate curve and on the US dollar – allowing gold to move significantly higher. In addition, bulls feel expected further escalating fears / uncertainty of a protracted trade war with China will continue to impede global growth, will put downward pressure on interest rates (US 10-year made fresh 36-month low 1.497% yesterday, 2-10yr inverted Wednesday) and will keep the Fed and most other Central Banks positioned dovishly. Bulls also see current geopolitical tensions – especially the situation between Hong Kong and Mainland China, Argentina, the US/UK and Iran and North Korea - as additional tailwinds for gold. Bulls will look for the market to resume its rally, and expect a test of initial resistance at $1524 (8/14 high), $1525 (options), $1527 - 28 (double top - 8/15 and 8/16 highs), and then $1535 (8/13 high). Bullish technicians see no significant chart resistance between $1535 and $1591 - the high from 4/7/13.
Bears were pleased with gold’s moderate retreat today, but a bit disappointed that support at $1510 was able to hold. Bears remain concerned that gold continues to attract buying on dips – and on momentum - despite the DX firming (higher highs in the last 5 sessions, of the last 8 sessions, up 1.06%), 0.96%). Bears continue to see gold as an overbought market that has risen $265 (20.4%) from the $1275 low on 5/30 (14-day RSI = 68.3) and expect a more significant pullback to resume. Bears feel that markets are a bit over their skis on rate cut predictions, feel that the downward pressure on bond yields is also overdone, and that a modest reversal should allow the US dollar to strengthen further against other currencies as they feel the dollar still remains the “cleanest dirty shirt in the laundry basket” with the US as the sole global growth engine. Recent soft data (misses on German GDP and Eurozone Industrial Production Wednesday) for both Germany and the Eurozone that drove the German 10-year yield further into negative territory over the past months (German bund yield made another record low today -0.719%,) underscores this view. Bears feel a US-China trade deal is in both sides’ best interests, and feel that Tuesday’s announcement of the scaling back of tariffs along with the resumption of talks in two weeks are significant and positive steps toward this end. This they feel will help drive equities to rebound, and will put further pressure on the yellow metal. Bears look for a significant pullback from gold’s torrid rise, and expect considerable long liquidation selling (large specs with a very heavy net long position – Net Fund Long Position 290k contracts, highest in 3 years, long gold now a crowded trade) to materialize if support at the following levels can be breached: $1510 (up trendline from 8/1 $1401 low, old double top – 8/7 and 8/8 highs), $1500 (options), $1494 (8/14 low), $1472 (8/7 low), $1457 (8/6 low), $1450 (options), $1438 (8/5 low), and $1430 8/2 low), $1423 (up trendline from 5/30 $1275 low).
All markets will continue to focus on geopolitical events (especially Brexit news and US / UK - Iran tensions, Hong Kong protests, Argentina), developments with the Trump Administration (especially on US-China trade, potential legal issues), Q2 corporate earnings, oil prices, and will turn to reports Monday on Japan’s Trade Balance and Retail Sales, Eurozone CPI for near term direction.
In the news:
Au’s trading volume edged close to new record in July: https://www.gold.org/goldhub/gold-focus/2019/08/au-trading-volume-edged-closer-new-record-july
Oppenheimer’s Rosin sees gold, silver options as safe place amid recent volatility: https://www.bloomberg.com/news/videos/2019-08-15/oppenheimer-s-rosin-sees-gold-silver-options-as-safe-place-amid-recent-volatility-video
BMO – why you shouldn’t chase the fear-based gold rally: https://uk.finance.yahoo.com/news/why-you-shouldnt-chase-the-gold-rally-on-the-stock-market-170538243.html
|US 10-year bond yield|
$1519 – 8/12 high
$1524 – 8/14 high
$1527 - 28 – double top - 8/15 and 8/16 highs
$1535 – 8/13 high
$1591 – 4/7/13
$1510 - double top – 8/7 and 8/8 highs
$1510 – up trendline from 8/1 $1401 low
$1504 – 8/16 low
$1500 – options
$1494 – 8/14 low
$1480 – 8/13 low
$1472 – 8/7 low
$1463– 20-day moving average
$1457 – 8/6 low
$1450 – options
$1438 – 8/5 low
$1438 - 40-day moving average
$1436-39 triple top – 6/25 7/2, and 7/3 highs
$1433-34 – double top 7/25 and 7/30 highs
$1430 – 8/2 low
$1425 – options
$1423 – up trendline from 5/30 $1275 low
$1422 – 7/30 low
$1421 – 50-day moving average
$1414-16 – 5 bottoms - 7/18, 7/23, 7/24, 7/26, and 7/29 lows
$1411 – 7/25 low
$1400 - 01 – 4 bottoms – 7/11, 7/16, 7/17, and 8/1 lows
$1400 – options
$1390 – 7/10 low
$1386-87 – double bottom, 7/5 and 7/9 lows
$1382 -84 – triple bottom – lows 6/21, 7/1, and 7/2
$1378 – trend line from 6/21 $1383 low
$1373-75 – double top – 7/6/16 and 7/11/16 highs
$1365-67– triple top – 8/2/16, 1/25/18 and 4/11/18 highs
$1360 - 50% retracement of up move from 5/2 $1266 low to 7/18 $1453 high
$1358 – 6/20 low
$1353-56 – quadruple top – 4/12/18, 4/18/18, 4/19/18, and 6/18 highs
$1355 – 100-day moving average
$1345 – down trendline from 8/25/13 $1433 high
$1344-48 – 6 tops , 2/20 and 4/20/18, 6/5, 6/7, 6/13, and 6/17 highs
$1342 – double top - 2/19 and 2/21 highs
$1338 – double bottom -6/14 and 6/18 lows
$1338 - 40 – triple top – 6/6, 6/10 and 6/12 highs
$1332-33 – double bottom – 6/13 and 6/17 lows
$1327-30 – triple top, 6/3, 6/4, and 6/11 highs
$1325 – options
$1325-26 – triple bottom – 6/5, 6/10, and 6/12 lows
$1324 – double bottom 6/4 and 6/11 lows
*$1317 – 200-day moving average