Gold Traders’ Report - September 5, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International 
SEP 5, 2019

  • Rally runs into hopes of thaw in US-China trade talks – corrects 2%
     
    Overnight – gold tumbles to $1538 on news of scheduled US-China trade talks
  • ·        Gold traded lower last night, retreating from its 6-year high made yesterday in a range of $1538 - $1553. 
  • ·        It was pressured by news that China’s Vice Premier He spoke with Lighthizer and Mnuchin from the US last night, that they agreed to meet next month in Washington to resume higher level trade talks, and confirmed that lower level conversations would continue this month.
  • ·        The news was followed by an upbeat statement from China’s Global Times, saying that there was “more possibility of a breakthrough between the two sides”. 
  • ·        Equity markets cheered the news, with the NIKKEI +2.3%, the SCI was up 1.0%, European markets were up from 0.8% to 0.9% (however FTSE was 0.7% weaker from Brexit woes), and S&P futures were +0.9%. 
  • ·        Global bond yields climbed in the risk on environment, putting further pressure on gold (German 10-year from -0.681% to -0.609%, US 10-year from 0.483% to 0.581%, and the US 10-year from 1.471% to 1.523%).  
  • ·        The DX initially rose from 98.39 – 98.54  - weighing further on the yellow metal - but then retreated during European time (98.14) becoming gold supportive.  The greenback was pressured by gains in the pound ($1.2210 - $1.2354) from receding fears of a no-deal Brexit (UK Parliament passed legislation requiring PM Johnson to ask the EU to extend the Brexit deadline for 3 months beyond the current Oct. 31 deadline) and euro ($1.1016 - $1.1067) as Draghi’s bid for a large stimulus package getting pushback from hawks overcame a miss on German Factory Orders. 
  • ·        A much better than expected reading on the US ADP Employment Change at 8:15AM (195k vs. exp. 149k) was followed by more dollar positive data at 8:30 AM on Nonfarm Productivity (2.3% vs. exp. 2.2%) and Unit Labor Costs (2.6% vs. exp. 2.4%), overcoming a slight miss on Initial Jobless Claims (217k vs. exp. 215k). 
  • ·        S&P futures rallied (+35  to 2974), and the US 10-year bond yield rose further to 1.547%.  The DX rebounded to 98.27, and gold continued to soften.  Stops were hit under $1535 (former resistance level) and $1532 ($1532 – up trendline from 8/1 $1400 low) and knocked gold down to $1525 where options support held.
  • ·        At 10AM, more positive economic data was released, with Factory Orders (1.4% vs. exp. 1.0%), and ISM Services (56.4 vs. exp. 54) overcoming a slight miss on Durable Goods (2.0% vs. exp. 2.1%). 
  • ·        US stocks surged (S&P +48 to 2986), with gains in the Financials, IT, Consumer Discretionary, and Industrials sectors leading the gains. 
  • ·        A rally in oil (WTI to $57.72) from a larger than expected draw in US Oil Inventories contributed to the move. 
  • ·        The 10-year yield climbed to 1.586% (2-week high), and the DX pushed higher to 98.38. 
  • ·        Gold broke support at $1525 and tumbled through $1517-20 (triple bottom – 8/29, 8/30 and 9/2 lows, 20-day moving average) to reach $1506 (2-week low).  A fair amount of long liquidation was seen.  However, as we’ve seen time and again, decent bargain hunting buying took the market quickly up to $1517, where prior support became resistance.  
  • ·        Into the afternoon, US equities trimmed some gains (S&P +34 to 2972), and the 10-year yield dipped to 1.562%. 
  • ·        The DX continued to climb, however (DX to 98.43) against a softening in the euro ($1.1084 - $1.1033.  Gold was caught in the cross currents, and traded in a choppy fashion between $1517 - $1521.
  • ·        Later in the afternoon, US stocks turned back higher (S&P finished +38 to 2976), while the US 10-year bond yield hovered around 1.565%.  The DX was steady between 98.39 – 98.44, and gold was similarly stable between $1517-19.  It held the lower level of the support level at $1517, and was $1518 bid at 4PM with a loss of $34. 
  • ·        Open interest was up 9.2k contracts, showing a net of new longs from yesterday’s rally. 
  • ·        Volume was lower but still very robust with 436k contracts trading. 
  • ·        Disappointed with gold’s $34 decline today, along with gold’s outsized loss (2.18%) against the more modest increase in the S&P (+1.28%). 
  • ·        Disappointed that key support levels failed to hold ($1532 -up trendline from 8/1 $1400 low), $1525. 
  • ·        However, bulls were encouraged that bargain hunting buying emerged to lift the market back above support at $1517-20 (triple bottom – 8/29, 8/30 and 9/2 lows, 20-day moving average).  
  • ·        Despite today’s pullback, 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 last night to meet next month, bulls feel that this issue won’t be solved anytime soon, and instead expect further escalation 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 slightly today, Fed Fund Futures still show relatively high chances of an aggressively dovish Fed:  95.8% chance of a 25bp cut at the September meeting, a 55.3% chance of two 25bp cuts by the October meeting, and a 32.6% likelihood of three 25bp cuts by the December meeting.
  • ·        See current geopolitical tensions – especially the situations between Hong Kong and Mainland China, Brexit, Israel, Syria, and Iran and North Korea - as additional tailwinds for gold.  
  • ·        Bulls will look for the market to consolidate around $1517-20, and then retest resistance at $1535 (8/13 high and former support), $1550, and then yesterday’s $1557 high.  Beyond $1557, bullish technicians see no significant chart resistance until $1591, the high from 4/7/13. 
  • ·        Pleased with gold’s pullback today, and that the market failed to hold support at $1532 (up trendline from 8/1 $1400 low).  
  • ·        However, some are concerned with the persistent bargain hunting buying that has cushioned downside moves, and lifted gold back up from today’s $1506 low to prior support at $1517-20.  
  • ·        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 Factory Orders today) and the Eurozone that drove the German 10-year yield further into negative territory over the past months (German bund yield at record low  -0.743% on Tuesday) 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 1.75% 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 297k contracts, highest in 3 years, long gold now a crowded trade) to materialize if support at the following levels can be breached: $1500, $1493-94 (5 bottoms, 8/14, 8/19, 8/20, 8/22, and 8/23 lows), $1472 (8/7 low), $1470 (up trendline from 5/30 $1275 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 Leading Index ,Germany’s Industrial Production, Eurozone Employment and GDP, US Payroll Report, Baker Hughes Rig Count, and Commitment of Traders Report for near term direction. 

