Gold Traders’ Report - August 21, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
AUG 21, 2019

Gold slid lower last night, trading in a range of $1496.65 - $1508, but found support ahead of $1493-4 ( triple bottom 8/14, 8/19, and 8/20 lows).  It faded a move up in global bond yields (German 10-year from -0.689% to -0.645%, UK 10-year from 0.47% to 0.489%, US 10-year from 1.552% to 1.601%) and mostly firmer global equities.  The NIKKEI was off 0.3%, the SCI was unchanged, European markets were up from 1.1% to 1.5%, and S&P futures were +0.8%.  Equities were lifted by strong earnings reports from Target and Lowe’s along with by firmer oil prices (WTI from $55.90 - $56.90) from a larger than expected draw in US Oil Inventories reported by the API last night.  A slightly firmer dollar during was also a headwind for gold as the DX rose from 98.16 – 98.30.  The dollar was helped by weakness in the euro ($1.1104 - $1.1087, Italian political uncertainty) and the pound ($1.1275 - $1.2116, no-deal Brexit concerns ahead of today’s meeting between Johnson and Merkel).

US stocks opened higher (S&P +28 to 2928), led by strength in the Consumer Discretionary and IT sectors, and boosted by a better than expected reading on US Existing Home Sales (5.42M vs. exp. 5.40M).  However, the 10-year yield pulled back to 1.574%.  The DX was caught in the cross currents and hovered between 98.15-98.20, and gold broke back above $1500 to reach $1504.50. 

Later in the morning, equites pulled back (S&P +20 to 2920), weighed by a CBO report expecting the US deficit to grow more quickly than projected, and a warning that tariff hikes could harm growth along with a dip in oil (WTI to $55.94, EIA reports shows smaller draw than the API in US Oil Inventories, a surprise build in gasoline stocks, and a larger than expected increase in distillates).  The 10-year yield declined further to 1.566%, and the DX edged down to 98.15.  Gold traded higher to $1506, but was unable to challenge its overnight high. 

Into mid-day, US stocks battled back to their morning highs (S&P +28 to 2928), and the 10-year yield ticked up to 1.577%.  The DX had a modest bounce to 98.21, and gold dipped briefly to $1501.  However, as we’ve seen countless time recently, strong bargain hunting bids emerged to lift the market quickly back to the $1504 area.

Ahead of the FOMC minutes, US stocks pared some gains (S&P +24 to 2924) and the 10-year yield made an intraday low at 1.56%.  The DX slipped back to 98.14, but held above support at 98.10-12 (last three sessions lows). Gold clawed back to $1506, but a lack of interest ahead of the FOMC minutes limited the advance. 

At 2PM, the FOMC minutes were a mixed bag, but a bit more hawkish than expected.  While the FOMC noted the slowing economic activity, particularly in business investment and  manufacturing, the use of “risk management” at a time of slowing economic activity and trade tensions and persistently low inflation as reasons for their cut three weeks ago, they also noted their cut shouldn’t be viewed as part of a “pre-set course” for future cuts, and that most participants saw the cut “as part of a recalibration of the stance of policy, or mid-cycle adjustment” in response to changing conditions, and that the cut should retain their optionality.  Fedwatch reduced the probability for future Fed rate cuts after the minutes as follows:

                                    Last week                  After minutes today

Sep 25bp cut 100%                          97.3%

Sep 50 bp cut            20%                             0%

Oct (2 25bp cuts)      74.7%                         69.2%

Dec (3 25bp cuts)     55.7%                         41.6%

Markets gyrated from algorithmic trading on the release, but after digesting, US stocks turned lower (S&P +18 to 2918), and the US 10-year bond yield rose to 1.589% (but the 2-10 year yields briefly inverted again).  The DX took out its overnight high to reach 98.32, and gold slipped to $1500.

Later in the afternoon, equities had a slight bounce (S&P finished +24  to 2924), while the 10-year yield ticked up to 1.591%.  The DX pulled back to 98.27, and gold edged up to $1502.  Gold was $1502 at 4PM with a loss of $4.

Open interest was up 1.2k contracts, showing a net of new longs from yesterday’s advance.  Volume was lower with 258k contracts trading. 

