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Gold Traders’ Report - May 17, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
MAY 17, 2019

Gold was fairly steady last night, trading either side of unchanged in a range of $1284.50 - $1289.  The yellow metal climbed to its high during Asian hours, helped by a dip in the US dollar (DX to 97.76), which was pressured from strength in the yen (110.03 – 109.55, risk off).  The yellow metal retreated to its $1284.50 low during European time, where it found support ahead of yesterday’s $1284 low.  It was pushed down by a rebound in the dollar (DX to 97.96, 2-week high), which was lifted by weakness in the yuan (6.8827 - 6.9171, trade war concerns), euro ($1.1184 - $1.1158), and the pound ($1.2798 - $1.2737 – 4 month low, cross party Brexit talks end without a deal).  Global equities were mostly weaker and gold supportive, with US –China trade tensions continuing to dominate market activity (China accuses US of “bullying behavior”).  Though the NIKKEI was up 0.9%, the SCI was off 2.5%, European markets were down 0.3% to 0.8%, and S&P futures were off 0.5%.  A move higher in oil (WTI from $63.05 - $63.62) helped mitigate the setback in stocks. 

Ahead of the NY open, gold bounced back to $1287, lifted by a further decline in S&P futures (-22 to 2855, earnings miss from Deere, Pinterest lower on weak earnings, Uber off on Amazon’s investment in delivery company Deliveroo), a pullback in the US 10-year bond yield to 2.366%, and a dip in the DX to 97.73. 

After opening lower, US stocks turned higher (S&P +10 to 2886) by late morning, helped by news that the US was poised to lift steel and aluminum tariffs on Canada and Mexico and a much stronger than expected reading on the University of Michigan Consumer Sentiment Index (102.4 vs. exp. 97.5, best since 2004).  A rebound in oil (WTI from $62.90 - $63.57) aided the move.  The 10-year bond yield rebounded to 2.405%, and the DX surged to 98.01.  The greenback was also helped by further weakness in the euro ($1.1155, 2-week low, Italian debt situation continues to weigh) and the pound ($1.1219, Brexit woes).  Gold sank as long liquidating stops were hit below the yesterday’s $1284 low, $1282-83 (double bottom – 5/10 and 5/13 lows), and $1277-80 (quadruple bottom – lows 5/6, 5/7, 5/8, and 5/9 lows) to reach $1275. 

In the afternoon US stocks fell back into negative territory (S&P -7 to 2868), with losses in the Energy, Industrials and IT sectors leading the decline, and with a drop in oil (WTI to $62.51) contributing to the move.  The 10-year yield edged down to 2.391% and the DX ticked lower to 97.92, which gave gold a modest boost to $1277.50.

Later in the afternoon, US stocks retreated further (S&P ends -17 to 2859 ), hurt from a report that negotiations between the US and China have stalled, with scheduling for the next round of talks is “in flux” as it is unclear what the two sides would negotiate.  The 10-year yield moved down to 2.386%, but the DX remained firm between 97.95-98.  Gold recovered further to $1278.50 and was $1278 bid at 4PM with a loss of $8. 

