Gold Traders’ Report - September 12, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
SEP 12, 2019

Gold finishes $2 higher at $1499 after a whipsaw session, driven by ECB, US-China news
 
Overnight:  gold retains nervous and choppy tone, dips to $1489 against delay in tariffs, then rallies to $1506 against a pullback in bond yields

  •       Gold advanced last night, but retained its choppy tone – trading either side of unchanged in a range of $1489 - $1506. 
  • ·        It traded down to its $1489 low early during Asian time, but found support ahead of $1484-86 (double bottom - 9/10 and 9/11 lows, $1484 – up trendline from 5/30 $1275 low).
  • ·        It faded strength in S&P futures (+17 to 3019) on news that Trump was delaying a planned 5% increase in tariffs on $250B worth of Chinese imports by 2 weeks as a gesture and at the request of Vice Premier Liu He,  along with an uptick in the US 10-year bond yield to 1.77% (5-week high)
  • ·        However, gold rallied during later Asian hours and during European time to $1506, tripping some buy stops over the past two session’s highs ($1498, $1501).  The move was fueled by a pullback in S&P futures (+2 to 3004) and the 10-year yield (1.721%) ahead of this morning’s ECB Rate announcement. 
  • ·        The ECB announcement at 7:45 AM was viewed as dovish.
  • ·        10bp cut in deposit interest rate (to -0.50%)
  • ·        Launched a new round of monthly bond purchases of 20B euros/mo. beginning November, and continuing as long as necessary.
  • ·        Extended forward guidance, saying that rates will remain at their present or lower levels until inflation outlook robustly converges to a level sufficiently close to 2%. 
  • ·        Initially, Draghi was dovish at his press conference, emphasizing Eurozone economic weakness (info since last meeting indicates more protracted weakness in economy, risks tilted to downside, headline inflation likely to decline before rising again towards the end of the year, need for highly accommodative stance of monetary policy for a prolonged period of time, ready to adjust all of its instruments as appropriate to ensure inflation moves towards its aim, requested help from fiscal policy to shore up the economy) 
  • ·        The euro sank ($1.1030 - $1.0927) along with the yield on the German 10-year bond (-0.55% to -0.646%), tugging the US 10-year yield down to 1.671%. 
  • ·        Though the DX soared (99.11) off of the weaker euro and helped by slightly firmer US CPI and Jobless Claims reports, gold rallied off of the decline in bond yields, taking out stops over $1515 (9/9 high) to reach $1524, where resistance at $1525 finally held.  
  • ·        Shortly afterward, Draghi turned a bit hawkish (Incoming data point to moderate but positive growth in Q3),
  • ·        Report from Bloomberg emerged that the Trump Administration was considering an interim trade deal with China (US would delay / roll back some tariffs in return for Chinese promises on IP and agricultural purchases).  
  • ·        US stocks shot higher (S&P +19 to 3020), led by gains in the IT, Materials, and Consumer Discretionary sectors. 
  • ·        The German (-0.537%)  and US (1.75%) bond yields rebounded sharply, and the euro shot higher ($1.1069 heavy short covering seen) – sending the DX tumbling back to 98.40.  Gold was caught in the cross currents but sold off sharply (again shrugging off the movement in the DX and fading the move in bond yields), and declined to $1505.
  • ·        Later in the morning, the White House rejected the report from Bloomberg that they were considering an interim deal with China
  • ·        US stocks sold off sharply (S&P unchanged at 3001)
  • ·        The US 10-year yield edged down to 1.735%, and the DX declined further to 98.28.
  • ·        Gold bounced in response, but was unable to get back over $1515 (9/9 high). 
  • ·        Into the afternoon, US stocks rose to their earlier highs (S&P +19 to 3020)
  • ·        German (-0.508%) and US (1.798%) bond yields kept climbing, both reaching fresh 5-week highs.  
  • ·        The DX declined further, however (98.18), pressured by the euro continuing to rebound ($1.1086). 
  • ·        Gold continued to fade the rise in yields, and slid further to $1497.
  • ·        Later in the afternoon, a report showing the US deficit for 2019 swelled past $1T helped push US stocks off their highs (S&P finished +9 to 3010)
  • ·        The US 10-year bond yield edged down to 1.78%
  • ·        DX rose to 98.40, helped by a pullback in the safe-haven yen (108.19, 6-week high). 
  • ·        Gold was caught in the cross currents, traded narrowly between $1498-$1500, and was $1499 bid at 4PM with a gain of $2. 
  • ·        Open interest was up 5.5k contracts, showing a fair amount of new longs from yesterday’s advance
  • ·        Volume was lower but still healthy with 327k contracts trading.
  • ·        A bit disappointed that the early session gain to $1524 eroded, but pleased with the $2 gain  given the strength in US stocks (S&P 7 points from all-time high) the US 10-year bond  yield reaching 5-week highs
  • ·        Encouraged that support ahead of $1484-86 (double bottom - 9/10 and 9/11 lows, $1484 – up trendline from 5/30 $1275 low) held overnight despite the conciliatory news on US-China trade
  • ·        Encouraged that gold has made 2 consecutive higher lows, attempting to consolidate after making 4 consecutive lower lows and lower highs, dropping $72 and probing 1-month lows 
  • ·        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. 
  • ·        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 on 9/4 that has brought in momentum following players.  
  • ·        Encouraged with the steady and significant purchases by global central banks
  • ·        Despite the recent agreement between the US and China to meet next month, bulls feel that this issue is highly complex and won’t be solved anytime soon.  Instead, bulls expect a further escalation of tensions that has already led to increasing tariffs and tough rhetoric that has generated tremendous global economic uncertainty and softened prospects for global growth. 
  • ·        Powell’s dovish tone recently at Jackson Hole (though tempered last Friday with his upbeat economic assessment) will only increase chances the Fed (and other central banks) will need to cut interest rates again and more aggressively, fueling further gains in gold.  
  • ·        Fed Fund Futures still show relatively high chances of an aggressively dovish Fed – though probabilities declined significantly again today:  88.8% chance of a 25bp cut at the September meeting, a 43.7% chance of two 25bp cuts by the October meeting, and a 21.9% likelihood of three 25bp cuts by the December meeting.
  • ·        Current geopolitical tensions – especially the situations between Hong Kong and Mainland China, Brexit, Israel, Syria, and Iran and North Korea – are additional tailwinds for gold – though the firing of the hawkish John Bolton on Tuesday is mitigating factor
  • ·        Bulls will look for the market to consolidate ahead of $1484 - 86 (double bottom - 9/10 and 9/11 lows, up trendline from 5/30 $1275 low and then retest resistance at $1500-01 (psychological level, options, 9/10 high), $1515 (9/9 high), $1524 (today’s high), and then $1525 (options). 
  • ·        Disappointed with gold’s ability to advance today, given the strength in equities and the 10-year bond yield
  • ·        Concerned with the persistent bargain hunting buying that has cushioned downside moves
  • ·        Still 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 a bit over their skis on rate cut predictions (even though FF Futures probabilities of future rate cuts declined significantly today) feel that the downward pressure on bond yields was also overdone, and expect the current reversal in rates should continue
  • ·        Stabilization / increase in US rates 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 ECB Industrial Production today) that drove the German 10-year yield further into negative territory over the past months (German bund yield near record lows, touched  -0.743% last week) underscores this view. 
  • ·        Feel a US-China trade deal is in both sides’ best interests, and feel that last week’s agreement to resume negotiations next month and future similar conciliatory actions (China’s exemption of 16 US products from tariffs yesterday, today’s announced delay of tariffs by Trump) will be viewed as positive steps by markets, which should help equities to continue to rebound (S&P within 20 points of its all-time high), 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 with a very heavy net long position – Net Fund Long Position 301k contracts, highest in 3 years, long gold now a crowded trade) to materialize if support at the following levels can be breached:  $1485 - 86 (double bottom - 9/10 and 9/11 lows),  $1484 (up trendline from 5/30 $1275 low), $1480 (8/13 low),$1472 (8/7 low), $1457 (8/6 low), $1450 (options), $1438 (8/5 low), and $1430 8/2 low).

