Gold Traders' Report - February 1, 2019

Jim Pogoda, Trader, Gold Bullion International 
FEB 1, 2019

Gold was nervous and choppy overnight – typical for a market at long term highs (9-month highs) - trading in a range of $1316.70 - $1322.20.

It traded down to its $1316.70 low during Asian and early European hours, where support from yesterday’s $1317 low essentially held.

Gold was pressured by a firmer US dollar (DX to 95.66), which was supported by weakness in the yuan (6.6995 – 6.7418) from a weaker Chinese PMI report.

Later during European time, gold recovered and reached its $1322.20 high as the DX retreated to 95.45.

The dollar softened against a firming euro ($1.1435 - $1.1475) off of an upbeat Eurozone CPI reading.

Global equities were mixed with the NIKKEI +0.1%, the SCI up 1.3%, European markets ranged from -0.2% to +0.2%, while S&P futures were -0.1%. Weaker oil prices (WTI from $54.19 - $53.38) was a headwind for stocks.

At 8:30 AM, the Non-Farm Payroll component of the US Jobs Report was a blow out: +304k jobs (exp. 165k).

Initially, algorithmic trading drove S&P futures higher (from 2696 to 2709), and took the US 10-year bond yield up from 2.624% to 2.645%.

The DX shot to 95.61, and gold tumbled to $1317.75. After a closer look, the report was seen as less robust as last month’s payrolls were revised down from 312k to 222k, Average Hourly Earnings were less than expected (0.1% vs. exp. 0.3%), and the Unemployment Rate ticked up to 4% (exp 3.9%).

S&P futures retreated to 2700, but the 10-year yield rose further to 2.686%. The DX plunged to 95.39, and gold reversed to take out the overnight high, and reached $1323.50.

At 10AM, stronger than expected reports on US ISM Manufacturing (56.6 vs. exp. 54.2), Construction Spending (0.8% vs. exp. 0.2%), and the University of Michigan Sentiment (91.2 vs. exp. 90.7) took US stocks higher (S&P +11 to 2715), with the Energy (strong earnings from Exxon and Chevron), and IT sectors leading the advance.

A recovery in oil (WTI to $54.84) aided the move, along with more dovish commentary from the Fed’s Bullard (pleased with rates at these levels and time to “wait and see”) and Kaplan (Fed needs to “get out of the way” until at least mid-year, citing downside risks to the US economy including slowing global growth, weakness in housing and manufacturing, and tighter financial conditions).

The 10-year yield rose to 2.695%, and the DX extended its climb to 95.64. Gold was forced back down, and took out its overnight low to reach $1316, where support ahead of the old resistance level at $1315 held.

Into the afternoon, US stocks turned negative (S&P -4 to 2700), while the 10-year yield continued to climb (2.697%). The DX was a bit choppy between 95.40 – 95.60, and gold was steady between $1316.50 - $1318.

Later in the afternoon, equities rallied back to positive territory (S&P +2 to 2706), and the 10-year bond yield slipped to 2.682%. The DX hovered around 95.60, and gold traded narrowly between $1318-19. It was $1318 bid at 4PM with a loss of $2.

Open interest was up 5.8k contracts, showing a net of new longs (but some new shorts) from yesterday’s advance.

Volume was much lower with just 238k contracts trading, as the Feb-April contract rollover is essentially done. A delayed Commitment of Traders Report - as of 12/24/18 – was finally released today. It showed the large funds adding 26.5k contracts of longs and trimming 8.5k contracts of shorts to increase their net long position to 111k contracts.

This was done on gold’s advance from $1242 – to $1271 during 12/19-12/24 when equities were plunging. Gross shorts remained elevated, however, with the large funds holding 97.6k contracts of short positions.

Though there has been some significant short covering in gold’s $50 rally since then – and some heavier covering in recent sessions – by following price action and open interest changes, there should still be a sizeable collective gross short position being held by the large fund community.

This still sets up the gold market very well to continue to move higher as these shorts - when forced to cover - will exacerbate any upside moves.

Bulls were disappointed with gold’s failure to take out the $1325-26 resistance level last night – especially when the DX had weakened to 95.40, the US 10-year yield was below 2.65%, and when equities were soft.

