Jim Pogoda, Senior Gold Trader, Gold Bullion International
MAY 31, 2019
The announcement from Trump that the US will place a 5% tariff (to climb steadily to 25%) on all Mexican imports if Mexico doesn’t take action to “reduce or eliminate the number of illegal aliens” crossing into the US roiled markets last night. Global equities sold off with the NIKKEI down 1.6%, the SCI was off 0.2% (hurt also by weaker Chinese PMI), European markets fell from 1.2% to 1.6%, and S&P futures tumbled 1.2%. Investors flocked to the safe havens, with the yen rallying to a 4-month high (109.62 – 108.71), and global bond yields – which were already plumbing near many month lows in recent sessions - fell further (Japan’s 10-year from -0.07% to -0.099% - near 3-year low, Germany’s 10 year from -0.176% to -0.213% - record low, UK’s 10-year from 0.904% to 0.854% - near 3-year low, and the US 10-year from 2.217% to 2.149% - fresh 20-month low). Gold spiked higher as it touched off buy stops over $1289 (double top - 5/17 and 5/30 highs), $1295 (down trendline from 2/20 $1347 high) and $1297 (100-day moving average) to reach $1299 where resistance there from the 5/16 high and ahead of $1300 (psychological and options level) capped the advance. Gold was also aided from a decline in the US dollar (DX from 98.17 – 97.95), which was hurt by the yen strength along with a bounce in the euro ($1.1126 - $1.1157, shrugs off weaker Italian GDP and German Retail Sales).
At 8:30 AM, stronger than expected readings on US Personal Income (0.5% vs. exp. 0.3%) and Personal Spending (0.3% vs. exp. 0.2%) lifted S&P futures (-27 to 2762) and took the US 10-year bond yield up to 2.178%. The DX had a modest bounce to 98.06, and gold pulled back to $1295.
US stocks opened weaker (S&P -38 to 2750), weighed by the Mexican tariff issue compounding the already worrisome US-China trade war (China’s former PBOC governor Xianglong warns the current trade war could cause a global financial crisis). Auto makers and suppliers took a large hit and all sectors were in the red except for Real Estate, with heavier losses seen in Communication Services, Consumer Staples, and the Consumer Discretionary. A further drop in oil (WTI to $54.72, 3-month low, ramping up of trade tensions hurting demand outlook) also weighed. The 10-year yield dipped back to 2.163%, and the DX sank to 97.75 – taking out its overnight low. The DX was pressured by the rising probability of the Fed cutting rates sooner than previously thought (FedWatch now has 68.1% probability of a 25bp cut at the September meeting, and a 58.6% probability of a 2nd 25bp cut at the December meeting). Gold rallied, taking out more stops over $1299, $1300 and $1301 (double top 5/13 and 5/15 highs) to reach $1304 – where the 5/14 high capped the move.
Later in the morning, a stronger report on the Chicago PMI (54.2 vs. exp. 54), and only a slight miss on the University of Michigan Consumer Sentiment Index (100 vs. exp. 101, but stronger inflation outlooks) led to a modest rebound in US stocks (S&P -19 to 2769), and the 10-year yield edging back up to 2.178%. The DX recovered to 98.03, and gold retreated to $1300.
Into the afternoon, US stocks turned back down (S&P -31 to 2756), with reports of discord in the White House over Trump’s tariffs against Mexico (Mnuchin and Lighthizer said not to be in favor of the action) outweighing some dovish (though theoretical) commentary from the Fed’s Williams (need to cut rates aggressively when deflation or a severe downturn threatens). A further decline in oil (WTI to $53.06) continued to weigh. The 10-year yield edged back down to 2.152%, but held above its prior low. The DX fell back to its prior low of 97.75, and gold probed higher. The yellow metal took out the prior and 5/14 $1304 top to reach $1307 (2-month high), where resistance there (50% retracement of down move from 2/20 $1347 high to 4/23 $1266 low) capped the rally.
Later in the afternoon, the S&P touched its opening low before edging slightly higher (S&P finished - 37 to 2752), while the US 10-year yield made a fresh 20-month low at 2.133%. The DX ticked down to 97.72, but gold remained steady just off its highs, trading narrowly between $1305 - $1306.50. Gold was $1305 bid at 4PM with a $17 gain.
