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Gold Traders' Report - February 15, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
FEB 15, 2019

Gold climbed overnight in a range of $1311.50 - $1319.40. It was fairly steady during Asian time, trading narrowly between $1311.50 - $1313 against a similarly steady US dollar (DX between 97.01 – 97.08.

During European time, however, gold climbed to its high of $1319.40 – briefly penetrating the stiff resistance between $1315-18 (9 tops - 2/4, 2/5, 2/6, 2/8, 2/11, 2/12, 2/13, and 2/14 highs) that has proved to be formidable over the past two weeks.

Uncharacteristically, gold was able to advance despite the DX firming (97.20), which was boosted by weakness in the euro ($1.1297 - $1.1260) as ECB’s Coeure fueled talk of fresh ECB stimulus and acknowledged the Eurozone’s recent economic slowdown is more pronounced than earlier expected.

Gold was also able to rally in the face of mostly firmer global equities, which were lifted by increasing hopes of a US/China trade deal as President Xi announced that the talks would continue in Washington next week.

The NIKKEI was off 1.1%, the SCI was down 1.4% (weaker Chinese CPI and PPI), European markets were up from 0.4% to 1.1%, and S&P futures were +0.2%. Higher oil prices (WTI from $54.41 - $55.07) aided the move in stocks.

At 8:30 AM, a better than expected reading on the US Empire State Manufacturing Index (8.8 vs. exp. 7.6) outweighed misses on Import Prices (-0.5% vs exp. -0.1%) and Export Prices (-0.6% vs. exp. -0.1%).

S&P futures climbed further (2757), and the US 10-year bond yield traded up to 2.682% (retraced most of the dip off of yesterday’s anemic Retail Sales Report). The DX shot up to 97.37 (2-month high), which was lifted by further weakness in the euro ($1.2234) off of the Coeure comments.

Gold declined in response, but decent dip buying limited the pullback to $1316.

At 9:15 AM, a worse than expected readings came out on US Industrial Production (-0.6% vs. exp. 0.1%) and Capacity Utilization (78.2% vs. exp. 78.7%).

US stocks paused momentarily but continued to climb (S&P futures +28 to 2771), while the 10-year yield edged down to 2.664%.

The DX tumbled to 97.02, and gold took out its prior high to reach $1319.80. However, a lack of follow-through buying took the yellow metal quickly back to $1317.

The University of Michigan Consumer Sentiment Report at 10AM was stronger than expected, and lifted US stocks further (S&P +29 to2773), with gains in the Financials, Energy and Industrials sectors leading the rally.

Comments from Trump (progress with the US-China trade talks, was amenable to extending the 3/1 deadline if progress was being made, looked to finalize a deal with Xi himself in the near future) and a further gain in oil (WTI to $55.69) contributed to the move.

The 10-year bond yield ticked up to 2.675%, and the DX bounced to 97.21. Gold retreated further and dipped to $1314.

Into the afternoon, US stocks trimmed some gains (S&P +18 to 2764), with some slightly hawkish comments from the Fed’s Bostic (policy rate a little short of neutral, recent soft data doesn’t change the view of above-trend growth, favors 1 hike in both ’19 and ’20) weighing.

The 10-year yield edged down to 2.664%, and DX broke below 97 to reach 96.83. Gold ran higher and took out its prior high to reach $1321.50 – where resistance at $1322-23 (triple top – 5/14/18, 1/30, and 2/1 highs) capped the advance. A fair amount of short covering was seen.

Later in the afternoon, US stocks made session highs (S&P finished +30 to 2776). The 10-year yield was steady around 2.665%, while the DX was also stable around 95.85-90.

Gold remained firm, and some late short covering took the market to a fresh high at $1322.60. It was $1321 bid at 4PM with a gain of $9.

Open interest was off just 0.4k contracts, showing a near balance of short covering and new longs from yesterday’s gain.

Volume was higher with 238k contracts trading. The CFTC’s Commitment of Traders Report as of 1/22 showed the large funds cutting 15.3k contracts of longs and 1.9k contracts of shorts to trim their net long position to 74k contracts.

This was done on gold’s move down from $1290 to $1286. Gross shorts remained elevated, with a collective 112k contracts remaining.

Though there has been some significant short covering in gold’s $40 rally since then – 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 help accelerate any upside moves.

Bulls were pleased with gold finally cracking the stiff resistance at $1315-18, and further encouraged that the level held on the close.

Moreover, it was done with amid a strong equity rally, and with a DX just under the 97 level.

The bulls still feel that the trend is their friend, and note the up trendline from the 11/13 $1196 low ($1289) 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.

Bulls also point to the delayed Commitment of Traders Report (as of 1/22/19) released today and estimates that the current COT Report still has the large funds with a significant (112k contracts) gross short position.

Therefore, the 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.

After a two-week consolidation period, bulls expect gold to take out initial resistance at $1322-23 (quadruple top – 5/14/18, 1/31, and 2/1, and 2/15 highs) and then challenge the recent high at $1325 – 26 (options, 5 tops - 4/26/18, 4/27/18, 4/30/18, 5/11/18, and 1/31/19 highs).

Once this is broken, bulls expect some momentum following buying to test next resistance levels of $1332-33 (double top - 4/23/18 and 4/24/18 highs), $1336 (4/23/18 high), and then $1346 (4/20/18 high).

Some bears were concerned when the stiff resistance at $1315-18 finally gave way today. However, other bears used the rally to get short(er) at more attractive levels.

They still 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 expect the recent pullback from the overbought condition (14-day RSI reached 74 on 1/31) will extend, 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 8 weeks to continue, and will find momentum from the S&P eclipsing its 200-day moving average two sessions ago.

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 think that with last week’s severe cuts in growth estimates by the UK and ECB, along with a cut by the Reserve Bank of India, a recent change to lower guidance by the Bank of Australia, and China’s slowdown, the US is left as the global growth engine.

This, they feel dims expectations of a significant dollar pullback off of a more dovish Fed, and has contributed to the dollar’s advance from 95.16 to yesterday’s 97.20 top.

Bears will look for further stale bull selling to lead to another test of initial support at the $1303-06 (5 bottoms – 1/29, 2/7,2/11, 2/13 and 2/14 lows and the pennant formation – the up trendline from the 1/28 $1298 low).

They expect some long liquidating sell stops under this level to lead to a test of $1295-98 (1/28 low, former resistance level) and then $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 Japan’s Machine Orders and Department Store Sales, and Tuesday on UK Employment Change, Germany’s ZEW Survey, Eurozone Construction Output and ZEW Survey, US NAHB Housing Market Index, and comments from the Fed’s Mester for near term direction.

In the news:

Resistance levels:

$1322-23 – quadruple top – 5/14/18, 1/30,  2/1, and 2/15 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:

$1315-18 – 9 tops  - 2/4, 2/5, 2/6, 2/8, 2/11, 2/12, 2/13, and 2/14 highs

$1311 – down trendline from 1/31 $1326 high

$1311 – 2/15 low

$1306 – 20-day moving average

$1303-05 – 5 bottoms  – 1/29, 2/7,2/11, 2/13 and 2/14 lows

$1304 – up trendline from 1/28 $1298 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 – 40-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

$1286 – 50-day moving average

$1285– up trendline from 11/13 $1196 low

$1280 – 1/25 low

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

$1275 – options

$1274 – 12/28 low

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

$1259 – 12/24 low

$1254 – 12/21 low

$1250 – options

$1253 – 100-day moving average

$1246 – 200-day moving average