Gold Traders' Report - February 26, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
FEB 26, 2019

Gold was modestly lower last night in a range of $1323.50 - $1330.25. It rose to its $1330.25 high during Asian time against an early drop in S&P futures (-13 to 2784) and as the US dollar retreated (96.45 – 96.32).

The DX was pressured by strength in sterling ($1.3095 - $1.3148) on news that May was considering a plan to postpone Brexit, thus reducing fears of a no-deal Brexit and a rise in the yen (111.08 – 110.75).

Later during European time, gold slipped below key support at the old breakout level of resistance at $1325-27 to reach its $1323.50 low as the DX had a modest recovery.

Though the pound galloped ahead ($1.3237, 4-month high, May will rule out a no-deal Brexit after 15 MP’s threatened to revolt, Labour party would support a 2nd Brexit referendum), the euro softened ($1.1367 - $1.1346, German GfK disappoints), and pushed the DX back up to 96.45.

Global equities were softer and gold supportive with the NIKKEI off 0.4%, the SCI down 0.7%, European markets were off between 0.3% - 1.1%, and S&P futures were -0.3% (UBS downgrades Caterpillar, earnings miss from Home Depot weigh).

A modest rebound in oil (WTI from $55 - $55.70) from yesterday’s plunge off of Trump’s comments that prices were “getting too high”, supported equities.

A worse than expected reading on US Housing Starts at 8:30 AM was followed by misses on the HPPI (0.3% vs. exp. 0.4%) and the S&P Case-Shiller HPI (4.18% vs. exp. 4.50%) at 9AM.

This helped push S&P futures lower (2788), and knocked down the US 10-year yield to 2.634%. The DX, which had an interim bounce to 93.38 was tugged back down to 96.25. Gold rebounded in response and traded up to $1327.50.

At 10AM, a much stronger than expected Consumer Confidence Report (131.4 vs. exp. 124.1) lifted US stocks into positive territory (S&P +3 to 2799), with a move up in oil (WTI to $55.95) also aiding the move.

The 10-year yield rose to 2.65%, the DX climbed to 96.47, and pushed gold lower. However, decent buying interest limited the dip to $1323.75 - in front of the overnight low.

Later in the morning, some slightly dovish comments from the Fed’s Powell (warns of headwinds to the economy, prepared to “adjust” balance sheet roll-off, can be patient with monetary policy) lifted US boosted US stocks (S&P +7 to 2803), while the 10-year yield dipped to 2.643%.

The DX sank to 96.14, helped also by a further pop in the pound ($1.3283 – 5-month high), and a rebound in the euro ($1.1380). Gold turned higher, and traded up to $1328.75 – but failed to challenge the overnight high.

In the afternoon, US stocks drifted back into negative territory (S&P -3 to 2793), while the 10-year yield made a fresh low at 2.632%.

The DX pulled back to 95.95 (3-week low) with pressure from further advances in the pound ($1.3288) and the euro ($1.1402) weighing on the greenback. Gold traded up to $1329.50, but was unable to take out its overnight high.

Later in the afternoon, equities turned up to make fresh highs (S&P to 2803), but finished with modest losses (S&P ended -2 to 2794) – completing a very choppy session.

The 10-year yield edged up to 2.64%, and the DX bounced back over 96 to 96.05. Gold ticked lower but remained firm and was $1329 bid at 4PM with a gain of $1.

Open interest was off 7.3k contracts, showing a net of some long liquidation and some options related closeouts from yesterday.

Volume was much lower with 190k contracts trading. The CFTC’s Commitment of Traders Report (delayed) as of 2/12 showed the large funds cutting 4k contracts of longs and adding 0.2k contracts of shorts, reducing their net long position to 105k contracts.

This was done on gold’s dip from $1317 - $1315 during that week. Gross shorts remained elevated, however, with a collective 109k contract short position holding.

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.

While bulls will take today’s modest gain, other bulls were disappointed with gold’s lack of strength – given the DX tested the 96 level. However, it was important for the bulls that gold held 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 ($1298) 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 2/12/19) 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).

Bears were relieved that gold only managed a modest gain today, given the weakness in the DX.

Some remain concerned that the key $1325-27 level continued to hold, and fear that this dip will be only consolidation in the middle of another significant leg higher.

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%).

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.

They expect equities will find further momentum from the S&P eclipsing its 200-day moving average (2746) the prior week, and will get a further boost on a close over 2800. 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 tomorrow on Eurozone Economic, Industrial, Services, and Consumer Confidence, US Goods Trade Balance, Wholesale Inventories, Retail Inventories, Pending Home Sales, Factory Orders, Durable Goods, Oil Inventories and Powell’s testimony to the House Financial Services Committee for near term guidance.

In the news:

Resistance levels: 

$1330 – 2/26 high

$1333 –double top 2/22 and 2/25 highs

$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 - options

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

$1321-23 – quadruple bottom – 2/18, 2/19, 2/21, and 2/26 lows

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

$1320 – 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

$1305 – 40-day moving average

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

$1300 – psychological level, options

$1299– up trendline from 11/13 $1196 low

$1298 – 50-day moving average

$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

$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

$1262 – 100-day moving average

$1259 – 12/24 low

$1254 – 12/21 low

$1250 – options

$1247 – 200-day moving average