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Gold Traders' Report - October 17, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 17, 2018

Gold was a little choppy overnight in a range of $1220.65 -$1228.30.  It slipped to its $1220.65 low during Asian hours, fading a move up in the US dollar (DX from 95.05 - 95.26).  The dollar was boosted from some weakness in the yen (112.20 – 112.42, improving risk appetite), the euro ($1.1580 - $1.1548), and the pound ($1.3192- $1.3160).  During early European time, gold turned higher and reached its $1228.30 top (breached but failed to hold above 100-day moving average at $1227) fading a dip in the DX to 95.07.  The greenback was pressured from a bounce in the yen (112.14), the euro ($1.1578) and the pound ($1.3190).  Later on during European time, the DX firmed further (95.43) against a drop in sterling ($1.3099, fading Brexit optimism, weaker UK CPI) and the euro ($1.1527, miss on Eurozone Core CPI), but gold held up fairly well, finding support ahead of $1225.  Global equities were mixed with the NIKKEI up 1.3%, the SCI was closed, European shares ranged from -0.3% to +0.2%.  S&P futures, which were up early during Asian time, turned down during European time (off 0.3%) and were supportive of gold.  A surprise draw in US oil inventories by the API last night (WTI from $71.76 to $72.41) were a tailwind for stocks.

 At 8:30 AM, the report on US Housing Starts was worse than expected (1201k vs. exp. 1210k), and pushed S&P futures down to 2804 (-13).  The US 10-year bond yield declined to 3.148%, and the DX dipped to 95.35.  Gold rose in response, but topped out between $1227-28 – failing to take out the overnight high and unable to hold above the 100-day moving average. 

 US stocks opened softer (S&P –30 to 2781) hurt by a weaker earnings report from IBM, and aided by a sharp decline in oil (WTI to $69.65, 2-month low – EIA reports much larger than expected build in US oil inventories).  The 10-year yield hovered around 3.15%, and the DX retreated to 95.28.  Gold pushed higher and took out its overnight high – but topped out at $1229.75 – unable to challenge $1232-35 (5 tops, 7/23, 7/25, 7/26, 10/15 and 10/16 highs). 

 During the late morning, US stocks reversed and turned positive by mid-day (S&P +9 to 2817), with gains from Netflix (strong earnings report last night), and the financials leading the rebound.  Comments from Trump calling for an across the board 5% spending cut from each Cabinet head aided the move (6-year high deficit announced days ago had contributed to equity market jitters).  The 10-year yield ticked up to 3.167%, and the DX bounced to 95.42.  Gold was pressured lower, but again found support at $1225.  

 At 2PM, the release of the minutes from the 9/25-26 FOMC meeting were a bit hawkish (gradual increases in the funds rate would most likely be consistent with a sustained economic expansion, might be a period where the Fed even will need to go beyond normalization of rates and into a more restrictive stance).  The 10-year yield rose to 3.177%, and equities turned back into negative territory (S&P -11 to 2798).  The DX improved to 95.56, and pressed gold lower, with the yellow metal breaching support at $1225 to reach $1222.50.

 Later in the afternoon, US stocks finished near unchanged (S&P -1 to 2809 ) while the 10-year yield kept rising (3.195%).  The DX ticked up to 95.62, but gold held its prior low at $1222.50, and was $1223 bid at 4PM with a loss of $2.   

 Open interest was off 6.7k contracts, showing a net combination of short covering and some profit taking by longs from yesterday.  Volume was lower with 247k contracts trading.  

 Bulls were again disappointed that for the 3rd consecutive session, gold was able to breach its 100-day moving average at $1227, but failed to hold that level - and finished lower.  Other bulls were encouraged, however, that gold performed as well as it did – given the 4bp rise in the 10-year yield to 3.195%, the firmer dollar, and with equities finishing steady.  Bulls remain steadfast in their thinking that gold bottomed at $1160 on 8/16 after a $35 2-day capitulation, and will look to continue to add to long positions on weakness, or on some expected ensuing upside momentum.  They maintain the market has been and remains extremely oversold - having dropped $205 (15.0%) since the 4/11 $1365 high, and $149 (11.4%) since the $1309 high on 6/14.  Bulls strongly believe that the dollar’s rally was badly overextended, and expect its correction from the 8/15 96.99 high (up 9.90% since its 88.25 low on 2/14) to continue, and drive a significant short covering rally in gold.  Bulls are looking for gold to close above its 100-day moving average at $1227 – expecting to ignite some momentum following buying as well as short covering over this key level which should bring $1232-35 (5 tops -  7/23, 7/25, 7/26, and 10/15, 10/16highs) and $1245-46 (double top – 7/16 and 7/17 highs) into play.  Beyond this, bulls are looking for a move to at least $1262 – the 50% retracement of the move down from the 4/11 $1365 high to the 8/16 $1160 low.  In addition, bulls maintain that last Friday’s Commitment of Traders Report showing the large funds added to their net short position (now 38k contracts net short - turned short 7 weeks ago for the first time since 2002) and with a massive gross short position (218k contracts –short side of gold an extremely crowded trade) leaves this market set up in a highly favorable position to move up from potential heavy short covering and sidelined longs returning to the market.

