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Gold Traders' Report - October 18, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 18, 2018

Gold traded either side of unchanged last night in a range of $1218.70 - $1225.20, largely fading movement in the US dollar.  Gold fell to its $1218.70 low during Asian hours as the DX climbed to 95.78 (resistance at the 10/10 95.79 high).  The dollar was aided from weakness in the pound ($1.3125 - $1.3076) and euro ($1.1507 - $1.1481) with no Brexit breakthrough and lingering Italian budget concerns.  During European time, however, gold rebounded to its $1225.20 high as the dollar slumped to 95.48.  The greenback was pressured by recoveries in the pound ($1.3131) and the euro ($1.1527) as UK PM May proposed to extend 21-month transition period following Brexit at the end of March.  Global stocks were mostly weaker and gold supportive with the NIKKEI off 0.8%, the SCI -2.9% (lowest since Nov 2014), European markets were flat to +0.4%, and S&P futures were -0.3%.  Weaker oil prices (WTI from $70.03 - $68.61, yesterday’s strong build in US inventories still resonating) weighed on equities. 

 At 8:30 AM, a better than expected reading on the Philly Fed Index (22.2 vs. exp. 20) gave S&P futures a modest boost to 2806, and brought the US 10-year yield to 3.213%.  The DX rebounded to 95.74, and sent gold down to $1221.  

 US stocks turned weaker on their open, however, and losses accelerated during late morning hours on news that Treasury Secretary Mnuchin would not be attending the Saudi FII conference in response to the disappearance and apparent killing of Saudi dissident Jamal Khashoggi.  Dour comments from ECB’s Draghi (warning that undermining EU budget rules carries high price for all)  in response to Italy’s planned budget that exceeds EU spending limits triggered a late selloff in Eurozone shares and also contributed to the move down in US equities.  The S&P sank 43 points to 2766, with the IT, Communications Services, and Industrials sectors all off around 2%.  The US 10-year yield dipped to 3.173%, and the DX pulled back to 95.55.  Gold rose in response, and tripped some buys stops over the 100-day moving average at $1226.  However, the advance was capped at yesterday’s $1230 high.  Some dovish comments from the Fed’s Bullard (Fed’s policy about right – no more hikes needed) and Quarles (uncertainty calls for gradual rate hikes) were gold supportive.  

 Shortly afterward, White House Economic Advisor Kudlow unleashed some harsh comments toward China (they are illegal traders, they have stolen our IP, they have not responded positively to any of our asks), triggering fresh fears that a protracted standoff will impact global growth.  US stocks sank further (S&P -54 points to 2755), and the 10-year yield slipped to 3.164%.  The dollar, however, turned and rallied (trade tensions have been dollar positive), with the DX running to 95.98.  Gold retreated, but was supported at the 100-day moving average at $1226.

 Later in the afternoon, US stocks pared some losses (S&P finished -41 to 2768), while the US 10-year yield ticked up to 3.181%.  The DX reached a new high at 96, and knocked gold under the 100-day moving average to reach $1224.40.  Gold was $1225 bid at 4PM with a gain of $2.  

 Open interest was off 5k, showing a net of long liquidation from yesterday’s decline.  Volume was a tad lower with 240k contracts trading. 

 Bulls were again disheartened that for the 4th consecutive session, gold was able to breach its 100-day moving average at $1226, but failed to hold that level – especially given the hammering of US stocks.  Other bulls will take today’s $2 gain, given that the US 10-year bond yield made another foray over 3.20%, and the DX touched 96.  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 $1226 – expecting to ignite some momentum following buying as well as further 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 $1226 for the 4th consecutive session, bears are looking for stale bull selling – especially ahead of the weekend - 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 CPI, China’s GDP, Retail Sales, Industrial Production and Jobless Rate, US Existing Home Sales, Baker –Hughes Rig Count, and the Commitment of Traders Report for near term direction. 

 In the news:

WGC Gold Investor:

 A fee war breaks out in gold ETFs:

Resistance levels: 

$1226 – 100-day moving average

$1230 – double top, 10/17 and 10/18 highs

$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

$1247 – down trendline from 4/23 $1336 high

$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:

$1225 – options

$1220-21 – 8/2 and 8/3 highs

$1221 – 10/17 low

$1219 – double bottom, 10/15 and 10/18 lows

$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

$1208 – 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

$1204 – 20-day moving average

$1202 – 40 day moving average

$1200 – psychological level, options

$1200 – 50 day moving average

$1199– 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