Gold Traders' Report - August 24, 2018

Jim Pogoda, Trader, Gold Bullion International 
AUG 24, 2018

Gold rose overnight in a range of $1183.20 - $1193.50, recapturing most of yesterday’s loss and taking out resistance at $1192 (old triple bottom).

Gold’s advance was fueled by weakness in the US dollar, as the DX retreated from 95.69 – 95.29. The dollar was pressured by strength in the yuan (6.89 – 6.83), sterling ($1.28 - $1.2860), and the euro ($1.1535 - $1.16), and some position squaring ahead of Fed Chair Powell’s address later in the morning.

Global stock markets were higher and weighed on gold with the NIKKEI +0.82%, the SCI gained 0.18%, European shares were up from 0.19% to 0.25%, and S&P futures were +0.17%. Firmer oil prices (WTI from $67.85 - $68.75) were supportive of stocks.

Dovish comments from the Fed’s Bullard ahead of the NY open (would stand pat on rates for the rest of the year, doesn’t see much inflation pressure) aided the price action.

At 8:30 AM, the headline Durable Goods report missed badly (-1.7% vs. exp. -1.0%). However, the components of Capital Goods Orders and Shipments of Non-defense, Ex-air were much stronger. 

This, coupled with some hawkish comments from the Fed’s Mester (Fed needs to keep hiking rates with the economy growing above trend, with the unemployment rate very low and inflation at the 2% target) provided a counterweight - leaving markets near unchanged - especially with participants not wanting to take positions ahead of Powell’s remarks to follow shortly.

At 10AM, Powell’s speech was moderately dovish. While he noted US economy has strengthened substantially, that most people who want jobs can find them, and strong economic performance will continue, markets honed in on his comments that he saw no sign of inflation accelerating over 2%, and there does not seem to be a risk of the economy overheating.

US stocks climbed higher (S&P +19 to record high 2876, NASDAQ record high at 7949) with energy, materials and IT leading the gainers. The 10-year yield declined to 2.817%, and the DX sank to 95.02. Gold shot up, triggering some buy stops over $1197 (yesterday’s high), $1200, $1202 (Wednesday’s high, 20-day moving average – 1st time crossing since 6/15) to reach $1208.65, where resistance at the old support between $1205-08 held. A fair amount of short covering was seen (large funds heavily short) and allowed for gold to outperform to the upside.

In the afternoon, US stocks remained firm, with the S&P finishing at a record high close of 2875. The 10-year yield ticked down to 2.815%, and the DX recovered slightly, but traded narrowly between 95.06 – 95.19. Gold drifted down to $1204.50, and was $1205 bid at 4PM with a gain of $20.

Open interest was off 4.7k contracts, showing a net of long liquidation, with some profit taking from shorts from yesterday’s decline. Volume was slightly lower with 240k contracts trading.

The CFTC’s Commitment of Traders Report as of 8/21 showed the large funds adding 1.7k contracts of longs and 6.7k contracts of shorts to increase their net short position to 9k contracts. This included the decline to the $1160 low on 8/16 and the subsequent rebound to $1197 on Tues 8/21.

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 (222k contracts), gold just needs a spark to unleash a torrent of buying from shorts covering and sidelined long-side players returning.

Bulls cheered gold’s sharp $20rally today, as the oversold condition of the market provided for outsized gains (gold up 1.69%, dollar off 0.70%). Many bulls feel that gold bottomed at $1160 after a $35 2-day capitulation from last week, and will continue to look to buy on weakness or on some 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 last week’s 96.99 high (up 9.90% since its 88.25 low on 2/14) to continue, and help trigger a significant short covering rally in gold. Bulls are looking for gold to consolidate recent gains over $1192, and then challenge resistance at $1205-$1205-08 (today’s high, and former 9 bottom support – 8/2, 8/3, 8/6, 8/7, 8/8, 8/10 7/7/17, 7/10/17 and 7/11/17 lows), and then $1216-18 (5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10and high). 

In addition, bulls maintain that today’s Commitment of Traders Report with the large funds getting further net short (turned short last week for the first time since 2002) and with the massive and growing gross short position (+7k to 222k 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 have been using gold’s recent bounce off of $1160 to rebuild short positions scale up, and will look to take profits on an expected retracement toward recent lows. Other bears, however, are still looking for gold to decline significantly more, as witnessed by today’s COT Report showing another hefty build in fund gross shorts (+7k contracts to 222k 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 (and emerging market currencies) still has legs, and were encouraged today that the DX was able to remain above 95 despite the dovish message from Powell.

They will be gunning for stops below $1185 (up trendline from 10/19/08 $682 low), $1175 (options strike), $1171-73 (quadruple bottom – 8/15, 8/17, 1/6/17 and 1/9/17 lows), and then the $1160 low from 8/16 to lead to a test of $1150.

All markets will continue to focus on geopolitical events (especially with Turkey and other emerging markets), 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 German Retail Sales and IFO Business Climate, Eurozone IFO, US Chicago Fed’s National Activity Index, and the Dallas Fed’s Manufacturing Activity Index for near-term direction.

In the news:

Resistance levels: 

$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

$1209 – 8/24 high

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

$1220-21 – 8/2 and 8/3 highs

$1221 – 40 day moving average

$1225 – 7/30 high

$1225  - options

$1227-28 – 7/27, 7/31 highs

$1230 – 50 day moving average

$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

$1250 -50% retracement from 4/11 $1309 high to 8/13 $1192 low

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

$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

$1271 – 100-day moving average

$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

$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

$1292– 200-day moving average

Support levels:

$1202 – 8/22 high

$1202 – 20-day moving average

$1200 – psychological level, options

$1197 – 8/23 high

$1192 – triple bottom 8/22, 8/13 and 8/14 lows

$1185 – up trendline from 10/19/08 $682 low

$1185 – down trendline from 6/14 $1309 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