Gold Traders' Report - December 3, 2018

Jim Pogoda, Trader, Gold Bullion International
DEC 3, 2018

The US and China reached a trade truce over the weekend, with China agreeing to purchase an unspecified amount of product from the US, will crack down on fentanyl sales, and will cut its 40% tariffs on cars.

The US won’t increase its current 10% tariffs to 25% on Jan 1, and will hold off on additional tariffs on $267B worth of Chinese goods during a 90-day period in which negotiations will continue.

Financial markets reacted sharply with global equities surging: the NIKKEI was up 1%, the SCI gained 2.6%, European markets were up from 1.3% to 2.4%, and S&P futures were up 1.6% (though early morning hawkish comments from the Fed’s Clarida dismissing the idea of a “Powell put pushed it back below 2800).

Oil surged from $50.70 to $53.85 (demand prospects brighten, OPEC expected to agree on cuts to rein in oversupply), while the US 10-year bond yield jumped to 3.048%.

The US dollar was caught in the cross-currents as the bearishness of the de-escalation of trade tensions that saw a surge in the yuan (6.9557 to 6.88111) and the euro ($1.1340 - $1.1380, stronger Eurozone PMI’s also supportive) was offset by the gains in equities and the increase in bond yields - but did decline moderately to 96.71.

Gold rallied from $1221.30 to $1223.30 -a one month high - triggering buy stops over $1226-27 (down trendline from 4/23 $1336 high, double top 11/28 and 11/30 highs), and $1228-30 (5 tops – 11/20, 11/21, 11/22, 11/23 and 11/26 highs), with a fair amount of short covering seen.

Ahead of the NY open, the DX bounced back to 97.15, helped by a pullback in the pound ($1.2825 - $1.2707) and the euro ($1.1319) over concerns PM May could face no-confidence vote if Parliament rejects the Brexit deal. Gold pulled back in response but found support at the old resistance at $1228.

Buying on the NY open took gold to back through the overnight high to reach $1232.80, with a dip in the DX back to 97 contributing to the advance.

Shortly afterward some upbeat comments from Treasury Secretary Mnuchin on the trade truce along with some dovish commentary from the Fed’s Quarles (rates will end up in a range of neutral, agreed with Powell that “we are approaching that range”) and Williams (Fed is approaching the bottom end of neutral rate range) pushed S&P futures turned up to 2803, and the US 10-year bond yield dipped to 3.017%.

The DX was tugged back to 96.93, and gold edged up to $1235, where resistance at $1235-38 (6 tops –10/29, 11/1, 11/2, 11/5, 11/6 , and 11/7 highs) capped the advance.

At 10AM, a miss on US Construction Spending (-0.1% vs. exp. 0.4%) was overshadowed by a much better than expected reading on ISM Manufacturing (59.3 vs. exp. 57.5).

US stocks, which had absorbed some prior selling on the open rebounded, with the S&P climbing from 2784 to 2795. The 10-year yield ticked up to 3.022%, and the DX moved up to 97.07. Gold sank to $1230.50, but as we have seen many times of late – bargain hunting buying quickly emerged to take the yellow metal back to the $1233-34 area.

US stocks pared gains into mid-day (S&P +13 to 2773), and the 10-year yield dipped to 2.993%. The DX retreated to 96.87, but gold couldn’t take out its prior high at $1235.

In the afternoon, equities turned higher (S&P finished + 30 to 2790), led by gains in the Consumer Discretionary, Energy, IT, and Materials sectors.

Stocks were aided by a report that Congress delayed a shutdown deadline until 12/21, some upbeat comments on the trade truce from White House Economic Advisor Kudlow (expecting fast progress, changes should happen very quickly), and some dovish remarks by the Fed’s Kaplan (sees challenges on rate path as global growth slows).

The 10-year yield slipped to 2.982% (3-month low), but the DX climbed to 97.06. Gold was pressured lower but found support at $1230. Gold was $1231 bid at 4PM with a gain of $9.

Open interest was off 2.0k contracts, showing a net of long liquidation from Friday’s decline. Volume was much lower - 178k contracts - with the Dec-Feb rollover essentially completed.

Bulls cheered today’s $9 advance that finally saw resistance at the trendline from the 4/23 $1336 high ($1226) and $1228-30 (5 tops 11/20, 11/21, 11/22, 11/23 and 11/26 highs) broken, and that these levels held on the close.

They were also encouraged that gold was able to rally despite a strong gain in equities. However, some bulls were disappointed that the trade truce didn’t take off more of a safe-haven premium off of the dollar, which left gold topping out at resistance in front of $1235-38 (6 tops –10/29, 11/1, 11/2, 11/5, 11/6 , and 11/7 highs).

Nonetheless, bulls are encouraged that gold is back again on the verge of challenging this next key resistance level.

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 three weeks back (+4.15% to fresh 17-month high) was badly overextended and expect a correction to drive a significant short covering rally in gold.

Bulls are looking for a spark that will aid in taking out $1235-38 which they feel should ignite further buying to challenge $1243 and then $1245-46 (double top – 7/16 and 7/17 highs).

In addition, bulls maintain that Friday’s Commitment of Traders Report still shows the funds with a massive gross short position (155k 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 (as we saw today) and sidelined longs returning to the market.

Bears were relieved that the DX held fairly well given the news of the trade truce. Bears remain comfortable scale-up selling into strength, feeling moves toward overhead resistance at $1235-38 and $1243 will continue to provide good entry points for short positions.

Bears point to the lack of follow-through gold has presented on recent rallies: today’s failure to take out $1235-38 (6 tops –10/29, 11/1, 11/2, 11/5, 11/6, and 11/7 highs), the failure to take out the same level during the first week of Nov, the failure to take out $1243 on 10/26 (would have tripped down trendline from 4/23 $1336 high), 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, higher interest rates (though that argument has lost some steam with 10-year hovering around 3% and recent Fed speak decidedly more dovish) and a rebound in equities (as we saw continue today) will provide downside pressure on gold, and see prices north of $1200 offering a great opportunity to get short(er).

This is witnessed by Friday’s COT Report that a shows massive gross short position (155k contracts) still remains. Bears will look for a breach of initial support at the trendline at $1226 to bring about a re-test of $1211 (100-day moving average, double bottom) and then expect a challenge of $1206 – the up trendline from 8/16 $1160 low, followed by a test of $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 UK Construction PMI, Eurozone PPI, and comments from the BOE’s Carney and the Fed’s Williams for near-term direction.

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