Gold Traders' Report - December 13, 2018

Jim Pogoda, Trader, Gold Bullion International 
DEC 13, 2018

Gold was modestly lower last night, still stuck in a narrow range of $1241.20 - $1246.90 and continued to trade against movement in the US dollar.

Gold climbed to its $1246.90 high during early European time – but was capped at yesterday’s $1247 top - as the DX slipped from 97.12 – 96.87.

The greenback softened from a recovery in the pound from 20-month lows ($1.2477- $1.2685, May survives confidence vote – some movement seen on Irish backstop issue) and the euro ($1.1362 - $1.1393).

However, gold turned down later during European hours to $1241.20, where support at the triple bottom at $1241-42 (12/10, 12/11, and 12/12 lows) held. Gold was pressured by a rebound in the dollar (DX to 97.08), which was supported by pullbacks in the pound ($1.2646) and euro ($1.1376 – ECB dovish, progress on Italian budget issue).

Global equities were mostly firmer and weighed on gold with the NIKKEI up 1%, the SCI +1.2%, European markets ranged from unchanged to -0.2%, and S&P futures were +0.3%. A continued pullback in oil (WTI to $50.35, IEA reports record Saudi output in Nov, questions on effectiveness of planned cuts) were a headwind for equities.

At 8:30 AM, a better than expected report on US Jobless Claims combined with some dovish commentary from the ECB’s Draghi (balance of risks moving to the downside, recent data weaker than expected, significant stimulus still needed to sustain inflation, cuts 2019 inflation forecast to 1.6% from 1.7%) that pummeled the euro ($1.1331) and a rejection by EU leaders to renegotiate the Brexit deal that knocked down the pound ($1.2615) to lift the DX to 97.30.

Gold fell through support at $1241-42, to reach $1240, but as we have seen on numerous occasions recently, bargain hunting buying quickly emerged to limit the downside and bring gold back up to $1243.

After opening firmer, US stocks turned negative by late morning (S&P -6 to 2646 – the 10% correction level), with gains in the Utilities and Consumer Staples sectors offset by losses in Financials and Materials. The US 10-year bond yield moved up to 2.917% (1-week high), but the DX came off (97.10) as the pound ($1.2640) and the euro ($1.1364) made modest rebounds. Gold was caught in the cross-currents and traded in a choppy fashion between $1241 - $1243.50.

Into the afternoon, US equities probed lower (S&P -13 to 2637)), while the 10-year yield slipped to 2.901%. The DX traded down to 97.03, and gold ticked up to $1243.75.

Later in the afternoon, US stocks trimmed some losses (S&P ended unchanged at 2651), while the 10-year yield edged up to 2.913%. The DX was steady between 97.05 – 97.10, and gold edged down to $1241.50. Gold was $1243 bid at 4PM with a loss of $3.

Open interest was up 2.5k contracts, showing a small net of new longs from yesterday’s advance. Volume was lower with just 168k contracts trading.

Bulls remain flustered by gold’s inability to crack the $1250 resistance level again today - especially when the DX dipped below 97 overnight. Bulls were looking for a breach of this level to bring the 200-day moving average at $1255 into play – above which they expect significant buying.

However, bulls were encouraged that despite the DX breaching 97.25 intraday and the 10-year bond yield holding above the 2.90% level - that gold held fairly well, with support holding ahead of $1240-42.

Bulls still feel the market has demonstrated a clear upside break of its pennant formation (down trendline from 4/23 $1336 high) and should be able to continue to prey on covering shorts and use the momentum from sidelined new longs to drive the market considerably higher.

Bulls remain steadfast in their thinking that gold bottomed at $1160 on 8/16 after a $35 2-day capitulation. They still have an uptrend in place from that level and will look to continue to 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 recent climb from its 9/21 93.81 low to the 97.70 high 4 weeks back (+4.15% to fresh 17-month high) was badly overextended – as well as its current strength - and expect a correction to drive a significant short covering rally in gold.

