Gold Traders' Report - May 29, 2018

Jim Pogoda, Trader, Gold Bullion International 
MAY 29, 2018

Gold rose overnight in a range of $1296.05 - $1306.50, aided by the political turmoil in Italy and Spain. Italy’s 10-year yield spiked to from 2.33% to 3.388%, and Spain’s 10-year yield jumped from 1.44% - 1.662%, while the safe haven 10-year German Bund yield sank from 0.46% to 0.192%, and the US 10-year yield tumbled from 2.93% to 2.799%.

The euro sank to $1.1510 – a 10-month low, driving the dollar to a fresh 6-month high (DX from 94.28 – 95.03).

Global equities were all significantly lower, with the NIKKEI off 0.6%, the SCI down 0.5%, Eurozone shares shed from 1.2% - 1.3%, and S&P futures were -0.7%. Weaker oil prices (WTI to $65.80, Russia and Saudis hint a possible exit from the supply cutting agreement) weighed on stocks.

Gold was lifted by the turmoil but checked by the dollar’s strength and some of the efforts to resuscitate the US-North Korean summit that was scuttled by Trump last week. It briefly penetrated resistance at $1305 (down trendline from 4/11 $1365 top) during European time, then just hovered below it ahead of the NY open.

Also, some dovish comments from the Fed’s Bullard (difficult for the Fed to raise rates when the BoJ and the ECB were pursuing accommodative policy) were gold supportive.
 
Just ahead of and through the NY open, the US 10-year bond yield rebounded to 2.88%, while S&P futures pared some losses (S&P -13 to 2704). The DX, which had pulled back to 94.70, jumped back to 94.90, and pressed gold lower.

The yellow metal fell through some stops under $1300 and its overnight low to reach $1293, where it found support ahead of the 5/24 low. An announcement that Vice Chairman Kim Young Chol was heading to NY to attempt to lay the groundwork for the US-North Korean summit aided the move.
 
At 10 AM a worse than expected reading on US Consumer Confidence knocked the rebounding S&P back down (-17 to2703) ,with the energy and financials sectors leading decliners. The 10-year yield dipped to 2.853%, and the DX slipped to 94.62. Gold rebounded sharply, charging back over the $1300 level to reach $1303.20.
 
Into the afternoon, US stocks losses accelerated (S&P -44 to2676 ) with financials getting trounced while the materials and industrials sectors were also hit hard. The flight to quality took the US 10-year yield down to 2.759% (6-week low) and brought the yen to 108.09 (1-month high). The dollar was caught in the cross currents of the rising yen and the plunging euro, and hovered between 94.75 – 94.95.

Gold was similarly trapped, and traded narrowly between $1302 - $1304.50. Later in the afternoon, US equites came off their lows (S&P -31 to 2690), and the 10-year yield recovered to 2.785%. The DX remained firm around 94.85, and gold dipped back to $1300. It was $1300 bid at 4PM with a loss of $1.
 
Open interest was off 4k contracts, showing a combination of some early short covering along with some subsequent long liquidation from Friday. Volume was lower but still very robust with 400k contracts trading – again bloated from the June – August contract rollover.

The CFTC’s Commitment of Traders Report as of 5/22 showed the large funds cutting 11.8k contracts of longs and 10.3k contracts of shorts to slightly reduce their long position to 91k contracts. This was done on gold’s move down to $1282, followed by its recovery to $1296, and is the lowest Net Fund Long Position since 7/25/17, when gold was trading around $1250.

While this report is generally neutral for sentiment, the positioning is relatively and historically small, and shows gross shorts still fairly elevated at 99k contracts. It leaves the gold market set up well to move higher - provided there is a spark - as there is plenty of room from sidelined longs to enter, and the excess shorts can fuel a rally if / when they are forced to cover.
 
Some bulls were disappointed that the turmoil in the global financial markets didn’t bring about a stronger rally in gold, and that the breach of resistance at $1305 (down trendline from 4/11 $1365 top) didn’t attract significant follow-through buying to take it higher.

However, other bulls were relieved that the gold held up as well as it did given that the DX made a 6-month high, breached 95, and held above 94.75. Bulls are encouraged that the COT Report still shows the market set up well to go higher, and expect a pullback in the DX to bring about a retest of $1305, and then the 200-day moving average at $1308.
 
Bears are still comfortable getting short into strength, and they expect the dollar’s rally to extend. Once $1300 fails, bears will be gunning for long liquidating sell stops below the double bottom at $1293-94, followed by $1288 (double bottom, 5/22 and 5/23 lows, up trendline from 12/15/16 $1123 low) to bring about a test of the 5/21 low at $1282.
 
All markets will continue to focus on the volatility in the equity and bond markets, geopolitical events (especially Italy, Spain, and North Korea), developments with the Trump Administration (especially on US-China trade), corporate earnings, oil prices, and will turn to reports tomorrow on Japanese Retail Sales, German Retail Sales, German Unemployment, Eurozone Consumer Confidence, US ADP Employment Change, Wholesale Inventories, GDP, Personal Consumption, and the Fed’s Beige Book for near-term direction.

Resistance levels: 

$1301 – 50% retracement of up move from 12/12/17 $1236 low to 1/25/18 $1366 high

$1302 – 5/25 low

$1304 – 20-day moving average

$1305 – down trendline from 4/11 $1365 top

$1306 – 5/29 high

$1307-08 – double top – 5/24 and 5/25  highs

$1308– 200-day moving average

$1318 -19 – quadruple top 5/3, 5/7, 5/8 and 5/9 highs

$1319 – 40 day moving average

$1322-23 – 5/10 and 5/14 highs

$1322 – 50 day moving average

$1325-27 – quadruple  top, 4/26, 4/27, 4/30, and 5/11 highs

$1325 – options

$1327 – 100-day moving average

$1332-33 – double top - 4/24 and 4/25 highs

$1335 – 4/23 high

$1334-35 triple bottom – 4/12, 4/13, and 4/20 lows

$1333 – 50% retracement of down move from 4/11 $1365 high to 5/1 $1302 low

$1346 – 4/20 high

$1350 – options

$1355 - 57 – quadruple top, 3/26, 3/27, 4/18, and 4/19 highs

$1365 – down trendline from 7/6/16 $1375 high

$1365-67 – 6 tops 4/11, 1/25, 8/2/16, 8/3/16, 8/4/16, and 8/5/16 highs

$1375 – 7/6/16 high   

$1388-89 – double top 3/16/14, 3/17/14 highs

Support levels:

$1300 – psychological level, options

$1298 – 5/23 high

$1296-97  – double top, 5/16 and 5/22  highs

$1293 – 94 – double bottom – 5/24 and 5/29 lows

$1288 – double bottom, 5/22 and 5/23 lows

$1288  - up trendline from 12/15/16 $1123 low

$1281-82 – double bottom, 5/21  and 12/27 lows

$1275 – options

$1273 – double bottom, 12/25 and 12/26 lows

$1267 – up trendline from 1/6/17 $1171 low

$1265 – 12/22 low