Gold Traders' Report - February 19, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
FEB 19, 2019

Gold firmed overnight in a range of $1322.90 - $1332 – reaching a 10-month high.

The yellow metal drifted down to its $1322.90 low during Asian hours, against a slight firming in the US dollar (DX from 96.78 – 96.94), and early rise in S&P futures (+4 to 2780).

Gold bounced during European time to its $1332 high, where resistance at $1332-33 (double top - 4/23/18 and 4/24/18 highs) capped the advance.

Gold’s rally started initially by a dip in the DX to its low of 96.76, which was pressured by some strength in the pound ($1.2895 - $1.2934, Junior Business Minister Harrington said he didn’t believe there would be a no-deal Brexit, May looking to reopen withdrawal agreement with the EU’s Junker tomorrow), and the euro ($1.1291 - $1.1324).

However, despite a rebound in the DX to 97.09 later during European hours off of euro weakness ($1.1274 – threats of US tariffs on EU cars), gold continued on its own momentum to its high.

Mostly weaker global equities were a tailwind for gold, with some pessimistic comments from China (US was inhibiting its industrial development by claiming Huawei equipment threatened cybersecurity) weighing.

The NIKKEI up 1%, the SCI was + 0.1%, European shares were off from 0.4% - 0.7%, and S&P futures turned lower (-0.3%). Firmer oil prices were supportive of stocks with WTI advancing from $55.59 - $56.33 (Saudi’s cut Dec production by 550k bpd o 7.687M bpd).

After the NY open, S&P futures continued to soften (2766), and some safe haven buying drove the US 10-year bond yield down to 2.641% - a 1-week low.

The DX turned down and took out its overnight low to reach 96.69.

Some dovish comments from the usually hawkish Fed’s Mester (favored slowing down the unwinding of the Fed’s balance sheet, continues to support Fed’s wait and see approach) along with continued strength in sterling ($1.30) and a rebound in the euro ($1.1328) also pressured the greenback.

Gold traded higher and took out the $1332-33 double top to reach $1334.

US stocks firmed after their open (S&P +9 to 2784), with Walmart (stronger earnings) and the Consumer Staples sector leading the advance. The 10-year yield continued to edge down (2.635%), however, while the DX had a modest bounce (96.75) – lifted by a better than expected reading on the US NAHB Housing Market Index (62 vs. exp. 59).

Gold continued to work higher though, from momentum buying along with some short covering, and reached $1339.40 by late morning.

Into the afternoon, US stocks trimmed some gains (S&P +6 to 2781), helped by a recovery in oil ($55.27 - $56.10).

The 10-year yield hovered around 2.64%, but the DX sank to a 1-week low of 96.42.

The dollar was hurt by news that the US is asking China to keep the value of the yuan stable as part of trade negotiations along with further strength in sterling ($1.3067 – 2-week high, continued optimism over avoiding a no-deal Brexit), and the euro ($1.1357 – 2-week high).

Gold surged further to $1342 – with no technical resistance to cap it until $1346 (4/20/18 high).

Later in the afternoon, US stocks firmed to fresh highs (S&P to 2788) - aided from some comments from Trump saying the March 1 deadline to increase tariffs on China is not a “magical” date - but then pared some gains near the close (S&P finished +4 to 2780).

The 10-year bond yield edged up to 2.65%, while the DX clawed back to 96.55. Gold retreated – but just slightly to $1339 –amid solid dip buying interest. It was $1340 bid at 4PM with a gain of $14.

Open interest was up 2.7k contracts, showing a net of new longs from Friday’s rally. Volume was lower with 206k contracts trading.

The CFTC’s Commitment of Traders Report (delayed as of 1/29) released today showed the large funds adding a whopping 25.8k contracts of longs and 0.8k contracts of shorts to increase their net long position to 100k contracts.

This was done on gold’s rally from $1286 - $1311. Gross shorts remained elevated, however, with a collective 113k contracts remaining.

Though there has been some significant short covering in gold’s $31 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 cheered gold’s strong advance today to fresh 10-month highs. Moreover, they were encouraged that gold was able to rally sharply amid rise in equities, and just modest pullback in the US dollar.

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 three 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 1/29/19) released today and estimates that the current COT Report still has the large funds with a significant 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.

Bulls expect a breach of initial resistance at $1346 (4/20/18 high), to trigger additional buying to challenge the next resistance levels $1353-56 (triple top – 4/12/18, 4/18/18 and 4/19/18 highs) and $1365-66 (triple top – 8/2/16, 1/25/18 and 4/11/18 highs).

Some bears got stopped out on gold’s strength over the past 3 sessions, expecting the downside breakout of the pennant formation at $1306 to lead to a significant leg down.

Other bears remain comfortable selling into strength, however, and have used this rally to get short(er) at more attractive levels.

They maintain that gold’s advance has been overdone – having rallied $65 since the $1277 low on 1/24 (5.09%), $109 since the $1233 low on 12/14 (8.84%), and $146 since the $1196 low on 11/13 (12.21%), and yielding an overbought 14-day RSI of 72.6.

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 further momentum from the S&P eclipsing its 200-day moving average (2746) last week.

Bears also 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 the recent 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 should keep the US dollar well bid. Bears will look for an initial pullback to the prior upside breakout level – the former resistance at $1326-27.

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 tomorrow on Japan’s Trade Balance, German PPI, Eurozone Consumer Confidence, US MBA Mortgage Applications, Fed’s Beige Book and comments from the ECB’s Praet and the Fed’s Kaplan for near term direction.

In the news:

Resistance levels: 

$1342 – 2/19 high

$1346 – 4/20/18 high

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

*$1365-67– triple top – 8/2/16, 1/25/18 and 4/11/18 highs

*$1373-75 – double top – 7/6/16 and 7/11/16 highs

 Support levels:

$1336 – 4/23/18 high

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

$1328 – 2/18 high

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

$1325 - options

$1323 – 2/19 low

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

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

$1307 – down trendline from 1/31 $1326 high

$1311 – 2/15 low

$1311 – 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

$1298 – 40-day moving average

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

$1289 – 50-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

$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

$1256 – 100-day moving average

$1254 – 12/21 low

$1250 – options

$1246 – 200-day moving average