Gold Traders' Report - October 3, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 3, 2018

Gold traded either side of unchanged last night in a range of $1202 - $1208.30, largely fading movements in the US dollar. It rose to its high of $1208.30 during Asian time, running into solid resistance at $1207-09 (8 tops, 8/29, 8/30, 8/31, 9/6, 9/12, 9/14, 9/20, and 10/2 highs) as the DX sank from 95.56 – 95.25.

The DX was pressured by strength in the euro ($1.1536 - $1.1593), which was supported by reports that Italy would cut its budget deficit targets after next year (to 2.2% and 2.0% for 2020 and 2021) eased concerns that had rattled markets. During European time, however, gold sank to its low of $1202 as the DX recovered to 95.57.

The greenback was supported by a softer pound ($1.3017 - $1.2961 – May says Britain not afraid to leave with no deal, but without one would be a bad outcome), a slip in the euro back to $1.1550 (Italy’s deputy PM confirmed 2019 target deficit of 2.4%, but just mulling over 2020 and 2021), along with some upbeat economic comments from the Fed’s Evans and Barkin.

Global equities were mixed with the NIKKEI off 0.6%, China was still closed, European shares ranged from -0.4% to +0.5%, and S&P futures were +0.3%. Firmer oil prices (WTI from $75.09 - $75.55, API reported smaller than expected build in US oil inventories and reported large draw in gasoline against an expected build) were supportive of stocks.

At 8:15 AM, a stronger than expected reading on ADP Employment (230k vs. exp. 185k, +5k revision to last month) took S&P futures higher (+10 to 2938), and lifted the US 10-year bond yield to 3.089%. The DX rose to 95.63, and knocked gold further down to $1201. However, as we have seen many times, dip buying emerged to quickly take gold back up to $1205.

At 10AM, a much stronger than expected report on ISM Services (61.6 vs. exp. 58, 21-year high) took US stocks higher (S&P +16 to 2940), with banks stocks leading the financial sector higher as rates continued to climb.

Stocks shrugged off a dip in oil (WTI to $74.30 ) from the EIA’s report showing a huge build in US oil inventories. The US 10-year bond yield took out the 3.128% high from May to reach 3.136% by mid-day – its highest since 2011. The DX climbed to 95.72, and knocked gold down below $1200 to reach $1198.

Into the afternoon, US stocks remained firm (S&P hovering between 2934-2938), helped by a strong rebound in oil (WTI to $76.90, fresh 4-year high, fears of Iran sanctions overcomes the huge build in stocks). The US 10- year yield continued to rise, touching 3.179%. While yields on the shorter end of the curve also advanced (2-year to 2.868%), the 2-10 spread widened from 25 bp to 31 bp – again, supporting financials. The DX took out yesterday’s 95.74 top to reach 95.80 – a fresh 6-week high. Gold was pressured lower, but bargain hunting buying limited the downside to $1197.

Later in the afternoon, US stocks trimmed gains (S&P +2 to 2925), with the sharp spike in interest rates spooking equity markets. The US 10-year yield pulled back to the 3.15%-3.16% area, while the DX ticked up to a new high of 95.82. Gold, caught in the cross-currents edged up to $1198.50, and was $1198 bid at 4PM with a loss of $6.

Open interest was up 5.1k contracts, showing a good chunk of new longs from yesterday’s rally – in addition to the decent amount of short covering seen. Volume surged with 373k contracts trading.

Some bulls were discouraged with gold’s $6 loss today, and its inability to hold above $1200. However, given the sharp rise in bond yields, gains in stocks and the DX making a fresh 6-week high, other bulls were glad today’s loss was limited to $6. 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 retest initial resistance at $1207-09 (8 tops, 8/29, 8/30, 8/31, 9/6, 9/12, 9/14, 9/20, and 10/2 highs), followed by $1211 (down trendline from the 8/10 $1217 high), $1213-14 (triple top – 8/13, 8/28, and 9/13 highs) and then $1216-18 (5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10 highs).

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 17k contracts net short - turned short 6 weeks ago for the first time since 2002) and with a massive gross short position (210k 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 were pleased with gold’s reversal lower today, and some were able to take decent profits from their shorts put on just yesterday. Other bears are looking for this market to resume its downtrend, believing that gold’s recovery rally ($1160 - $1214) has been completed.

They point to its repeated inability to take out the $1214 double top (despite some significant dollar weakness) and repeated violations of up trendlines from the $1160 low on 8/16 as evidence that the yellow metal will continue its decline.

This is witnessed by last Friday’s COT Report showing the large funds added to their net short position and have constructed a hefty 210k gross short position.  Bears feel fuel from dollar strength, higher interest rates and soaring equities continue to provide downside pressure on gold. They will be gunning for stops below support at $1181 - 84 (5 bottoms - 8/20, 8/23, 8/24, 9/27, and 9/28 lows) to lead to a test of $1175 (options strike) and then $1171-73 (quadruple bottom – 8/15, 8/17, 1/6/17 and 1/9/17 lows).

All markets will continue to focus on geopolitical events (especially emerging markets), developments with the Trump Administration (especially on US-China and US-Canada trade, potential legal issues), oil prices, and will turn to comments later this afternoon by Powell, then reports tomorrow on Germany’s Construction PMI, US Challenger Job Cuts, Jobless Claims, Factory Orders, Durable Goods, and comments from the Fed’s Quarles for near-term direction.

In the news:

Resistance levels: 

$1198 – 40 day moving average

$1198- up trendline from the 8/16 $1160 low

$1198 – 20-day moving average

$1200 – psychological level, options

$1201 – 50 day moving average

$1203-04 –triple top, 9/24, 9/25, and 9/26 highs

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

$1211 – 9/21 high

$1211 – down trendline from 8/10 $1217 high

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

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

$1220-21 – 8/2 and 8/3 highs

$1222 – down trendline from 4/11 $1365 high

$1225 – 7/30 high

$1225 - options

$1227-28 – 7/27, 7/31 highs

$1234-35 – triple top, 7/23, 7/25, and 7/26 highs

$1235 -38 – 6 bottoms –7/16/18, 7/13/18, 12/12/17, 7/18/17, 7/19/17, 7/20/17 lows

$1236 – 100-day moving average

$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:

$1197 – 10/3 low

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

$1190 – up trendline from 10/19/08 $682 low

$1185 – 10/1 low

$1188 - 9/11 low

$1187 – 50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high

$1183 – up trendline from 8/16 $1160 low

$1181 - 84 – 5 bottoms - 8/20, 8/23, 8/24, 9/27, and 9/28 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