Gold Traders' Report - October 5, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 5, 2018

Gold traded higher overnight in a range of $1197.30 - $1204. It ticked down to its $1197.30 low during Asian time and into early European hours, as the dollar advanced (DX to 95.91).

The greenback was helped by weakness in the euro ($1.1520 - $1.1487) on some positioning ahead of the US Payroll report and some renewed jitters over Italian politics.

Later during European time, however, gold climbed to its $1204 high as the DX pulled back to 95.74 against some strength in the pound ($1.3005 - $1.3060) on reports that Brexit divorce deal is very close.

Weaker global stocks were a tailwind for gold as the NIKKEI fell 0.6%, China was still closed, European shares were off from 0.4% to 0.6%, and S&P futures were -0.1%. A modest dip in oil prices from near four-year highs (WTI from $74.70 - $74.30) weighed on stocks.

At 8:30 AM, the much awaited US Payroll Report was a mixed bag. The headline Non-Farm Payroll figure missed considerably (134k vs. exp. 180k), and markets (algorithmic trading) slammed S&P futures lower (-9 to 2898) and knocked the US 10-year yield down from 3.206% to 3.187%.

The DX tumbled to 95.70, and gold took out the overnight high to reach $1204.75. However, after a closer look, a more robust Report emerged: the last 2 months were revised up (+87k), Unemployment Rate dipped to 3.7% vs. exp. 3.8% (lowest since 1969), while Average Hourly Earnings were 0.3% as expected.

Also, many analysts pointed to the effects of Hurricane Florence as a mitigating factor for the lower payroll gain. As a result, markets gyrated wildly while participants digested the data, with gold trading in a choppy fashion between $1200 and $1204.75 as the DX ranged from 95.57 – 95.95.

US stocks turned up and opened higher (S&P +8 to 2910) while the 10-year yield climbed to 3.232%. The DX, however, was pressured down to 95.50 against a climbing euro ($1.1539) and sterling ($1.3122) as a report from Bloomberg saying the EU is ready to offer the UK a “super-charged free trade deal” and that talks were accelerating.

Gold rose to $1205.90, but resistance in front of the 10-top high at $1207-09 (8/29, 8/30, 8/31, 9/6, 9/12, 9/14, 9/20, 10/2, 10/3, and 10/4 highs) held yet again.

Into mid-day equities turned back down sharply (S&P -33 to 2869) - again spooked by rising interest rates with IT, communication services, and consumer discretionary sectors leading decliners.

Hawkish comments from the Fed’s Williams (a ways to go before higher interest rates will start to slow the economy) and Bostic (I may have underestimated economic strength, potential to overheat requires higher rate path) aided the move.

The 10-year yield advanced further, taking out yesterday’s 3.232% high to reach 3.248% high since 2011).  The DX rebounded to 95.77, and gold backed off to $1200, where support held.

Later in the afternoon, US stocks trimmed losses (S&P finished -16 to 2886), while the 10-year yield slipped to the 3.23% area. The DX drifted down to 95.60, and gold clawed back to $1204. The yellow metal was $1203 bid at 4PM with a gain of $4.

Open interest was up 6.5k contracts, showing a net combination of new longs and shorts from yesterday’s choppy activity. Volume expanded with 307k contracts trading.

The CFTC’s Commitment of Traders Report as of Oct 2 showed the large funds cutting 0.5 contracts of longs and adding 3.7k contracts of shorts to increase their net short position to 22k contracts. Having this group still net short – they turned short on 8/17 for the first time in 16 years – remains a headwind for the bullish argument. However, with the large funds net short, the gold market is set up to move sharply higher as the short side of gold has become an extremely crowded trade.

With longs on the sidelines and a massive gross short position having been constructed (214k contracts), gold just needs a spark to unleash a torrent of buying from shorts covering and sidelined long-side players returning.

Bulls were encouraged with gold’s ability to advance today, despite the continued run-up in the US 10-year bond yield to 3.248% - a 7-year high - and the DX remaining firm. 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 $1210 (down trendline from the 8/10 $1217 high, and down trendline from 4/11 $1365 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 today’s Commitment of Traders Report showing the large funds added to their net short position (now 22k contracts net short - turned short 7 weeks ago for the first time since 2002) and with a massive gross short position (214k 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 with gold’s resiliency over the past two sessions that saw the US 10-year yield shoot to within a whisker of 3.25%, the DX make forays over 96, while the S&P remains within 1.5% of its recent all-time high.

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 today’s COT Report showing the large funds added to their net short position and have constructed a hefty 214k gross short position. Bears feel fuel from dollar strength, higher interest rates and soaring equities will 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 Brexit developments) with the Trump Administration (especially on US-China trade, potential legal issues), oil prices, and will turn to reports Monday on Japan’s Trade Balance and Economy Watcher’s Survey, China’s Caixin PMI and Foreign Direct Investment, German Industrial Production, and the Eurozone Sentix Investor Confidence for near-term direction.

In the news:

Resistance levels: 

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

$1206 – 10/5 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

$1211 – 9/21 high

*$1210 – down trendline from 8/10 $1217 high

*$1210 – down trendline from 4/11 $1365 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

$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

$1234 – 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:

$1200 – psychological level, options

$1200 – 50 day moving average

$1199 – 20-day moving average

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

$1197 – 40 day moving average

$1196-7 – triple bottom - 10/3, 10/4, and 10/5 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