 Bears remain comfortable trading gold from the short side, scale up selling into rallies.  With gold failing to close above its 100-day moving average at $1227 for the 3rd consecutive session, bears are looking for stale bull selling to trigger a move back to initial support at the $1210 - $1214 area.  Many bears are firm in their conviction that fuel from dollar strength, higher interest rates and a rebound in equities will continue to provide downside pressure on gold, and see prices north of $1200 offering a great opportunity to get short(er).  This is witnessed by last Friday’s COT Report showing the large funds added to their net short position and have constructed a hefty 218k gross short position.  They will be looking for a quick corrective move lower, back through former support points of $1214, $1207-09, and then a re-test of $1200. 

 All markets will continue to focus on geopolitical events (especially Brexit developments), developments with the Trump Administration (especially on US-China trade, potential legal issues), oil prices, Q3 corporate earnings, and will turn to reports tomorrow on Japan’s Trade Balance, German Wholesale Price Index, UK Retail Sales, US Jobless Claims, Philly Fed, Leading Index, and comments from the Fed’s Bullard and Quarles for near term guidance. 

 In the news:

WGC Investment Update – IMP report highlights gold’s relevance:   https://www.gold.org/research/imf-report-highlights-golds-relevance?utm_source=launch-email&utm_medium=email&utm_campaign=wgc-2018-investment-update-mkt-pullback

 Central Bank gold buying – new kids on the block:   https://www.sharpspixley.com/articles/lawrie-williams-central-bank-gold-buying-new-kids-on-the-block_286112.html

 Rupee pangs in the Diwali season – gold prices surge to a 2-year high:   https://www.business-standard.com/article/markets/rupee-pangs-in-the-diwali-season-gold-prices-surge-to-a-2-year-high-118101700131_1.html

 Hedge funds reeling from gold jump have 5 charts to watch: https://www.bloomberg.com/news/articles/2018-10-17/hedge-funds-reeling-from-gold-rally-have-five-charts-to-watch

 A triptych for stronger gold prices is under way:   https://seekingalpha.com/article/4211911-triptych-stronger-gold-prices-way?ifp=0

 Resistance levels: 

$1225 – options

$1227 – 100-day moving average

$1230 high

$1232-35 – 5 tops, 7/23, 7/25, 7/26, 10/15 and 10/16 highs

$1245-46 – double top – 7/16 and 7/17 highs

$1250  - options

$1251-53 – triple bottom 7/4, 7/5, and 7/6 lows

$1259-61 – quadruple top – 6/27, 7/4, 7/5, and 7/6 highs

$1262 – 50% retracement from 4/11 $1365 high to the 8/16 $1160 low

 Support levels:

$1220-21 – 8/2 and 8/3 highs

$1221 – 10/17 low

$1219 – 10/15 low

$1216 – 10/12 low

$1216-18 – 5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10 highs

$1213-14 – triple top – 8/13, 8/28, and 9/13 highs

$1211 – 9/21 high

*$1209 – down trendline from 8/10 $1217 high

$1207-09 –10 tops, 8/29, 8/30, 8/31, 9/6, 9/12, 9/14, 9/20, 10/2, 10/3, and 10/4 highs

$1204 – 06 – double top – 10/5, 10/8 highs

$1203 – 20-day moving average

$1201 – 40 day moving average

$1200 – psychological level, options

$1200 – 50 day moving average

$1200– down trendline from 4/11 $1365 high

$1194 -  10/10 high

$1192-94 – 5 bottoms, 9/12, 9/14, 9/17, 9/21, and 9/23 lows

$1190 – up trendline from 8/16 $1160 low

$1185 – 10/10 low

$1181 - 84 – 7 bottoms - 8/20, 8/23, 8/24, 9/27, 9/28, 10/8, and 10/9 lows

$1175 – options strike

$1172– quadruple bottom – 8/17 low

$1160 – 8/16  low

$1156 – 1/4/17 low

$1150 – options

$1146 – 1/4/17 low