Gold Traders’ Report - May 21, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
MAY 21, 2019

Gold continued its decline last night, trading lower in range of $1272 - $1278.15.  It edged up to its $1278.15 high during early Asian time against a tick down in the DX (97.90), but resistance at yesterday’s $1279 top capped the advance.  Gold slid during European time to its low of $1272, where support at the up trendline from the 8/16/18 $1160 low held.  Gold was pressured by mostly firmer global equity markets off of the announcement that the US Commerce Department was easing restrictions on Huawei (allows them to access US technology for up to 90 days to maintain existing networks and handset updates).  The NIKKEI was off 0.1%, the SCI rallied 1.2%, European markets were up from 0.5% to 1.0%, and S&P futures were up 0.6%.  Firmer oil prices (WTI from $63.15 - $63.78, escalating US-Iran tensions) supported stocks.  A move up in the US 10-year bond yield (2.409% to 2.434% - 1-week high) and the dollar (DX to 98.13 ,1-month high) were headwinds for gold.  The greenback was lifted from weakness in the yen (110.07 – 110.43, safe- haven demand recedes), the pound ($1.2732 - $1.2685, 4- month low, lessening chances of May’s deal getting through Parliament, speculation that May’s replacement will increase possibility of a no-deal Brexit), and the euro ($1.1172 - $1.1141, downbeat comments from ECB’s De Guindos). 

 US stocks opened firmer and climbed into the late morning hours (S&P +28 to 2868), aided by some dovish comments from the Fed’s Evans (inflation “makeup” strategies could require short-run price increases well above 2%, trend growth is likely less than 2%) and shrugged off a miss in US Existing Home Sales (5.19M vs. exp. 5.35M).  Gains in the IT and Materials sectors led the advance.  After a dip to 2.419%, the 10-year yield moved up to 2.437% while the DX remained firm between 98-98.10.  Gold broke through the key $1272 support and slid to $1269.50, where support ahead of $1269 (double bottom - 4/24 and 5/3 low) held.  However, a lack of conviction to the downside to attack $1265-67 (5 bottoms - 12/25, 12/26, 12/27, 4/23, and 5/2  lows) led to a bounce from bargain hunting bids to $1272.50.

 Later in the morning, reports that PM May was poised to support a second referendum on Brexit sent the pound ($1.2812) and the euro soaring ($1.1188).  The DX tumbled to 97.81, and gold was lifted further to $1275.  

 Into the afternoon, US stocks trimmed some gains (S&P +19 to 2859), hurt by some mildly hawkish comments from the Fed’s Rosengren (not as worried about inflation being below target, views inflation misses as being predominantly temporary).  The US 10-year yield ticked down to 2.425%, but the DX rebounded (98.05) as the pound ($1.2730) and the euro ($1.1156) sank back after May’s offer of a 2nd referendum was conditional on Parliament passing the new version of her Brexit deal.  Gold was caught in the cross currents and traded in a choppy fashion between $1272.50 - $1274.50. 

 Later in the afternoon, US stocks clawed back to their morning highs (S&P finished +24 to 2864) and the 10-year yield edged back up to 2.43%.  The DX was steady between 98.05-98.10, and gold was similarly stable around $1274.50.  Gold was $1274 bid at 4PM with a loss of $3.

 Open interest was off 8.8k contracts, showing a net of long liquidation on yesterday’s move below $1275.  Volume was lower with 261k contracts trading.

 Bulls were disappointed with gold’s continued decline which has now reached $34 in 5 sessions of lower highs and lower lows since touching $1304 last week.  However, bulls were encouraged with gold’s ability to rebound after breaching $1272 (up trendline from 8/16/18 $1160 low, and close above that level.  They see gold approaching oversold (14-day RSI = 41), and see the recent 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 $1272).  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 45.9% 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 Friday’s Commitment of Traders Report (as of 5/14) that showed the large funds with a still relatively small net long position (adjusted 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 $1272 - $1275 and then challenge the former support level and down trendline at $1286. 

 While some bears were pleased with gold’s $3 decline today, others were concerned with the lack of follow through selling once the up trendline from the $1160 low from 8/16/18 was finally breached at $1272.  Many bears thought a failure of support at that trendline would lead to a cascade of sellingthrough $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.  While some bears will remain patient, other bears are uneasy that the lack of conviction to the downside will result in a quick snap back higher, with weak shorts getting stopped out, providing fuel for a recovery rally.  Like the bulls were disappointed with the lack of conviction on the upside over $1300 a week ago, bears were similarly disappointed today.  Perhaps market participants are concerned with the resolution key geopolitical issues (US-China trade, Iran, Brexit) before committing to more significant positions, or perhaps the dreaded summer doldrums have begun to settle in.  The bears applauded Powell’s less dovish tone from three weeks ago (and will look to confirm that in after seeing the results of the FOMC minutes from that meeting tomorrow), 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 close below $1272 (up trendline from 8/16/18 $1160 low).  Below this level, bears hope to trip significant long liquidation that they believe should lead to aggressive selling through $1269-70 (triple bottom - 4/24, 5/3, and 5/21 lows) 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 tomorrow on Japan’s Trade Balance and Machine Orders, UK CPI and PPI, US MBA Mortgage Applications, Oil Inventories, FOMC Minutes and comments from the BOJ’s Harada, ECB’s Draghi, Visco, and Praet, and the Fed’s Williams and Bostic for near term direction. 

 In the news:

Russia adds another 15.6 tonnes to its gold reserves in April:   https://www.sharpspixley.com/articles/lawrie-williams-russia-adds-another-156-tonnes-to-gold-reserves-in-april_293033.html

Why are Indians falling out of love with gold? – the Economist:   https://www.economist.com/the-economist-explains/2019/05/20/why-are-indians-falling-out-of-love-with-gold

JPMorgan says yen and gold may improve as trade war hedges:   https://uk.investing.com/news/stock-market-news/jpmorgan-says-yen-and-gold-may-improve-as-tradewar-hedges-1514828

YTD Performance


12/31/2018

5/21/2019

Change
% Change
Gold


1282.5

1274

-8.5

-0.663%

DX


96.06

98.05

1.99

2.072%

S&P


2505

2864

359

14.331%

JYN


109.63

110.54

0.91

0.830%

Euro


1.1466

1.1161

-0.0305

-2.660%

US 10-year bond yield


2.69%

2.428%

-0.0026

-9.605%

Oil (WTI)


45.45

63.1

17.65

38.834%

 

Resistance levels: 

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

$1275 – options

$1278-79 – double top - 5/20 and 5/21 highs

$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

*$1287 – down trendline from 2/20 $1347 high

$1288 – 40-day moving average

$1291 – 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:

*$1273 – up trendline from 8/16/18 $1160 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

$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