Gold Traders’ Report - October 4, 2019

 
OCT 4, 2019

Gold Sheds $2 to $1504 Against Equity Rally on Steady Us Payroll Report - Gold Today October 4, 2019 

Jim Pogoda, Senior Gold Trader, Gold Bullion International


Overnight – gold trades narrowly between $1506 - $1510 ahead of the US Payroll Report

·        Gold edged moderately higher last night, trading in a narrow range of $1506 - $1510 with activity somewhat muted ahead of this morning’s much awaited US Employment Report.

·        It faded some weakness in S&P futures (-14 to 2898) - which reversed a modest gain during early Asian hours. 

·        Gold was also lifted by a slight pullback in the US 10-year bond yield (1.544% - 1.52%) and the US dollar (DX from 98.93 – 98.73). 

·        The dollar was weighed by a firming yen (106.92 – 106.65, risk off) and euro (stronger Germany’s Construction PMI). 

·        News that Carrie Lam invoked emergency powers and announced a face mask ban on Hong Kong protestors ahead of the weekend heightened tensions and was also gold supportive. 

 

Gold retreats to $1496 on a steady US Payroll Report

·        At 8:30 AM, the US Payroll Report was a mixed bag. 

·        The miss in Nonfarm Payrolls (136k vs. exp. 145k) sent gold spiking up to $1515 from knee jerk algorithmic trading that sent the DX down to 98.67. 

·        However, after a closer look, markets looked favorably - and with some relief after the poor US data released this week – on the large (45k) revisions to the last 2 months reports along with decline in the Unemployment Rate (3.5% vs. exp. 3.7%, lowest in 50 years) – but shrugged off a large miss on Average Hourly Earnings (0 vs. exp. 0.3%). 

·        S&P futures rallied (+14 to 2925), and the US 10-year bond yield rose to 1.555%. 

·        The DX popped up to 99.01, and gold traded lower. 

·        The yellow metal retreated back to $1496 where support at yesterday’s low held. 

 

Gold rebounds to $1508 against a decline in the US 10-year yield and the dollar

·        US stocks opened stronger, and held firm into the late morning (S&P +24 to 2934), with gains in Apple (reports Apple asked iPhone 11 suppliers to increase production by 10%) and the IT, Communication Services, and Health Care sectors leading the advance.  

·        A rebound in oil (WTI to $53.32) aided the move along with some upbeat comments on US –China trade from White House Economic Advisor Larry Kudlow (There could be positive surprises coming out of these talks, coming into this, China has been buying some commodities – a small amount, but perhaps a good sign). 

·        However, the 10-year bond market diverged, and the yield slipped to 1.515%. 

·        The DX was caught in the cross currents but turned lower following the bond market, and dipped to 98.79. 

·        Gold faded the movement in the dollar, and rose to $1508, with bargain hunting buying seen  

 

Stronger US stocks press gold back to $1502

·        Equities continued to rise into mid-day (S&P +30 to 2940), helped by some positive comments on US –China trade from Trump (good chance of making biggest trade deal ever with China). 

·        The 10-year bond yield hovered either side of 1.52%, and the DX - still caught in the cross currents – traded up to 98.92. 

·        Gold pulled back in response, and dipped to $1502. 

·        Some slightly hawkish comments from the Fed’s Rosengren (monetary policy is currently accommodative, expects 1.7% growth for remainder of 2019, cited strong auto report, strong consumer, just had two rate cuts,  takes a while to take effect) and Bostic (optimistic on the economy, still expects above trend growth for 2019), were dollar supportive and weighed on gold 

 

Gold slides to $1503 against some not so dovish comments from Powell

·        In the afternoon, US stocks were knocked off of their highs (S&P + 27 to 2937) from some not so dovish comments from the Fed’s Powell (cited unemployment at 50-year low, economy in a good place, failed to mention this week’s lackluster data - weak ISM, Factory Orders, Durable Goods, Construction Spending). 

·        The 10-year yield ticked up to 1.526%, and the DX rose to 98.89. 

·        Gold – after a rebound to $1509, fell back to $1503. 

