Gold Traders’ Report - June 7, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
JUN 7, 2019

Gold remained choppy last night, trading either side of unchanged in a range of $1330.35 - $1337.15. It rose to $1336 against a drop in S&P futures (2837) during early Asian time after the White House said it still intended to impose tariffs on Mexican imports Monday - amid prior reports it was considering an extension.  The yellow metal declined during the rest of Asian time and into early European hours, fading strength in the US dollar (DX from 96.98 – 97.18).  The greenback was supported by softness in the yuan (PBOC Gov Gang says plenty of room for monetary policy easing), the yen (108.30 – 108.61, risk on, weaker Japanese Leading Index) and euro ($1.1280 - $1.1250, weaker German Industrial Production and Exports).  Gold recovered to make its $1337.15 high during later European hours, helped by a pullback in the DX (97.02), with some position squaring seen ahead of the US Jobs Report. Global equities were firmer and a headwind for gold, helped by comments from the White House that “significant progress was being made” on the US-Mexico immigration / tariff talks.  The NIKKEI was up 0.5%, the SCI was closed, European markets were up from 0.8% to 1.5%, and S&P futures were +0.3%.  A continued rebound in the beleaguered oil market (WTI from $52.92 - $53.83, Saudis look to extend production cuts into 2nd half of year) was supportive of stocks. 

At 8:30 AM, the US Payroll Report was much weaker than expected.  Non-Farm Payrolls were only up 75k (exp. 175k), with downward revisions to the last two months totaling 75k, and Average Hourly Earnings also missed (0.2% vs. exp. 0.3%).  The soft report immediately stoked hopes of a more aggressive response from the Fed, with FedWatch showing significant increases in the probability of future 25 bp rate cuts as follows:

            Fed Meeting date                 Now                Yesterday      1 month ago

            June                                        29.2%             16.7%             10%

            July                                         78.9%             68.3%             16.6%

 FedWatch indicated the probabilities of a 2nd 25bp cut also increased dramatically:

            Fed Meeting date                 Now                Yesterday      1 month ago 

            Sep                                          66.4%             53.1%             4.7%

            Oct                                          78.8%             69.6%             8.0%

 Markets are also predicting a better than even chance of a 3rd rate cut at the December meeting:

           Fed Meeting date                 Now                Yesterday      1 month ago

            Dec                                         58.5%             48.4%             2.6%

After a quick knee-jerk lower, S&P futures rallied strongly (+20 to 2866), while the US 10-year bond yield plunged to 2.06% (fresh 21-month low).  The DX tumbled to 96.58 (10-week low), and gold spiked higher.  It took out buy stops over last night’s $1337 high, $1340 (yesterday’s high), and $1344 6/5 high to reach $1345 – where resistance in front of $1346-47 (double top 2/20 and  4/20/18 highs) held. 

US stocks opened stronger (S&P + 27 to 2871), riding hopes that that the weak jobs report would spur the Fed to cut rates sooner than previously expected.  Strength in the Tech, Consumer Discretionary and Communication Services sectors led gainers.  The 10-year yield was choppy between 2.06% and 2.078%, but the DX fell further to 96.45.  Gold extended its gain, taking out resistance at $1346-7, but was capped at $1348 (long term down trendline from 8/25/13 $1433 high), and a lack of follow through buying.  

Stocks added to their gains into mid-day (S&P +41 to 2885), helped by upbeat comments from VP Pence’s chief of staff Marc Short on US-Mexico tariff / immigration talks (“there is the ability, if negotiations continue to go well, that the president can turn that off at some point over the weekend”), while the 10-year yield edged up to 2.091%.  The DX recovered to 96.65, and gold was knocked back to $1338.50. 

Into the afternoon, US equities pared some gains (S&P +29 to 2873) while the 10-year yield eased back to 2.072%. The DX softened to 96.50, and gold climbed back to $1344. 

Equities were fairly steady for the rest of the afternoon (S&P finished +30  to 2873), while the 10-yer yield hovered between 2.08% - 2.09%.  The DX drifted up to 96.62, and gold faded back to $1339.  Gold was $1341 bid at 4PM with a gain of $6.  