Open interest was off 10.9k contracts, showing a net of short covering from yesterday’s advance along with a fair amount of position closing from yesterday. Volume was much lower but still very healthy with 345k contracts trading – still inflated by the June-August contract rollover (though winding down). The CFTC’s Commitment of Traders Report as of 5/28 showed the large funds cutting 9k contracts of longs and 7k contracts of shorts. This was done on gold’s up move from $1270 to $1285, reflecting a decent amount of profit taking from longs along with a fair amount of short covering. The Net Fund Long Position edged down to 87k, with gross shorts slipping to 108k. In the last three sessions, however, a hefty amount of short covering and new longs came in, taking the NFLP well north of 105k contracts, and reduced the gross shorts to around 100k contracts. Even this adjusted NFLP remains historically low, and the adjusted level of gross spec shorts remains relatively high. This leaves 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 cheered gold’s double digit advance today, and its ability to breach and hold above key resistance levels of $1289 (double top - 5/17 and 5/30 highs), $1295 (down trendline from 2/20 $1347 high), $1297 (100-day moving average), $1299 (5/16 high), $1301 (double top 5/13 and 5/15 highs), and $1304 (5/14 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 from 4 weeks ago - which was confirmed by the release of the FOMC minutes from the prior Wednesday - 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 - now involving Mexico - will impede global growth (FedWatch now has 68.1% probability of a 25bp cut at the September meeting, and a 58.6% probability of a 2nd 25bp cut at the December meeting, US 10-year yield still scraping 20-month lows). 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 5/28) that showed the large funds with a still relatively small net long position (89k), and a still relatively high gross short position (115k 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 will look for the rally to extend, and to challenge initial resistance at $1307 (today’s high, 50% retracement of down move from 2/20 $1347 high to 4/23 $1266 low), followed by $1309 - 12 (triple top – 3/28, 4/10 and 4/11 highs), $1319 (3/27 high), $1322 (3/26 high), and then $1325 (options, 3/25 high).
Many bears were stopped out today, and are still smarting from gold’s failure to breach the up trendline from the $1160 low at $1275 from earlier in the week. However, other bears with stronger hands used gold’s bounce in the past two sessions to get short(er) at better levels. Bears see gold’s $37 rebound from its $1270 low on 5/21 as overextended, with its 14-day RSI at 64.2 to be approaching overbought. However, some bears are feeling a growing concern over the supportive nature of the decline in global bond yields – especially the US 10-year yield’s decline to fresh 20-month lows, and with markets predicting an increasing probability that the Fed will be moving to cut rates later this year (FedWatch now has 68.1% probability of a 25bp cut at the September meeting, and a 58.6% probability of a 2nd 25bp cut at the December meeting). The bears applauded the slightly hawkish FOMC minutes from the prior Wednesday, which echoed Powell’s less dovish tone from 4 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 (though not the case this past week), 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 (including today’s German CPI and Retail Sales) for both Germany and the Eurozone that drove the German 10-year yield further into negative territory over the past two weeks (record low yield today) 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. They expect the rebound in US equities seen over the past 5 months to resume (S&P made all time high just 1 month ago), 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 $1294 level (down trendline from 2/20 $1347 high).
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 PMI, China’s Caixin PMI, Eurozone PMIs, UK PMI, US Markit PMI, ISM and Construction Spending for near term direction.
In the news:
Dollar downed – 3 reasons for the USD selloff and why it cannot last: https://www.fxstreet.com/analysis/dollar-downed-three-reasons-for-the-usd-sell-off-and-why-it-cannot-last-201905311513?utm_source=onesignal&utm_medium=push&utm_campaign=analysis
Asia gold – China premiums rise as trade woes boost buying; India demand tapers: https://www.reuters.com/article/asia-gold-demand/asia-gold-china-premiums-rise-as-trade-woes-boost-buying-india-demand-tapers-idUSL4N2372W5?rpc=401&
Gold hits two-week high after latest Trump tariff threat: https://uk.reuters.com/article/global-precious/precious-gold-hits-two-week-high-after-latest-trump-tariff-threat-idUKL4N2372WQ
|US 10-year bond yield|
$1307 – 5/31 high
$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
$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
$1304 - 5/14 high
$1301 – double top 5/13 and 5/15 highs
$1300 – psychological level, options
$1299 – 5/16 high
$1297– 100-day moving average
$1294 – down trendline from 2/20 $1347 high
$1289 – double top - 5/17 and 5/30 highs
$1288 – 50-day moving average
$1285-87 – 5 tops – 5/23, 5/24, 5/27, 5/28, and 5/29 highs
$1284 - 40-day moving average
$1284 – 20-day moving average
$1279 – 5/29 low
$1276 – 5/28 low
$1275 – options
$1274-75 – double bottom – 5/17 and 5/20 lows
*$1274 – up trendline from 8/16/18 $1160 low
$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
*$1261 – 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