 

Stocks finish on their highs, gold goes out $1504 bid

·        Later in the afternoon, equities went out strong (S&P +41 to 2952), but the 10-year yield touched 1.508% before edging up to 1.52%. 

·        The DX remained caught in the cross currents but ticked down to 98.80. 

·        Gold was fairly steady between $1504-$1507, and was $1504 bid at 4PM with a loss of $2. 

 

Futures volume and open interest

·        Open interest was up 4.5k contracts, showing a net of new longs from yesterday’s advance. 

·        Volume was a little higher and remained very robust with 422k contracts trading. 

 

Commitment of Traders

·        The CFTC’s Commitment of Traders Report as of 10/1 showed the large funds slashing 47k contracts of longs and cutting 4k contracts of shorts to reduce their net long position by 43k contracts to 269k contracts

·        This was done on gold’s drop from $1535 on 9/24 to $1479 on 10/1

·        While this was a significant reduction, this NFLP is still very large, and reflects how very crowded the long side of gold is currently. 

·        It will begin to be an impediment for further upside gains, and the swelling of gross longs  (323k contracts) can hasten and exaggerate downside moves  – if  / when the longs are forced to liquidate

 

Bulls

·        Disappointed that gold couldn’t finish in positive territory today, given the pullback in the US 10-year bond yield and the dollar.

·        However, some bulls were satisfied with the minor loss, given the magnitude of strength in equities off of the positive Jobs Report 

·        Bulls remain pleased with the strength and consistency of bargain hunting buying on price declines which has limited the degree of the price corrections in this 4-month old rally (bargain hunting buying emerged on gold’s dip below $1500 off of the strong Jobs Report this morning) 

·        Remain ecstatic with gold’s sharp advance that has extended to $275 (22.1%) from the $1275 low on May 30 to the $1557 6-year high two weeks ago that has also brought in momentum following players.  

·        Benefitted from the recent escalation of the ongoing trade war between the US and China (escalation possibly spreading to the financial side, with the US having to deny contemplating restrictions on US investment in China, bulls talk of potential Chinese retaliation by dumping US Treasuries)  that led to both sides increasing tariffs earlier this month along with increasing tough rhetoric. 

·        Despite the agreement between the US and China to meet next week, bulls feel that this issue won’t be solved anytime soon, and instead expect further escalation of the trade war to ensue.  They feel this will add to further uncertainty, and increase the probability of a more severe global economic slowdown. 

·        Despite Powell and the Fed not projecting as dovish as some would have liked at their last meeting, markets are still anticipating the Fed is in an easing mode

·        Probabilities of future rate hikes have increased in recent days off of the weak US economic data (especially large misses on both ISM Manufacturing and ISM Services) - Fed Fund Futures show:  76.4% chance of a 25bp cut at the October meeting, a 40.6% probability of two 25bp cuts by the December meeting, and a 23.4% likelihood of three 25bp cuts by the January meeting - and bulls see a rate cutting environment one in which gold can flourish

·        Bulls see current geopolitical tensions – especially the Saudi / Iran situation, along with the tensions between Hong Kong and Mainland China, the Brexit issue, and North Korea - as additional tailwinds for gold.

·        Bulls feel the $98 correction from gold’s $1557 high on 9/4 has run its course, and are expecting the bounce off of the $1459 bottom to continue. 

·        See this past week’s price action / Commitment of Traders data as a healthy pruning of weaker longs, and see the current market better positioned to move higher

·        Bulls look for a retest of resistance at $1512– (9/26 high) followed by $1515 (today’s high), $1520 (yesterday’s high), $1525 (options, down trendline from 9/4 $1557 high) and then $1535-36 (double top – 9/25 and 9/25 highs.

 

Bears

·        Bears will take today’s pullback, but some were looking for more – given how strong the equity bounce was today. 

·        Still concerned with the persistent bargain hunting buying that has cushioned downside moves (bounce from $1496 today)

·        See gold as an overbought market that has risen $282 (22.1%) from the $1275 low on 5/30, and expect a more significant correction to ensue. 

