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Gold Traders' Report - December 6, 2018

Jim Pogoda, Trader, Gold Bullion International 
DEC 6, 2018

Gold traded either side of unchanged last night in a range of $1234.70 - $1240.85, largely fading movement in the US dollar.

It rose to its high of $1240.85 during Asian time as the DX ticked down to 96.97, where resistance at the 12/4 $1242 high capped the advance.

Later during European time, gold fell to its $1234.70 low as the DX rebounded to 97.22.

The dollar was boosted by the arrest in Canada of Huawei CFO Meng Wanzhou for allegedly violating US sanctions on Iran – prompting fears of a flare-up in US-China trade tensions, along with softness in the pound ($1.2739 - $1.2700, Brexit concerns) and the euro ($1.1353 - $1.1321, miss on German Factory Orders).

Global equities were much weaker and gold supportive with the NIKKEI down 1.9%, the SCI -1.7%, European markets were off from 2.1% to 2.4%, and S&P futures were off 1.8%.

Equities were spooked by the Huawei arrest, a dip in oil (WTI to $50.25 concerns OPEC would cut less than expected), and continued concerns over the flattening/inversion of the US yield curve.

Around the NY open, some dovish commentary from the Fed’s Kaplan (approaching neutral rate, growth expected to slow, Fed needs to be patient) along with misses on the ADP Employment (179k vs. exp. 195k), US Jobless Claims (231k vs. exp. 225k), Unit Labor Costs and the Trade Balance (-$55.5B vs. exp. -$55.0B) knocked S&P futures lower (2649), and sent the US 10-year bond yield down to 2.843% (3-month low).

The DX slid to 96.54, and gold pushed higher. The yellow metal took out resistance at the overnight high, the $1242 high from 12/4, and the $1243 high from 10/26 to reach $1244.35 – a 5-month high.

However, just when it seemed gold was poised to rally significantly higher, the advance was cut short at 10AM by a stronger than expected reading on ISM Services (60.7 vs. exp. 59).

US stocks turned up (S&P -41 to 2658), and the 10-year yield edged higher to 2.852%, and the DX rebounded to 96.75. Gold pulled back in response but found support at $1241.50.

During the late morning, equities reversed and headed lower (S&P -79 to 2621), with losses in the Energy, Financials, and Materials sectors leading the decliners. Stocks were hurt by a plunge in oil (WTI to $50.07) on news that OPEC was delaying a decision on output until tomorrow, shrugging off a larger than expected draw in US oil inventories from the EIA report.

The 10-year yield made a fresh low at 2.833% on a flight to safety, while the DX retreated to 96.69. Gold traded higher but topped out at $1243 – in front of its earlier high.

In the afternoon, US stocks got a lift from some upbeat comments from the IMF’s Lagarde (doesn’t see elements for recession, concerns are a little bit overdone, thinks the Fed was probably going to slow down in rate increases) and some dovish remarks from the Fed’s Bostic (“within shouting distance of neutral and I do think neutral is where we want to be”) along with recoveries in Apple and Alphabet shares. The S&P rebounded to 2668 (-31) while the 10-year yield bounced to 2.876%. The DX moved up to 96.79, and gold slid to $1237.

Later in the afternoon, US stocks continued to trim losses (S&P finished -4  to 2696 ), aided by a WSJ report that the Fed was considering a more cautious approach on rate hikes. The 10-year yield continued its bounce to 2.886%, while the DX clawed back to 96.84. Gold held fairly well, only dipping to $ 1236.50, and was $1238 bid at 4PM – unchanged.

Open interest was off 3.9k contracts, showing some long liquidation along with some short covering from yesterday. Volume was paltry with just 114k contracts trading – as all other financial markets were justly closed in observance of the funeral of President George H. W. Bush.

Bulls cheered the early rally today and were within a whisker of tripping significant short covering over $1244 that could have launched the market well past $1250 - but were thwarted by the stronger ISM report turned markets around.

Given the steep losses in equities, the dip below 2.90% in the 10-year yield and the move below 97 in the DX, bulls were disappointed with gold’s inability to advance.

However, gold has demonstrated a clear upside break of its pennant formation (down trendline from 4/23 $1336 high) and remains within shouting distance of $1244.

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 continued financial market turbulence to re-test resistance at $1244 and then $1245-46 (double top – 7/16 and 7/17 highs). In addition, bulls maintain that last 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 bailed out by the stronger ISM but were encouraged by gold’s inability to advance given stocks getting hammered, the flight to bonds that took the 10-year yield to another 3-month low at 2.833%, and a dip in the DX below 97. Bears remain comfortable scale-up selling into strength feeling moves toward overhead resistance at $1243 and $1245-46 will continue to provide good entry points for short positions.

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, higher interest rates (though that argument has lost some steam with 10-year yield probing below 2.85% today 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 last 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 $1225 to bring about a re-test of $1212 (100-day moving

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), OPEC announcement/oil prices, and will turn to comments this evening from the Fed’s Powell and Williams, and reports tomorrow on Japan’s Leading Index and Household Spending, German Industrial Production, BOE’s Inflation Report, Eurozone GDP, US Payroll Report, Wholesale Inventories, University of Michigan Sentiment, Baker –Hughes Rig Count, Consumer Credit, Commitment of Traders Report, and comments tomorrow from the Fed’s Brainard for near-term guidance.

In the news:

Resistance levels: 

$1239-40 – triple  top, 10/23, 10/25, and 12/5  highs

$1242 – 12/4 high

$1243 – 10/26 high

$1244 – 12/6 high

*$1245-46 – double top – 7/16 and 7/17 highs

$1248-49 – double top 7/12 and 7/13 highs

$1250  - options

$1257 – 7/11 high

*$1258 – 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:

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

$1235 – 12/6 low

$1233 – 12/5 low

$1231 – 12/4 low

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

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

$1224 – down trendline from 4/23 $1336 high

$1225 – options

$1224 – 40 day moving average

$1222 – 20-day moving average

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

$1217 – 11/30 low

$1219 – 50 day moving average

$1212 – 100-day moving average

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

$1208 – 11/15 low

*$1209 – up trendline from 8/16 $1160 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