Open interest was up 3.2k contracts, showing a net of new longs from yesterday’s advance.  Volume was much lower  - but still healthy – with 270k contracts trading. The CFTC’s Commitment of Traders Report as of 5/28 showed the large funds adding a whopping 46k contracts of longs and slashing 23k contracts of shorts.  This was done on gold’s rally from $1280 to $1329, reflecting a healthy amount of new longs and a significant amount of short covering during the up move.   The Net Fund Long Position jumped from 87k to 156k contracts, with gross shorts slipping to 84k contracts.  In the last three sessions, a fair amount of additional short covering and new longs have been seen, which should put the NFLP north of 170k contracts, and reduce the gross shorts to under 80k contracts.  However, even this adjusted NFLP is not historically high, and gross shorts remain elevated.  This still leaves the gold market well positioned to probe higher as many longs remained sidelined and the still elevated amount of gross shorts - when forced to cover - will help accelerate any upside moves. 

Bulls cheered gold’s advance today, especially given the strength in equities – but some were disappointed with the lack of follow through at the key $1346-48 levels.   However, bull are encouraged that gold has now made 6 consecutive higher lows since hitting the low of $1275 on 5/30.  Bulls remain thrilled that gold has held above key resistance levels at $1307 (50% retracement of down move from 2/20 $1347 high to 4/23 $1266 low), $1309-12 (triple top – 3/28, 4/10 and 4/11 highs), $1319 (3/27 high), $1322 (3/26 high), and $1325 (options, 3/25 high).  Bulls feel the move down from the $1304 high to $1270 two weeks ago was overdone, and used the dip to get long(er) at more attractive levels. Despite Powell’s brush off of recent weak inflation data as transitory last month - bulls feel that the Fed’s dovish pivot has not been altered, and that market perceptions that the next move(s) will certainly be a cut and not a hike are still intact and increasing – especially after Powell’s comments last Tuesday (Fed will act as appropriate to sustain the expansion) and the abundance of dovish commentary from the several Fed governors who have spoken in recent days, and after today’s soft jobs report (FedWatch now has a 78.9% probability of a 25 bp cut at the July meeting, a 78.8% chance of a 2nd 25 bp cut at the October meeting, with a 58.5% probability of a 3rd 25bp cut at the December meeting, US 10-year yield made a fresh21-month low today).  In addition, bulls feel escalating fears of a protracted trade war with China, along with concerns the US would be entering a trade war with Mexico will impede global growth.  This they feel will keep US interest rates from climbing, keep the US dollar in check, and allow gold to probe higher.  Bulls also point to today’s Commitment of Traders Report (as of 6/4) that showed the large funds with a still relatively low – moderate net long position (156k), and a still relatively high gross short position (84k contracts).  Therefore, the bulls feel the gold market remains set up to move higher, as some funds remained sidelined / not fully committed and the shorts will provide fuel to further upside moves -  when forced to cover (as seen in recent sessions).  Bulls will look for the rally to extend, and challenge initial resistance at $1342 (double top - 2/19 and 2/21 highs), and then $1344 (6/5 high).  If bulls can get a breach of $1346-47 (double top 2/20 and  4/20/18 highs) and $1348 (down trendline from 8/25/13 $1433 high), they feel fresh momentum buying will propel the market toward the tough resistance levels of $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), and $1373-75 (double top – 7/6/16 and 7/11/16 highs). 

Bears remain concerned with gold’s resilience - continuing to make gains despite significant strength in stocks.  While many bears were stopped out in recent sessions, other bears with stronger hands used gold’s bounce in the past 7 sessions to get short(er) at better levels.  Bears see gold’s $78 rebound from its $1270 low on 5/21 as overextended, with its 14-day RSI at 76.9  signaling very overbought.  While some bears acknowledge a growing concern over lower rates – both the in the long end (10-year to 21-month lows) and the short end (FedWatch predicting earlier Fed cuts), they feel that an imminent rate cut by the Fed is not in the cards (as Kaplan remarked), believe the market is a bit over its skis on rate cut predictions, and see the Fed’s predominant watchword “patience” as a double-edged sword.  They feel that the downward pressure on bond yields is also getting overdone, and a modest reversal should allow the oversold US dollar(14-day RSI =33) to rebound against other currencies, as they feel the dollar still remains the “cleanest dirty shirt in the laundry basket”, with the US as the sole global growth engine. Recent soft data for both Germany and the Eurozone that drove the German 10-year yield further into negative territory over the past month (record low bund yield again today at -0.262%) underscores this view.  While derailed recently over fears that US-China trade talks are on the rocks, bears maintain that a deal is in both sides’ best interests, and are optimistic that an agreement will be put in place and reverse recent softness in equities.  They expect the rebound in US equities seen over the past 5 months to continue (S&P made all time high just 1 month ago, recovered past a 50% retracement today from 2954 all time high to 6/3 2729 low), putting further pressure on the yellow metal.  Bears expect gold’s rally to make a hasty retreat, and trip sell stops below the previous resistance levels – especially below the key $1307 level (50% retracement of down move from 2/20 $1347 high to 4/23 $1266 low).