·        Feel that markets are back to overestimating the probabilities of future Fed rate cuts, feel that the downward pressure on bond yields was also overdone, and that a modest reversal should allow the US dollar to strengthen further against other currencies as they feel the dollar still remains the “cleanest dirty shirt in the laundry basket” with the US as the sole global growth engine. Recent soft data for both Germany and the Eurozone (weak German and Eurozone Services PMI’s yesterday) that drove the German 10-year yield further into negative territory over the past months (German bund yield remains negative and not far from record lows of  -0.743%) underscores this view. 

·        Feel a US-China trade deal is in both sides’ best interests, and feel that the recent agreement to resume negotiations next week and future similar conciliatory actions will be viewed as positive steps by markets, which should help equities to continue to rebound and will put downward pressure on the yellow metal.  

·        Bears look for a significant pullback from gold’s torrid rise, and expect considerable long liquidation selling (large specs still with a very heavy net long position – Net Fund Long Position 269k contracts, long side of gold remains a crowded trade) to materialize if support at the following levels can be breached:   $1475 (10/2 low), $1457-59 – double bottom (8/6 and 10/1 lows), $1450 (options), $1438 (8/5 low), and then $1433 (100-day moving average).

 

Looking ahead

All markets will continue to focus on geopolitical events (especially Brexit news and Saudi - Iran tensions, Hong Kong protests), developments with the Trump Administration (especially on US-China trade, potential legal / impeachment issues), oil prices, and will turn to reports Monday on China’s Foreign Reserves and Caixin Services PMI, Japan’s Economy Watchers Survey and Leading Index, Germany’s Factory Orders, Eurozone Sentix Investor Confidence, US Consumer Credit, and comments from the Fed’s Kashkari for near term direction.  

 

In the news:

Gold regains $1500 – what next?:   https://www.sharpspixley.com/articles/lawrie-williams-gold-regains-$1-500-where-to-next_296636.html

CME - Is gold about to outperform equities?:   https://www.cmegroup.com/education/featured-reports/is-gold-about-to-outperform-equities.html?utm_source=pardot&utm_medium=email&utm_campaign=economic_research

CME – 7 themes to ponder as we head for 2020:   https://www.cmegroup.com/education/featured-reports/seven-themes-dominating-economic-landscape.html?utm_source=pardot&utm_medium=email&utm_campaign=economic_research

Commitment of Traders Report:   https://www.cftc.gov/dea/futures/deacmxsf.htm

 

YTD Performance




12/31/2018
10/4/2019
Change
% Change
Gold




1282.5
1504
221.5
17.271%
DX




96.06
98.83
2.77
2.884%
S&P




2505
2952
447
17.844%
JYN




109.63
106.88
-2.75
-2.508%
Euro




1.1466
1.0979
-0.0487
-4.247%
US 10-year bond yield




2.69%
1.520%
-0.0117
-43.410%
Oil (WTI)




45.45
52.91
7.46
16.414%

 

 

Resistance levels: 

$1505 – 10/2 high

$1507 – 9/27 high

$1510 - 40-day moving average

$1512 – 9/26 high

$1515 – 10/4 high

$1520 – 10/3 high

$1525 – down trendline from 9/4 $1557 high

$1525 – options

$1535-36 – double top – 9/25 and 9/25 highs

$1553 – 9/5 high

$1557 – 9/4 high

$1591 – 4/7/13 high

$1600 – options

$1604 – 3/31/13 high

$1614 – 3/24/13 high

 

Support levels:

$1501 – double bottom - 9/25 and 9/26 lows

$1500 – 20-day moving average

$1500 – psychological level, options

$1500– 50-day moving average

$1496 – 10/4 low

$1484 - 86 – 4 bottoms - 9/10, 9/11, 9/13, and 9/18 lows

$1480 – 8/13 low

$1475 – 10/2 low

$1472 – 8/7 low

1465 – 9/30 low

$1457-59 – double bottom - 8/6 and 10/1 lows

$1450 – options

$1438 – 8/5 low

$1433 – 100-day moving average