Gold Traders' Report - August 31, 2018

Jim Pogoda, Trader, Gold Bullion International 
AUG 31, 2018

Gold moved higher overnight in a range of $1198.70 - $1209.15. After ticking down to its low during early Asian hours, gold climbed higher against weakness in the dollar (DX from 94.77 – 94.54).

The DX was pressured by strength in the yen (111.05 – 110.68, uptick in Japan’s Core CPI), the yuan (6.835 – 6.8245, stronger than expected Chinese PMI), and by a rebound in some emerging market currencies (Turkish lira from 6.785 – 6.49, Turkey waives a tax on lira savings, Russian rouble from 68.25 – 67.80).

Weaker global equities aided gold’s climb with the NIKKEI -0.1%, the SCI of 0.55, Eurozone shares were down from 0.5% to 1.1%, and S&P futures were -0.2%. Comments from Trump late yesterday rejecting an EU deal to scrap tariffs on cars, and threatening to pull out of the WTO along with weaker oil prices (WTI from $70.15 - $60.64) contributed to the softness in stocks.

Just before the NY open, reports emerged that US-Canadian talks had stalled, and a deal won’t be reached by today (the unofficial deadline), with a rumor that Trump said the US proposal is “going to so insulting that they’re not going to be able to make a deal”. S&P futures sold off (-7 to 2895) and the US 10-year bond yield sank to 2.8833%. The Canadian dollar tumbled (1.30 – 1.3071), and the DX shot up to 94.97. Gold sold off, but found support just in front of $1200.

Later in the morning, stronger than expected reports on the Chicago PMI (63.5 vs. exp. 63) and the University of Michigan Consumer Sentiment Index (96.2 vs. exp. 95.5) helped US stocks pare losses (S&P -7 to 2907), and pushed the 10-year yield up to 2.848%. The DX drove higher, also fueled by weakness in the euro ($1.1584 – concerns over auto tariffs, disappointing Eurozone CPI) to take out 95 to reach 95.05. Gold, which had previously rebounded to $1204 – slumped back to support at $1200.

Near mid-day, US stocks turned down (S&P -23 to 2891, energy, telecom, and utilities lead decliners), after Canada’s trade negotiator Freeland said “we’re not there yet, we’re looking for a good deal, not any deal”. The Canadian dollar weakened further (1.3087), and helped the DX climb to 95.23. Gold broke support at $1200, but again – solid dip buying limited the damage to $1198.70.

In the afternoon, stocks slumped again when news emerged that the US –Canada talks were ending with no agreement. The Canadian dollar slumped to a fresh low (1.3088), and the DX - which had dipped back to 95.05 – popped to 95.15. Gold – which had recovered to $1202.50 – was pressed to its low of $1198.35.

Near the close, news from the Trump Administration that the US-Canada trade talks would resume again next Wednesday pared losses in stocks (S&P finished off 13 to 2901), and the US 10-year yield rebounded to 2.868%. The DX pulled back to 95.07, and gold recovered to $1200. It was $1200 bid at 4PM – unchanged.

Open interest was up 1.1k contracts, showing a small net combination of new short and some new bargain hunting longs from yesterday’s decline. Volume was much higher with 299k contracts trading. The CFTC’s Commitment of Traders Report as of 8/28 showed the large funds cutting 6k contracts of longs and 12k contracts (sizeable short covering) of shorts to reduce their net short position to 3k contracts.

This was largely done on gold’s recovery to $1214. Having the large funds remain net short – a position they haven’t been in since 2002 is still not great for market sentiment. However, the fact that a good chunk (12k) of gross shorts have taken profits – or covered - is a step in the bulls direction, and it still leaves the gold market set up well to move higher, as the short side of gold has become an extremely crowded trade.

With many long players on the sidelines and a massive gross short position (210k contracts) overhanging the market, gold just needs a spark to unleash a torrent of buying from shorts covering and sidelined long-side players jumping back in.

Bulls were somewhat disappointed that gold finished on its lows, giving up the overnight up move to $1209, and unable to hold its up trendline ($1202) from the 8/16 $1160 low. However, they were encouraged by the strong support seen at $1200 –despite the strong (0.7%) gain in the DX today.

Much of the bullish community believes that gold bottomed at $1160 on 8/16 after a $35 2-day capitulation, and will look to either add to long positions on weakness, or on some expected 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 8/15’s 96.99 high (up 9.90% since its 88.25 low on 2/14) to continue, and drive a significant short covering rally in gold.

Bulls are looking for gold to consolidate recent gains over $1192-$1195, and then challenge resistance at $1205-09 (today and yesterday’s, highs, 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 8/10 highs).

Beyond this, bulls are looking for a move to at least $1262 – the 50% retracement of the move down from the 4/11 $1365 high to the 8/16 $1160 low. In addition, bulls maintain that last today’s Commitment of Traders Report showing the large funds still net short (turned short two weeks ago for the first time since 2002) and with a massive gross short position (210k contracts –short side of gold 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.

Bears have been using gold’s recent bounce off of $1160 to rebuild short positions scale up, and are comfortable to continue to sell into strength. Other bears, however, are still looking for gold to decline significantly more, as witnessed by today’s COT Report showing the large funds are still net short, with a massive 210k contract gross short position.

They feel fuel from a rebound in the dollar from its recent correction will provide downside pressure on gold, and that the dollar’s ability to strengthen against other currency majors (and emerging market currencies) still has legs. They will be gunning for stops below $1200 (proving difficult over past sessions, however), $1192, $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 emerging markets), developments with the Trump Administration (especially on US-China and US-Canada trade, potential legal issues), oil prices, and will turn to reports Monday on Japan’s Capital Spending, China’s Caixin PMI, Eurozone PMI, and comments from the Fed’s Evans for near-term direction.

In the news:

Resistance levels:

$1202 – up trendline from 8/16 $1160 low

$1207 – 08 – double top, 8/29 and 8/30  highs

$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 – double top, 8/24, 8/31  highs

$1212 – 8/27 high

$1214 – double top – 8/13 and 8/28 highs

$1216 – 40 day moving average

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

$1220-21 – 8/2 and 8/3 highs

$1224 – 50 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

$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

$1262 – 50% retracement from 4/11 $1365 high to the 8/16 $1160 low

$1265 – 100-day moving average

$1266 – 7/9 high

$1268 – 6/26 high

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

$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

$1290– 200-day moving average

$1292-95 –5 bottoms – 6/6, 6/7, 6/8, 6/11, 6/12, and 6/13

Support levels:

$1200 – 8/28 low

$1200 – 20-day moving average

$1200 – psychological level, options

$1198 – 8/31 low

$1196 – 8/30 low

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

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

$1173 – 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