Gold Traders’ Report - September 16, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
SEP 16, 2019

  • Gold rallies on safe haven buying after attack on Saudi oil processing facility
     
    Overnight – gold climbs to $1512 after attack knocks out 50% of Saudi oil production, tough talk from Trump on retaliation, fears of a wider conflict

  • ·         Drone attacks on a Saudi oil processing facility Saturday that knocked out 5.7M bpd (50%) of daily output roiled markets. 
  • ·        While Yemen’s Iranian backed Houthi rebels claimed responsibility, Trump blamed the attack directly on Iran, saying the US was “locked and loaded”, and awaiting verification on how and what terms the US would “proceed” – threatening a wider conflict.  
  • ·        Oil spiked higher (WTI to $63.63)
  • ·        Equities sold off (NIKKEI closed, SCI unchanged, European shares off  from 0.2% to 0.7%, S&P futures -0.8%)
  • ·        Stocks were also weighed by weaker economic data from China (misses on Fixed Asset Investment, Industrial Production, and Retail Sales), giving more evidence that the trade war was weighing on global growth.  
  • ·        Safe-haven assets rallied with the US 10-year bond yield declining (1.901% to 1.821%), the yen advancing (108.13 – 107.50) against a softer US dollar (DX to 98.02), and gold climbing. 
  • ·        The yellow metal ran through buy stops over $1500 and $1509 (Friday’s high) to reach $1512.
  • ·        Later during European hours, S&P futures pared losses (-7 to 3000), after the Saudis said about 2M bdp could be restored by today, and Trump authorized the release of oil from the US Strategic Petroleum Reserve, with WTI oil declining to $58.78.  The US 10-year bond yield recovered to 1.861%, and the DX rebounded to 98.47. 
  • ·        Gold retraced to $1499, but once again, strong bargain hunting buying brought the market back to $1504-05 ahead of the NY open. 
  • ·        Markets largely ignored a worse than expected reading on the Empire State Manufacturing Index (2.0 vs. exp. 4.1) – the only US economic report of the day. 
  • ·        US stocks continued to trim losses through their open (S&P -5 to 3002), while the 10-year bond yield edged up to 1.873%. 
  • ·        The DX improved to 98.64, and gold retreated back to $1496
  • ·        However, as we’ve seen time and again, bargain hunting buying took gold back up to $1500
  • ·        Later in the morning, a DJ report that the US told the Saudis that the attacks on their Abqaiq oil refiner didn’t come from Yemen along with the Saudis announcing that evidence indicates that Iranian arms were used in the attack sent US stocks back down (S&P -16 to 2991), with losses in the Materials Consumer Discretionary and Consumer Staples sectors leading the decline. 
  • ·        Oil shot back higher (WTI from $59.94 to $61.35)
  • ·        The 10-year yield edged back down to 1.841%. 
  • ·        The DX kept firming, however, (98.72), helped by weakness in the euro ($1.0993, US-EU trade dispute) pound ($1.2399, PM Johnson reiterates no-deal threat), and the yen (108.09, flight to quality eases).  
  • ·        Gold was caught in the cross currents and traded up to $1506 – unable to challenge its overnight high. 
  • ·        In the afternoon, US stocks US stocks trimmed losses (S&P finished  -7 to 3000), but were unable to take out their earlier highs. 
  • ·        The move was aided by a denial from Iran’s President Rouhani that they were involved in the Saudi attack, claiming the attack was a reciprocal measure by the “Yemeni people” to assaults on their country, and comments from Trump that diplomacy is never exhausted when it comes to Iran. 
  • ·        The 10-year bond yield hovered between 1.83%-1.84%, while the DX remained fairly firm between 98.60-98.70. 
  • ·        Gold pulled back, but found support at $1497.  Gold was $1499 bid at 4PM with a gain of $10
  • ·        Open interest was off 2k contracts, showing a net of long liquidation from Friday’s decline. 
  • ·        Volume was lower but still very robust with 378k contracts trading. 
  • ·        The CFTC’s Commitment of Traders Report as of 9/10 showed the large funds cutting a hefty amount of longs - 31.3k contracts - and 0.5k contracts of shorts to reduce their net long position by 32k contracts to 270k contracts.  
  • ·        This was done on gold’s decline from $1545 on 9/3 to $1487 on 9/10.  
  • ·        However, since the report, a fair amount of new longs came in on gold’s rebound back over $1500, and the NFLP is probably in the area of 285k contracts. 
  • ·        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  (365k contracts) can hasten and exaggerate downside moves  – if  / when the longs are forced to liquidate.
  • ·        Encouraged with gold’s $  rally, but disappointed that the initial spike to $1512 high during early Asian time eroded significantly, and that the market was unable to hold above $1500 at the close
  • ·        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 the night before that has brought in momentum following players.  
  • ·        Benefitted from the recent escalation of the ongoing trade war between the US and China that led to both sides increasing tariffs last week along with increasing tough rhetoric.  
  • ·        Despite the agreement between the US and China to meet next month, 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. 
  • ·        This along with Powell’s dovish tone recently at Jackson Hole will  only increases chances the Fed (and other central banks) will need to cut interest rates again and more aggressively, fueling further gains in gold.  
  • ·        Though probabilities for future rate cuts declined again today, Fed Fund Futures still show relatively high chances of an aggressively dovish Fed:  65.8% chance of a 25bp cut at the September meeting (34.2% of a hold), a 49.6% chance of two 25bp cuts by the October meeting, and a 16.9% likelihood of three 25bp cuts by the December meeting.
  • ·        Bulls see current geopolitical tensions – especially the Saudi – Iran situation, along with the tensions between Hong Kong and Mainland China, Brexit, and North Korea - as additional tailwinds for gold.
  • ·        Bulls will look for the market to consolidate around $1500, and then retest resistance at $1509 (9/13 high), $1512 (9/16 high), and then $1515 (9/9 high). 
  • ·        While bears were disappointed with today’s advance in gold, most thought, bears were generally pleased that gold wasn’t able to hold its initial gain to $1512, and that it failed to hold $1500 at the close – given the magnitude and scope of the Saudi attack
  • ·        However, some are concerned with the persistent bargain hunting buying that has cushioned downside moves (bargain hunting bids emerged at $1496 during the late morning hours to lift the market back over $1500)
  • ·        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, 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 (weak German Wholesale Prices Friday) and the Eurozone that drove the German 10-year yield further into negative territory over the past months (German bund yield remain 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 last night’s agreement to resume negotiations next month and future similar conciliatory actions will be viewed as positive steps by markets, which should help equities to continue to rebound (S&P within 30 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 270k contracts, near 3-year highs, long side of gold remains a crowded trade) to materialize if support at the following levels can be breached:   $1489 (double bottom - 9/12 and 9/13 lows), $1485 - 86 (triple bottom - 9/10, 9/11, and 9/13 lows), $1490 (up trendline from 5/30 $1275 low), $1480 (8/13 low), $1476 (50-day moving average), $1472 (8/7 low), $1457 (8/6 low), $1450 (options), and then $1438 (8/5 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 Japan’s Department Store Sales, China’s New Home Prices, Germany’s ZEW Survey, Eurozone ZEW Survey, US Industrial Production, Capacity Utilization, NAHM Housing Market Index, and Long Term TIC Flows for near term direction.  

