Gold Traders' Report - February 22, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
FEB 22, 2019

Gold continued to pullback last night, moving lower in a range of $1321.60 - $1327.

The yellow metal traded up to its $1327 high during Asian time where it was capped by the old resistance level $1325-27.

The move was fueled by a modest dip in the US dollar (DX from 96.64 – 96.53), which was pressured from strength in the euro ($1.1330 - $1.1351) as German GDP (yoy) came in +0.9% as expected.

Gold retreated to its low of $1321.60 later during European hours where support from yesterday’s low held.

A rebound in the DX to 96.79 forced gold lower, which was boosted by a pullback in the euro ($1.1317, disappointing German IFO) and the pound ($1.3051 - $1.2968, EU states it can’t provide legally binding changes to the Irish backstop, Barnier fears accidental no-deal Brexit in 5 weeks).

Global equities were mostly stronger and a headwind for gold, with optimism over the US-China trade talks fueling gains.

The NIKKEI off 0.2%, the SCI was up 1.9%, European shares were up from 0.3% to 0.5%, and S&P futures were +0.5%. An increase in oil prices (WTI from $56.70 - $57.78) helped lift equities.

Just ahead of and through the NY open, US stock futures (S&P futures to 2779) dropped on news that the EU was ready to target Caterpillar, Xerox and others with tariffs if Trump targets EU cars with tariffs along with a plunge in Kraft Heinz (misses earnings, reveals SEC subpoena).

The US 10-year bond yield dropped from 2.685% to 2.655%, and the DX tumbled back to 96.53. Gold popped in response, and took out buy stops over last night’s high and former breakout level $1325-27 to reach $1330.70. A fair amount of short covering was seen.

US stocks turned back higher after they opened (S&P+12 to 2787), with gains in the IT sector leading the advance.

Focus turned back to the increasing optimism over US-China trade negotiations, where Trump is meeting with Vice Premier Liu He later today. The 10-year yield ticked up to 2.657%, while the DX hovered around 96.55. Gold held its prior gain, and traded either side of $1330.

Into mid-day, some dovish comments by the Fed’s Clarida (suggested makeup strategy after inflation undershoots, allowing inflation to run above targets) boosted US stocks (S&P +20 to 2794) and helped the 10-year yield resume its slide to 2.638%.

The DX worked lower with the bond yield, reaching 96.42, and gold extended its rise to $1333.15.

In the afternoon, US stocks pared gains (S&P +6 to 2781), off of some tepid comments from Trump on the US-China trade talks (may or may not work out final details with Xi) and Bob Lighthizer (still some great hurdles left).

The US 10-year yield edged up to 2.655%, while the DX ticked up to 96.50. Gold came off its highs, but found support around $1330.

Later in the afternoon, some more optimistic comments from Trump (more likely that a deal does happen…Chinese delegation staying for another 2 days means something) and Xi (negotiators have made significant progress, hopes both sides will redouble efforts to meet half way) turned US stocks back higher (S&P ends +18 to 2793).

The 10-year bond yield was steady around 2.655%, while the DX inched up to 96.55. Gold was pressured down to $1327, but held the prior breakout level. It was $1328 bid at 4PM with a gain of $2.

Open interest was off 6.2k contracts, showing a net of long liquidation from yesterday’s $16 plunge. Volume was higher with 297k contracts trading.

The CFTC’s Commitment of Traders Report (delayed – as of 2/5) showed the large funds adding 5.9k contracts of longs and cutting 3.6k contracts of shorts to increase their net long position to 109k contracts.

This was done on gold’s rally from $1311 - $1315. Gross shorts remained elevated, however, with a collective 109k contracts remaining.

Though there has been some significant short covering in gold’s $32 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 ability to advance today - especially since the DX held 96.50 and US equities had significant gains.

Moreover, the bulls were impressed that gold finished over the key $1325-27 prior breakout level. The bulls are confident that the trend is their friend, note the up trendline from the 11/13 $1196 low ($1295) 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 2/5/19) 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 feel that gold’s consolidation is over, and expect the market to mount a challenge of resistance of the double top at $1346-47 (2/20 and 4/20/18 highs). Above here, bulls expect 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 were disappointed that the key $1325-27 level was eclipsed on the upside again, which tripped some short covering.

However, other bears remain comfortable selling into strength and will continue to use rallies as entry points for getting short(er).

They maintain that gold’s advance has been overdone – having rallied $70 since the $1277 low on 1/24 (5.48%), $114 since the $1233 low on 12/14 (9.25%), and $151 since the $1196 low on 11/13 (12.63%), and yielding an overbought 14-day RSI of 72 the prior day.

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 9 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 expect further long liquidation to continue and look for a test of initial support at $1323 (double bottom – 2/19 and 2/21 lows), followed by the prior 9-top high resistance level between $1315-18.

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 German Import Prices, US Chicago Fed National Activity Index, Wholesale Trade Sales and the Dallas Fed Manufacturing Activity Index for near term direction.

In the news:

Resistance levels: 

$1333 –2/22 high

$1336 – 4/23/18 high

$1342 – double top - 2/19 and 2/21 highs

$1346-47 – double top 2/20 and  4/20/18 highs

$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:

$1325 - 27 – 6 tops-  1/31, 2/18,  4/26/18, 4/27/18,4/30/18, and 5/11/18 highs

$1325 - options

$1321-23 – triple bottom – 2/18, 2/19 and 2/21 lows

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

$1318 – 20-day moving average

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

$1311 – 2/15 low

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

$1303 – 40-day moving average

$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– up trendline from 11/13 $1196 low

$1294 – 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

$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

$1260 – 100-day moving average

$1254 – 12/21 low

$1250 – options

$1247 – 200-day moving average