Open interest was off 3.1k contracts, showing a net of long liquidation from yesterday’s decline.  Volume surged with 319k contracts trading.  The CFTC’s Commitment of Traders Report as of 5/14 showed the large funds adding a whopping 40.5k contracts of longs and cutting 8.6k contracts of shorts.  This was done on gold’s rally from $1286 to $1304 during the past week, reflecting a large influx of new longs along with some significant short covering.  The Net Fund Long Position increased to 124k contracts, while gross shorts ticked down to 102k contracts.  In the past three sessions, however, a fair amount of long liquidation has been seen down to $1275, which should take the NFLP down to between 105-110k contracts.  The NFLP still remains historically low, and the level of gross spec shorts remains relatively high – leaving the gold market well positioned to recover 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 were disappointed with gold’s $8 loss today - especially given the early softness in equities and the dip in the 10-year yield - and the cumulative $29 decline from its $1304 peak last Tuesday.  Other bulls see the move down as a healthy correction (albeit a bit excessive), and are using the pullback to get long(er) at more attractive levels.  Bulls feel that the trend is their friend and that the up move going back to the 8/16/18 $1160 low is still intact (up trendline at $1271).  Despite Powell’s brush off of recent weak inflation data as transitory from two weeks ago, bulls feel that the Fed’s dovish pivot has not been altered, and that market perceptions that the next move(s) will be a cut and not a hike are still intact – especially given the abundance of dovish commentary from the several Fed governors who have spoken in recent days, along with escalating fears that a protracted trade war will impede global growth (FedWatch has a 59% probability of a 25bp rate cut at the Oct FOMC meeting).  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 5/14) that showed the large funds with a still relatively small net long position (adjusted with last three sessions to approximately 105-110k contracts), and a still relatively high gross short position (102k contracts).  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 look for gold to consolidate between $1271 - $1275 and then challenge the former support level and down trendline at $1289.  

Bears cheered today’s $8 decline, and are encouraged with the 3 consecutive lower highs and lower lows that have knocked the market $29 lower to $1275.  While some bears took profits today on the way down to options support at $1275 off of the strength in the DX, others are looking for a more significant move lower.    The bears applauded Powell’s less dovish tone from two weeks ago, and feel that the prospect of an imminent rate cut is off the table now for at least the near / intermediate term.  They feel that this should remove downward pressure off of bond yields, and allow the US dollar to appreciate against other currencies, as they feel the dollar 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 two weeks underscores this view.  While derailed recently over fears that US-China trade talks are on the rocks, bears view that a deal is in both sides best interests, and are optimistic that an agreement will be put in place.  They expect the rebound in US equities seen over the past 5 months to resume (S&P made all time high on 5/1), putting further pressure on the yellow metal.  Bears expect gold’s pullback to continue, and will look for gold to challenge initial support at $1275 (options, today’s low) and then $1271 (4/18 low and up trendline from 8/16/18 $1160 low).  Below this level, bears expect to trip significant long liquidation that they believe should lead to a cascade of selling through $1269 (double bottom - 4/24 and 5/3 low) and $1265-67 (5 bottoms - 12/25, 12/26, 12/27, 4/23, and 5/2  lows) to bring a test of the 200-day moving average at $1257.

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), Q1 corporate earnings, oil prices, and will turn to reports Monday on Japan’s GDP, Industrial Production and Capacity Utilization, German PPI, Eurozone Current Account, US Chicago Fed National Activity Index, and comments from the Fed’s Powell for near term direction. 

In the news: 

How billionaires are preparing for the next bear market:

Venezuela sells $570M from gold reserves despite sanctions:

Resistance levels: 

$1277-80 – quadruple bottom – lows 5/6, 5/7, 5/8, and 5/9 lows

$1282-83 – double bottom – 5/10 and 5/13 lows

$1283 – 20-day moving average

$1287 – up trendline from 12/28 $1274 low

*$1289 – down trendline from 2/20 $1347 high

$1289 – 40-day moving average

$1292 – 50-day moving average

$1296 – 4/12 high

$1297– 100-day moving average

$1299 – 5/16 high

$1300 – psychological level, options

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

$1304  - 5/14 high

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

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

$1319 - 3/27  high

$1322 -3/26 high

$1325 – options

$1325 – 3/25 high

$1327 – 2/28 high

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

$1333 –double top 2/22 and 2/25 highs

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

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

*$1350 – 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:

$1275 – 5/17 low

$1275 – options

$1271 – 4/18 low

*$1271 – up trendline from 8/16/18 $1160 low

$1269 – double bottom - 4/24 and 5/3 low

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

$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

*$1257 – 200-day moving average

$1250 – options

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