While some bulls were disappointed with today’s pullback, most will take today’s modest decline – given the strength in equities, the tick up in the 10-year bond yield and the gain in the US dollar – along with the hawkish tilt of the FOMC minutes.  Bulls remain encouraged with the strength and consistency of bargain hunting buying on price declines, as seen off of the $1496 low last night, and later holding above $1500 intraday today.  The bullsremain ecstatic with gold’s sharp advance that has extended to $260 (20.4%) from the $1275 low on May 30 to the $1535 6-year high last Tuesday.  Despite Powell’s somewhat hawkish comments on the recent rate cut being just a “mid-cycle adjustment” and was not the start of a longer running rate cutting cycle – confirmed by today’s minutes - 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 (though they declined a fair amount again today) of future Fed rate cuts with a 97.3% chance of 25bp cut at the September meeting, a 69.2% probability of another 25bp cut at the October meeting, and a 41.6% chance of a third future cut at the December meeting. This, bulls 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% last Thursday, 2-10yr inverted again today) 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 $1513 – (8/19 high), $1527-28 (double top - 8/15 and 8/16 highs), $1521 (pennant down trendline from 8/13 $1535 high), and then $1535 – 8/13 high.  Beyond $1535, bullish technicians see no significant chart resistance until $1591, the high from 4/7/13.  

While bears will take today’s $4 decline in gold today, some were looking for a significantly larger pullback – given the more hawkish FOMC minutes, the rally in stocks, higher 10-year yield and stronger US dollar.  Bears remain concerned that gold keeps attracting buying on both dips and momentum, and was able to hold above $1500 this afternoon – especially after the release of the more hawkish FOMC minutes.  Nonetheless, bears are encouraged that the US dollar has continued its rebound (higher highs in 7 of the the last 8 sessions, up 1.18% since 97.31 low on 8/13, remains within 0.65 of its 21-month high) along with US stocks (S&P up 100 points since its 2822 low on 8/5, within 105 points of its all-time high), and the 10-year bond yield (back over 1.55% from its 1.475% 3-year low last Thursday).  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 still elevated at 62) and expect a more significant pullback to ensue.  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 last 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 Friday -0.727%,) underscores this view.  Bears feel a US-China trade deal is in both sides’ best interests, and feel that last 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 putfurther 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: $1497 (8/21 low, pennant up trendline from 8/13 $1480 low), $1493-94 (triple bottom, 8/14, 8/19, and 8/20 lows), $1472 (8/7 low), $1457 (8/6 low),  $1450 (options), $1440 (up trendline from 5/30 $1275 low), $1438 (8/5 low), and $1430 8/2 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 tomorrow on Japan’s PMI, All Industry Activity Index and Machine Tool Orders, Eurozone PMIs, ECB’s Account of its July Policy Meeting, US Jobless Claims, Markit PMIs, Leading Index, and the Kansas City Fed Manufacturing Activity Index for near term guidance. 

 

In the news: 

Fed says July rate cut was “recalibration” and not part of “pre-set course” for more easing:   https://www.cnbc.com/2019/08/21/federal-reserve-releases-minutes-from-july-meeting.html

Swiss gold exports re-distributed as Chinese imports curtailed:   https://www.sharpspixley.com/articles/lawrie-williams-swiss-gold-exports-re-distributed-as-chinese-imports-curtailed_295587.html

Another ex-JPM precious metals trader pleads guilty to spoofing:   https://www.cnbc.com/2019/08/20/another-ex-jp-morgan-precious-metals-trader-pleads-guilty-to-spoofing.html

 

YTD Performance


12/31/2018

8/21/2019

Change
% Change
Gold


1282.5

1502

219.5

17.115%

DX


96.06

98.30

2.24

2.332%

S&P


2505

2924

419

16.727%

JYN


109.63

106.63

-3

-2.736%

Euro


1.1466

1.1084

-0.0382

-3.332%

US 10-year bond yield


2.69%

1.591%

-0.011

-40.767%

Oil (WTI)


45.45

55.83

10.38

22.838%

 

Resistance levels: 

$1508 – double top - 8/20 and 8/21 highs

$1513 – 8/19 high

$1520 – up trendline from 8/1 $1401 low

$1521 – pennant down trendling from 8/13 $1535 high

$1527 - 28 – double top - 8/15 and 8/16 highs

$1535 – 8/13 high

$1591 – 4/7/13

 

Support levels:

$1500 – options

$1497 – 8/21 low

$1497 – pennant up trendline from 8/13 $1480 low

$1493-4 – triple bottom 8/14, 8/19, and 8/20  lows

$1480 – 8/13 low

$1472 – 8/7 low

$1471– 20-day moving average

$1457 – 8/6 low

$1450 – options

$1445 - 40-day moving average

$1438 – 8/5 low

$1440 – up trendline from 5/30 $1275 low

$1436-39 triple top – 6/25 7/2, and 7/3 highs

$1433-34 – double top 7/25 and 7/30 highs

$1431 – 50-day moving average

$1430 – 8/2 low

$1425 – options

$1422 – 7/30 low

$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 -  50% retracement of up move from 5/2 $1266 low to 8/13 $1535 high

$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

$1362 – 100-day moving average

$1358 – 6/20 low

$1353-56 – quadruple top – 4/12/18, 4/18/18, 4/19/18, and 6/18 highs

$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

*$1322 – 200-day moving average