Gold Traders' Report - October 4, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 4, 2018

Last night, gold traded in a range of $1196 - $1203.15, continuing to move against the direction of the US dollar.

The yellow metal fell to its $1196 low early during Asian hours as the US 10-year bond yield shot higher (3.232%, high since 2011) and the DX popped to 96.12 (fresh 6-week high) off of some hawkish comments from the Fed’s Powell late yesterday afternoon (rates still far from neutral, may raise rates past neutral).

Global bond yields also rose with the JGB (0.138% - 0.164%), UK Gilt (1.586% - 1.667%), and German Bund (0.482% - 0.551%) all significantly higher.

However, gold rebounded to its $1203.15 as the dollar faded during European hours (DX to 95.77) from strength in the pound ($1.2925 - $1.30) and the euro ($1.1462 - $1.1505) from a report that Brexit negotiations may have reached a major breakthrough regarding new proposals avoiding extensive checks on the Irish border.

Gold was also supported by weaker global equity markets: NIKKEI - 0.6%, SCI still closed, European markets off from 0.2% to 1.1%, and S&P futures -0.5%.

Just ahead of and through the NY open, a pullback in the US 10-year yield (3.185%) tugged the DX down to 95.69 – despite a much better than expected reading on US Jobless Claims (207k vs. exp. 213k, 49-year low). Gold – which had dipped back to $1200.50 - climbed in response, reaching $1204.

At 10 AM, a worse than expected reading on US Durable Goods (4.4% vs. exp. 4.5%, Cap Goods Orders Nondefense ex air -0.9% vs. -0.5% last) overcame a slightly better reading on Factory Orders (2.3% vs. exp. 2.2%).

US stocks, which opened softer, continued to move sharply south (S&P -39 to 2886). The US 10-year yield slipped further to 3.176%, and the DX sank to 95.52. Gold shot higher to $1206.75, where resistance in front of $1207-09 (9 tops, 8/29, 8/30, 8/31, 9/6, 9/12, 9/14, 9/20, 10/2 and 10/3 highs) held once again.

US stocks continued to soften into the afternoon (S&P -41 to 2884), with the rising rate fears spooking investors. Communication services, consumer discretionary and IT sectors were pummeled. The 10-year yield climbed back to 3.21%, which helped lift the DX back to 95.88. The DX was also helped by softness in the euro ($1.1493) from some dour comments from the ECB’s Nowotny (Brexit-linked dangers being underestimated). Gold sank in response, tripping some sell stops under $1200 to reach $1197 – where support in front of yesterday’s $1196 low held.

Later in the afternoon, US equities pared some losses (S&P ends -24 to 2902). The 10-year yield hovered either side of 3.19%, while the DX drifted down to 95.75. Gold ticked up to $1200 and was $1199 bid at 4PM with a gain of $1.

Open interest was off 3.2k contracts, reflecting a net of long liquidation from yesterday’s decline. Volume was lower with 260k contracts trading.

While some bulls were looking for more – especially given the significant tumble in equities, others will take today’s $1 gain, given the dramatic rise in the 10-year yield, and the DX revisiting the 96 handle. 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 stubborn resistance at $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), 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.

Some bears were concerned how well gold held up well given the 96 handle in the DX and a 10-year yield over 3.20%. Other bears remain patient selling into rallies, looking for this market to resume its downtrend, and 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 trade, potential legal issues), oil prices, and will turn to reports tomorrow on Japan’s Leading Index, German Factory Orders and PPI, UK Unit Labor Costs, US Payroll Report, Baker-Hughes Rig Count, Commitment of Traders Report, along with comments from the Fed’s Kaplan and Bostic for near-term guidance.

In the news:

Resistance levels: 

$1200 – psychological level, options

$1201 – 50 day moving average

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

$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

$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:

$1198 – 40 day moving average

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

$1198 – 20-day moving average

$1196-7 – double bottom -  10/3 and 10/4 lows

$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