However, other bulls are pleased that gold was able to hold over former key resistance at $1315 in the face of a rebound in the DX, the 10-year yield reversing to approach 2.70%, and the modest gain in stocks.

The bulls feel that the trend is their friend, and note the up trendline from the 11/13 $1196 low is still intact, and expect the yellow metal’s strong rally over the past two months to carry further. They’re expecting continued volatility in equity markets along with a pause in Fed rate hikes for a considerable period and a further decline in the US dollar to continue driving gold higher.

With the delayed Commitment of Traders report today, and the estimate of current COT large fund positioning pointing to a still elevated large fund gross short position, bulls feel the gold market remains set up to move higher, as these shorts will provide fuel to further upside moves – when forced to cover.

Bulls expect gold to take out resistance at $1322-23 (triple top – 5/14/18, 1/31, and today’s high) and then $1325 – 26 (options, 5 top - 4/26/18, 4/27/18,4/30/18, 5/11/18, and 1/31/19 highs), and trip further buying to challenge $1332-33 (double top - 4/23/18 and 4/24/18 highs), $1336 (4/23/18 high), and then $1346 (4/20/18 high).

Bears feel that gold’s advance has been overdone – having rallied $49 since the $1277 low on 1/24 (3.83%), $93 since the $1233 low on 12/14 (7.54%), and $130 since the $1196 low on 11/13 (10.87%).

The bears see that the market is overbought (14-day RSI = 70.7), and are comfortable selling scale up into strength. They maintain that the 20% correction in equities – much of which occurred during very illiquid holiday trading – was also overdone, and expect the rebound seen over the past month to continue.

Bears feel that the plunge in the US dollar seen since 12/14 (97.71 – 95.03, 2.74%) has also overshot, and look for the rebound in the greenback to carry forward, and pressure gold lower. Bears will look for a breach of initial support at the former resistance at $1303-04 followed by $1295-98 to lead to a test of $1286-88 (6 bottoms – 1/10, 1/11, 1/14, 1/15, 1/16, and 1/17 lows).

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, Q4 corporate earnings, and will turn to reports Monday on China’s Caixin Services PMI, Eurozone Sentix Investor Confidence and PPI, US Factory Orders, Durable Goods, and comments from the Fed’s Mester for near term direction.

In the news:

Resistance levels: 

$1322-23 – triple top – 5/14/18, 1/30, and 2/1  highs

$1325 - options

$1325 - 26 – quadruple top -  4/26/18, 4/27/18,4/30/18, and 5/11/18 highs

$1332-33 – double top - 4/23/18 and 4/24/18 highs

$1336 – 4/23/18 high

$1346 – 4/20/18 high

$1353-56 – triple top – 4/12/18, 4/18/18 and 4/19/18 highs

*$1365-66– double top – 1/25/18 and 4/11/18 highs

Support levels:

$1318 -19 – quadruple top 5/3/18, 5/7/18, 5/8/18 and 5/9/18 highs

$1316-17 – double bottom - 1/31 and 2/1 lows

$1315 – 5/15/18 high

$1312 – 1/29 high

$1309 – 6/14/18 high

$1309 – 1/30 low

$1303-05 – triple top, 6/15/18, 1/25, and 1/28  highs

$1303 – 1/29 low

$1300 – psychological level, options

$1298 – 1/28 low

*$1295-98 – 8 tops – 1/3, 1/4, 1/10, 1/11, 1/14, 1/15, 1/16, and 1/17 highs

$1295 – 20-day moving average

$1287 – 1/23 high

$1286-88 – 6 bottoms – 1/10, 1/11, 1/14, 1/15, 1/16, and 1/17 lows

$1280 – 1/25 low

$1279 – 40-day moving average

$1277 – 79  6 bottoms – 12/28, 1/4, 1/21, 1/22, 1/23, and 1/24 lows

$1276– up trendline from 11/13 $1196 low

$1275 – options

$1274 – 12/28 low

$1269 – 50-day moving average

$1265-67  – 12/25, 12/26 ,and 12/27  lows

$1259 – 12/24 low

$1254 – 12/21 low

$1250 – options

$1246 – 200-day moving average