 

In the news:

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

Gold rallies on concern Saudi attack may presage wider conflict:   https://www.bloomberg.com/news/articles/2019-09-16/gold-surges-as-saudi-attack-spurs-haven-demand-ahead-of-fed-meet

 

YTD Performance


12/31/2018

9/16/2019

Change
% Change
Gold


1282.5

1499

216.5

16.881%

DX


96.06

98.65

2.59

2.696%

S&P


2505

2998

493

19.681%

JYN


109.63

108.12

-1.51

-1.377%

Euro


1.1466

1.1001

-0.0465

-4.055%

US 10-year bond yield


2.69%

1.849%

-0.0084

-31.162%

Oil (WTI)


45.45

61.88

16.43

36.150%

 

 

Resistance levels: 

$1509 – 9/13 high

$1512 – 9/16 high

$1515 – 9/9 high

$1515 – 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:

$1500 – psychological level, options

$1496 – 9/16 low

$1491 - 40-day moving average

$1489 – double bottom - 9/12 and 9/13 lows

$1485 - 86 – triple bottom - 9/10, 9/11, and 9/13 lows

$1490 – up trendline from 5/30 $1275 low

$1480 – 8/13 low

$1476 – 50-day moving average

$1472 – 8/7 low

$1457 – 8/6 low

$1450 – options

$1438 – 8/5 low