Gold Traders’ Report - August 22, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
AUG 22, 2019

Gold was lower overnight, declining in a range of $1492.55 - $1503.70.  It fell through support at $1500 and $1499 (pennant up trendline from 8/13 $1480 low) and $1497 (yesterday’s low) on the way to its $1492.55 bottom – where support at $1493-4 (triple bottom 8/14, 8/19, and 8/20 lows) held.  Gold was pressured by an increase in global bond yields (German 10-year from -0.695% to -0.624%, UK 10-year from 0.457% to 0.529%, US 10-year from 1.591% to 1.62%), with yesterday’s moderately hawkish FOMC minutes still resonating.  Gold was also weighed by a rebound in S&P futures during European time (+5 to 2934), which were helped by a strong earnings reports from Dick’s Sporting Goods and Nordstrom’s, along with upgrades on Wayfair and Slack.  Some hawkish comments from the Fed’s George (we’ve added accommodation and it wasn’t required in my view, cited low unemployment, rising wages, and inflation close to target)along with a firmer dollar (DX to 98.40) were also  headwinds for gold.  The DX was supported by weakness in the euro ($1.1112 - $1.1063) as dovish ECB minutes overcame better than expected German and Eurozone PMIs, though both remain well under the expansion / contraction level of 50.  

At 8:30 AM a better than expected US Jobless Claims report (209k vs. exp. 218k) helped lift S&P futures further (2937), and bring the 10-year yield to 1.622%.  The DX edged up (98.26 – 98.35), and gold – after a modest bounce to $1495.50, was tugged back to $1493.50. 

At 9:45 AM, worse than expected readings on US Markit Manufacturing PMI (49.9 vs. exp. 50.5 – and below 50 signaling contraction for first time since ‘09) and Services PMI (50.9 vs. exp. 52.8) knocked US stocks lower (S&P +3 to 2922) and sent the US 10-year bond yield to 1.576%.  The DX sank to 98.08, hurt also by a surge in the pound ($1.2272) as Merkel said they could find a backstop solution by Oct 31.  Gold rallied sharply in response to $1504 – but was unable to take out its overnight high.

Shortly afterward, hawkish comments from the Fed’s Harker (doesn’t see need for further stimulus now, we’re roughly where neutral is and think we should stay here for a while and see how things play out, labor markets are strong, inflation is moving up) reduced the probabilities of aggressive future Fed rate cuts as follows from FedWatch:

                                                Yesterday                                Today

Sep 25bp cut                     97.3%                              91.2%

Sep Hold                                            2.7%                           8.8%

Oct (2 25bp cuts)                    69.2%                                   58.5%

Dec (3 25bp cuts)                       41.6%                               34.2%

USs stocks fell further (S&P -20 to 2905), but the 10-year yield was lifted back up to 1.599%.  The DX bounced to 98.30, and gold fell back to $1497. 

Into the afternoon, US stocks rebounded (S&P +3 to 2928), led by gains in the Financials sector.  The 10-year yield bounced back to 1.615%, but the DX retreated to 98.15.  Gold was caught in the cross currents and slipped back to $1498. 

Later in the afternoon, equities had a slight pullback back into negative territory (S&P -3 to 2922), hurt by some more mildly hawkish remarks from the Fed’s Kaplan (would like to avoid cutting rates again in Sep, expects US growth to stand at a solid 2% in 2019).  After a dip to 1.593%, the 10-year yield rose to 1.615%, and the DX edged up to 98.18.  Gold was pressured lower, but the downside was limited to $1498. 

US stocks went out near unchanged (S&P -1 to 2923), and the 10-year yield ticked down to 1.613%.  The DX edged up to 98.20, but gold clawed back to finish at $1499 bid with a loss of $3 – was able to hold the pennant up trendline from the 8/13 $1480 low.  

Open interest was up 1k contracts, showing a small net of long liquidation from yesterday’s decline.  Volume was a little higher with 261k contracts trading. 

Some bulls were disappointed with gold losing ground today, but most were accepting of the modest decline – given the more hawkish views from FOMC members that gave interviews today, the move up in the US 10-year yield back over 1.60%, and the steadiness in the USD and stocks.  Bulls were encouraged that gold was able to recover and hold $1499, the pennant up trendline from 8/13 $1480 low on the close.  Bulls remain pleased 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 bulls remain 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 yesterday’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 91.2% chance of 25bp cut at the September meeting, a 58.5% probability of another 25bp cut at the October meeting, and a 34.2% 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 briefly 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), $1518 (pennant down trendline from 8/13 $1535 high), $1527-28 (double top - 8/15 and 8/16 highs), 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 $3 decline in gold today, some were looking for a significantly larger pullback - at least under the pennant line at $1499 - given the hawkish remarks from Harker, Kaplan and George, the higher 10-year bond yield (recaptures 1.60% level), and the relatively stability in US stocks and the dollar.    Nonetheless, bears are encouraged that the US dollar has remained firm (higher highs in 8 of the last 9 sessions, up 1.18% since 97.31 low on 8/13, remains within 0.75 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 1.60% 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 60) 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 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 last 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 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: $1499 (8/21 low, pennant up trendline from 8/13 $1480 low), $1493-94 (4 bottom, 8/14, 8/19, 8/20, and 8/22 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 CPI, US New Home Sales, Baker Hughes Rig Count, Commitment of Traders Report, and the much awaited speech from the Fed’s Powell at Jackson Hole for near term direction.  

 

In the news:

China eases restrictions on gold imports:   https://www.lse.co.uk/news/china-eases-restrictions-on-gold-imports-sources-6bhfp5w37dr41rx.html

China’s gold reserves jump for 7th month as consumption, production slump:   https://www.zerohedge.com/news/2019-08-20/report-chinas-1h19-gold-consumption-and-production-slumps-reserves-jump-7th-month

 he new gold rush: https://www.bbc.co.uk/sounds/play/w172wx8s83sg7sf

Fed’s Powell, under pressure, likely to stick to “mid-cylcle” message:   https://www.reuters.com/article/us-usa-fed-jacksonhole-powell/feds-powell-under-pressure-likely-to-stick-to-mid-cycle-message-idUSKCN1VC1Y8

 

Resistance levels: 

$1500 – options

$1504 – 8/22 high

$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:

$1499 – pennant up trendline from 8/13 $1480 low

$1497 – 8/21 low

$1493-4 – 4 bottoms 8/14, 8/19, 8/20, and 8/22  lows

$1480 – 8/13 low

$1479– 20-day moving average

$1472 – 8/7 low

$1457 – 8/6 low

$1450 – options

$1447 - 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

$1434 – 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

$1364 – 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

*$1323 – 200-day moving average