In the news:

JPMorgan – Gold may be heading for decade long bull phase:   https://www.miningmx.com/news/gold/38292-gold-may-be-heading-for-decade-long-bull-phase-as-recession-evokes-stimulus-of-2008/

Can Swiss refineries stay ahead of forgers?:   https://www.swissinfo.ch/eng/counterfeit-bullion-_can-swiss-refineries-stay-ahead-of-forgers-/45205290?utm_source=gn&utm_campaign=swi-rss&utm_medium=rss&utm_content=o

LME’s gold, silver contracts in doubt as SocGen pulls out:   https://www.reuters.com/article/us-lme-precious-gold-exclusive/exclusive-lmes-gold-silver-contracts-in-doubt-as-societe-generale-pulls-out-idUSKCN1VP2H1?rpc=401&

Gold Investment Snapshot – WGC:   https://www.youtube.com/watch?v=XBiq5cB5PBY

Japan’s retail gold price clambers to highest since 1980:   https://uk.reuters.com/article/japan-gold/japans-retail-gold-price-clambers-to-highest-since-1980-amid-global-economy-jitters-idUKL3N25W109


YTD Performance


12/31/2018

9/5/2019

Change
% Change
Gold


1282.5

1518

235.5

18.363%

DX


96.06

98.40

2.34

2.436%

S&P


2505

2976

471

18.802%

JYN


109.63

106.94

-2.69

-2.454%

Euro


1.1466

1.1035

-0.0431

-3.759%

US 10-year bond yield


2.69%

1.565%

-0.0112

-41.735%

Oil (WTI)


45.45

56.16

10.71

23.564%

 

Resistance levels: 

$1525 – options

$1532 – up trendline from 8/1 $1400 low

$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:

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

$1506 – 9/5 low

$1500 – options

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

$1480 – 8/13 low

$1472 – 8/7 low

$1465 - 40-day moving average

$1457 – 8/6 low

$1456 – up trendline from 5/30 $1275 low

$1454 – 50-day moving average

$1450 – options

$1438 – 8/5 low