Bulls are looking for continued financial market turbulence to re-test resistance at $1250 and then challenge $1255 – the 200-day moving average. Bulls feel a breach above the 200-day moving average will be consequential to launch a sharper upside move.

In addition, bulls maintain that Monday’s Commitment of Traders Report still shows the funds with a very large gross short position (124k contracts). They feel the that the short side of gold is still a very crowded trade and that the gold market is still set up in a highly favorable position to move up from potential heavy short covering and sidelined longs returning to the market.

Bears remain encouraged that gold failed once again to rally past $1250 today, despite the dollar taking a foray under 97.

Bears remain comfortable selling into strength, feeling moves toward overhead resistance at $1250 and $1255 will continue to provide good entry points for short positions and expect some stale bull selling to materialize ahead of the weekend.

Bears point to the lack of follow-through gold has presented on recent rallies, and that the fairly heavy amount of short covering seen thus far from the prior few week’s COT reports has failed to lead to a breach of at least $1250 - as signs of a tired market – and expect a significant pullback to unfold.

Many bears are firm in their conviction that fuel from dollar strength, a return to higher interest rates (though that argument has lost some steam with 10-year yield hovering around 2.90% and recent Fed speak decidedly more dovish) and a rebound in equities will provide downside pressure on gold, and see prices north of $1200 offering a great opportunity to get short(er).

This is witnessed by Monday’s COT Report that shows a very large gross short position (124k contracts) still remains. Bears will look for a breach of initial support at the trendline at $1221 to bring about a re-test of $1212 (100-day moving average, double bottom, the up trendline from 8/16 $1160 low), and then challenge $1200.

All markets will continue to focus on geopolitical events (especially Brexit developments), developments with the Trump Administration (especially on US-China trade, potential legal issues), oil prices, and will turn to reports tomorrow on Japan’s Tankan Survey, Industrial Production and Capacity Utilization, China’s Retail Sales, Industrial Production, and Jobless Rate, German Wholesale Price Index, Eurozone PMI’s, US Retail Sales, Industrial Production, Capacity Utilization, Markit PMI, Business Inventories, Baker Hughes Rig Count, and the Commitment of Traders Report for near-term direction.

In the news:

Resistance levels: 

$1247 – double top, 12/12 and 12/13 highs

$1250 – triple top 12/7, 12/10, and 12/11 highs

$1250  - options

$1257 – 7/11 high

*$1255 – 200-day moving average

$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

$1266 - 68 – double top, 7/9 and 6/26 highs

Support levels:

$1240-42 – quadruple bottom 12/10, 12/11, 12/12,and 12/13  lows

$1235-38 – 7 tops –10/29, 11/1, 11/2, 11/5, 11/6, 11/7, and 12/3 highs

$1237 – 12/7 low

$1235 – 12/6 low

$1233 – 12/5 low

$1231 – 12/4 low

$1231 – 20-day moving average

$1228-30 5 tops  – 11/20, 11/21, 11/22, 11/23 and 11/26 highs

$1227 – 40 day moving average

$1226 – 27 – double top, 11/28 and 11/30 highs

$1225 – options

$1224 – 50 day moving average

$1220 – down trendline from 4/23 $1336 high

$1218-21 – 6 bottoms, 11/19, 11/20, 11/21, 11/23, 11/25, and 11/29 lows

$1217 – 11/30 low

$1212 – 100-day moving average

$1211-12 – double bottom (11/27 and 11/28 lows).

*$1212 – up trendline from 8/16 $1160 low

$1208 – 11/15 low

$1201 – 50% retracement of up move from 8/16 $1160 low to 10/26 $1143 high

$1200 – psychological level, options

$1196-98 – double bottom – 11/13,  11/14 lows

$1191 – 10/11 low

*$1181 - 85 – 9 bottoms - 8/20, 8/23, 8/24, 9/27, 9/28, 10/1, 10/8, and 10/9, and 10/10lows

$1175 – options strike

$1172 8/17 low

*$1160 – 8/16  low

$1156 – 1/4/17 low

$1150 – options

$1146 – 1/4/17 low