All markets will continue to focus on geopolitical events (especially Brexit news), developments with the Trump Administration (especially on US-China trade, potential legal issues), oil prices, and will turn to reports Monday on Japan’s Trade Balance, GDP, and Economy Watchers Survey, China’s New Yuan Loans and Trade Balance, UK GDP, Industrial Production, Trade Balance, and Construction Output, and US JOLTS Job Openings for near term guidance. 

In the news: 

Gold outshines the US dollar:   http://news.degussa-goldhandel.de/marketreport/newsletter/TIHAU0S6E4.pdf

Asia gold – India flips to discount, premiums elsewhere skid as prices surge:   https://www.reuters.com/article/asia-gold-demand/asia-gold-india-flips-to-discount-premiums-skid-elsewhere-as-prices-surge-idUSL4N23E1AO?rpc=401&

Chow Tai Fook sees gold in rural China under trade war cloud:   https://asia.nikkei.com/Business/Companies/Chow-Tai-Fook-sees-gold-in-rural-China-under-trade-war-cloud

YTD Performance


12/31/2018

6/7/2019

Change
% Change
Gold


1282.5

1341

58.5

4.561%

DX


96.06

96.58

0.52

0.541%

S&P


2505

2873

368

14.691%

JYN


109.63

108.16

-1.47

-1.341%

Euro


1.1466

1.1335

-0.0131

-1.143%

US 10-year bond yield


2.69%

2.088%

-0.006

-22.264%

Oil (WTI)


45.45

53.98

8.53

18.768%

 

Resistance levels: 

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

$1344 – 6/5 high

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

*$1348 – down trendline from 8/25/13 $1433 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:

$1340 – 6/6 high

$1333 –double top 2/22 and 2/25 highs

$1330 – double top – 2/27 and 2/26 highs

$1327-29 – triple top, 6/3, 6/4, and 2/28 highs

$1327 – 6/6 low

$1325 – options

$1325 – 6/5 low

$1322 -3/26 high

$1320 – 6/4 low

$1319 - 3/27  high

$1309 - 12 - triple top – 3/28, 4/10 and 4/11 highs

$1307 – 5/31 high

$1307 – 50% retracement of down move from 2/20 $1347 high to 4/23 $1266 low

$1304  - 5/14 high

$1301 – double top 5/13 and 5/15 highs

$1300 – psychological level, options

$1299 – 5/16 high

$1299– 100-day moving average

$1298 – 20-day moving average

$1291 – down trendline from 2/20 $1347 high

$1291 – 50-day moving average

$1289 – double top - 5/17 and 5/30  highs

$1289 - 40-day moving average

$1285-87 – 5 tops – 5/23, 5/24, 5/27, 5/28, and 5/29 highs

$1279 – 5/29 low

*$1276 – up trendline from 8/16/18 $1160 low

$1276 – 5/28 low

$1275 – options

$1274-75 – double bottom  – 5/17 and 5/20 lows

$1273 – 5/22 low

$1269-70– triple bottom - 4/24, 5/3, and 5/21 low

$1265-67 – 5 bottoms - 12/25, 12/26, 12/27, 4/23, and 5/2  lows

*$1265 – 200-day moving average

$1259 – 12/24 low

$1254 – 12/21 low

$1253 – 50% retracement of up move from 8/16/18 $1160 low to 2/20 $1347 high

$1250 – options

$1242-43 – double bottom – 12/19 and 12/20 lows