Gold Traders’ Report - September 6, 2019

Jim Pogoda, Senior Gold Trader, Gold Bullion International
SEP 6, 2019

Gold retraces $12 to $1506 in choppy trade:

Overnight – PBOC easing extends risk on environment, pressures gold to $1503
· Gold continued to soften overnight, trading in a range of $1503 - $1520.
· Took out its $1506 low from yesterday, but dip buying ahead of $1500 limited the downside to $1503.
· Pressured by a further advance in global equities (NIKKEI +0.5%, SCI +0.5%, European shares up from 0.1% to 0.3%, and S&P futures +0.4%) which were helped by news of further easing by the PBOC (announced 50bp cut in reserve requirement ratio for banks, would cut by 100bp for some banks).
· US 10-year bond yield rose in response (1.559% to 1.601%) and was also a headwind for gold,
· Firmer US dollar (DX from 98.31 – 98.52) also weighs on gold - DX was helped by a softer euro ($1.1037 - $1.1019) from a miss on German Industrial Production (-0.6% vs. exp. 0.3%), and pound ($1.2343 - $1.2285) from increased chances of a snap election and profit taking.
·
· Average Hourly Earnings and the Labor Participation Rate were stronger than expected (0.4% vs. exp. 0.3%) and the Unemployment Rate came in at 3.7% as expected
· Increase in Nonfarm Payrolls was lower than anticipated (130k vs. exp. 160k), with downward revisions of 20k to the last two months reports
· Private Payrolls were only up 96k (exp. 150k), as a sizeable chunk of the job gains were from temporary government census workers
· While the probability of a 25bp rate cut at the September FOMC meeting declined slightly from 95.8% to 93.5%, the chances of 2 cuts by the October meeting increased from 55.3% to 59.9%, and the likelihood of 3 cuts by the December meeting rose from 32.6% to 34.2%.
· S&P futures came off (+1 to 2973), while the US 10-year yield slid to 1.552%. The DX softened to 98.18, and gold rallied.
· The yellow metal tripped buy stops over the former support level at $1517-20 (triple bottom – 8/29, 8/30 and 9/2 lows, 20-day moving average) to reach $1528
· US stocks recovered by late morning (S&P +8 to 2984), helped by a strong earnings report from Lululemon, and with strength from the Materials, Consumer Staples, Health Care, and Consumer Discretionary sectors leading the advance. Rally in oil (WTI to $56.91) contributes to the move
· The 10-year yield continued to decline, however, touching 1.54%. The DX recovered to 98.32, and gold retreated back to support at $1517.
· In the afternoon, Fed Chair Powell gave upbeat comments on the economy (US economy will continue to grow even as it faces global headwinds, labor market is still tightening, consumer is in good shape, there will be no recession, we are monitoring risks).
· US stocks initially dipped, but then turned up to make intraday highs (S&P +9 to 2985). The 10-year yield edged up to 1.564%, and the DX climbed to 98.43. Gold tumbled back through support under $1517 to reach $1505, as support ahead of this morning’s low held.
· Later in the afternoon, US stocks remained choppy but pared some gains (S&P finished +3 to 2979)
· The 10-year yield remained quiet around 1.55%.
· The DX traded either side of 98.40
· Gold hovered between $1505 - $1507. Gold was $1506 bid at 4PM with a loss of $12.
· Open interest was off 25.3k contracts, showing some heavy long liquidation from yesterday’s selloff.
· Volume surged with 632k contracts trading.
· Large funds adding 2.8k contracts of longs and 1k contracts of shorts to increase the Net Fund Long Position to 301k contracts – its largest in 3-years.
· This was done on gold’s modest increase from $1522 on 8/27 to the $1550 on 9/3.
· However, in the last three sessions, a fair amount of long liquidation was seen down to today’s $1503 low, and the NFLP is probably now in the area of 275-280k 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 (as we’ve seen over the past few sessions) – if / when the longs are forced to liquidate.
· Disappointed with gold’s $12 decline today, despite the modest gain in stocks, slight pullback in the US 10-year bond yield, and steady US dollar
· Disappointed that support at $1517-20 failed to hold ($1532 -up trendline from 8/1 $1400 low), $1525.
· However, bulls were encouraged that bargain hunting buying emerged to keep the market over $1500 overnight against strong gains in global equities, a move over 1.60% in the US 10-year yield and a DX north of 98.50
· Encouraged that dip buying prevented the market from finishing below yesterday’s $1506 low
· 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 on 9/4 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 Wednesday 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 (though tempered today with his upbeat economic assessment) 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.
· Fed Fund Futures still show relatively high chances of an aggressively dovish Fed: 91.2% chance of a 25bp cut at the September meeting, a 60.4% chance of two 25bp cuts by the October meeting, and a 35.7% 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 - as additional tailwinds for gold.
· Bulls will look for the market to consolidate above $1500, and then retest initial resistance at $1517-20 followed by $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 $1517-20 (triple bottom – 8/29, 8/30 and 9/2 lows, 20-day moving average)
· However, some are concerned with the persistent bargain hunting buying that has cushioned downside moves ($1500 held overnight) and lifted gold back up from today’s $1503 low to $1528 after the soft US Payroll Report.
· 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 Industrial Production today) and the Eurozone that drove the German 10-year yield further into negative territory over the past months (German bund yield near record lows, touched -0.743% Tuesday) underscores this view.
· Feel a US-China trade deal is in both sides’ best interests, and feel that Wednesday 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 50 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: $1500, $1493-94 (5 bottoms, 8/14, 8/19, 8/20, 8/22, and 8/23 lows), $1473 (up trendline from 5/30 $1275 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 Monday on China’s Trade Balance and New Yuan Loans, Japan’s Trade Balance, GDP, and Economy Watchers Survey, Germany’s Trade Balance, Eurozone Sentix Investor Confidence, UK Industrial Production and Trade Balance, and US Consumer Credit for near term direction.

YTD Performance	12/31/2018	9/6/2019	Change	% Change
Gold	1282.5	1506	223.5	17.427%
DX	96.06	98.40	2.34	2.436%
S&P	2505	2979	474	18.922%
JYN	109.63	106.92	-2.71	-2.472%
Euro	1.1466	1.1025	-0.0441	-3.846%
US 10-year bond yield	2.69%	1.560%	-0.0113	-41.921%
Oil (WTI)	45.45	56.58	11.13	24.488%