 

Looking ahead

All markets will continue to focus on geopolitical events (especially Brexit news and US / UK - Iran tensions, Hong Kong protests), developments with the Trump Administration (especially on US-China trade, potential legal issues), oil prices, and will turn to reports tomorrow on Japan’s Industrial Production and Capacity Utilization, Germany’s Wholesale Price Index, Eurozone Trade Balance and Labour Costs, US Import Prices, Export Prices, Retail Sales, University of Michigan Consumer Confidence, Business Inventories, Baker Hughes Rig Count, and Commitment of Traders for near term direction.

 

In the news:

Statement from the ECB following policy meeting:   https://www.reuters.com/article/us-ecb-policy-rates-statement/statement-from-the-ecb-following-policy-meeting-idUSKCN1VX1DN

 Assessing the dynamics of gold – ABN:   https://www.bloomberg.com/news/videos/2019-09-12/assessing-the-dynamics-of-gold-abn-amro-s-georgette-boele-video

 A crazy last 12 hours: https://www.cnbc.com/2019/09/12/heres-what-happened-in-the-us-stock-market-over-crazy-12-hours.html

 

YTD Performance


12/31/2018

9/12/2019

Change
% Change
Gold


1282.5

1499

216.5

16.881%

DX


96.06

98.37

2.31

2.405%

S&P


2505

3010

505

20.160%

JYN


109.63

108.09

-1.54

-1.405%

Euro


1.1466

1.1063

-0.0403

-3.515%

US 10-year bond yield


2.69%

1.785%

-0.009

-33.544%

Oil (WTI)


45.45

55.07

9.62

21.166%

 

 

Resistance levels: 

$1500 – psychological level, options

$1501 – 9/10 high

$1503 – 9/6 low

$1506 – 9/5 low

$1515 – 9/9 high

$1519 – 20-day moving average

$1517-20 (triple bottom – 8/29, 8/30 and 9/2 lows, 20-day moving average)

$1524 – 9/12 high

$1525 – options

$1528 – 9/6 high

$1535 – 8/13 high

$1549 - $1550 –triple top - 8/26, 8/29, and 9/3 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:

$1498 – 9/11 high

$1498 – 9/9 low

$1493-4 – 5 bottoms 8/14, 8/19, 8/20, 8/22, 8/23 lows

$1489 – 9/12 low

$1488 - 40-day moving average

$1485 - 86 – double bottom - 9/10 and 9/11 lows

$1484 – up trendline from 5/30 $1275 low

$1480 – 8/13 low

$1473 – 50-day moving average

$1472 – 8/7 low

$1457 – 8/6 low

$1450 – options

$1438 – 8/5 low