Gold Traders’ Report – June 19, 2018

The announcement from Trump slapping a 10% tariff on $200B worth of Chinese goods last night and the Chinese Commerce Ministry’s response stating that “the US has initiated a trade war that violates market laws” roiled markets.

Global equities sold off hard with the NIKKEI down 1.8%, the SCI off 3.8%, European markets 0.5% to 1.3% lower, and S&P futures dipped to a low of 2736 (1.66% down).
The yuan was clobbered, falling from 6.445 to 6.48, a 5-month low. Investors flocked to the safety of bonds with the US 10-year yield sliding from 2.92% to 2.853% (3-week low) the JGB from 0.04% to 0.0.28%, the German Bund from 0.40% to 0.35%, and the UK Gilt from 1.32% to 1.257%.

They also ran initially to the yen (110.55 – 109.55) and to gold, which rallied through yesterday’s high and former support at $1282-$1282.50 to reach $1284.30.
Gold was also helped as the yen strength pushed the DX down from 94.80 to 94.53. However, the dollar quickly reversed and rallied, and climbed through European hours. The DX took out its quadruple top between 95.14-95.17 to reach 95.30 – an 11-month high.

Some currency traders feel a trade war will be beneficial to the greenback, as import tariffs would fuel inflation, with the US economy already nearing full capacity and is in the midst of a rate hike cycle.
The dollar benefited from weakness in the euro ($1.1644 – $1.1530, Draghi reinforced his dovish message at the Sintra conference) and the pound ($1.3270 – $1.3150, 6-month low, PM May lost a key Brexit vote).
Gold collapsed in response, and took out support at $1277 (yesterday’s low), $1275 (Friday’s low, options), $1273 (double bottom, 12/25 and 12/26 lows) and $1271 (up trendline from 1/9/17 $1171 low) to reach $1270.45.

At 8:30 AM, a stronger than expected report on US Housing Starts (1.35M vs. exp. 1.312M) was largely offset by a miss on Building Permits (1.301M vs. exp. 1.350M). The dollar came off its highs by mid-morning (DX to 95.07), pressured by recoveries in sterling ($1.3180) and the euro ($1.1571), and gold clawed back to $1276.60.

Into the afternoon, US stocks pared losses (S&P -8 to 2765), with Boeing, DowDuPont and Caterpillar leading decliners. Soothing comments from US Trade Advisor Navarro, (US is open to talks, dismissed notion that trade standoff would damage relationship with China) along with a rebound in oil (WTI from $64.36 – $64.90) aided the move.

The 10-year yield recovered to 2.895%, and the dollar drifted down to 95. Gold was caught in the cross-currents, but advanced modestly against the declining greenback to reach $1277.35. It was $1275 bid at 4PM with a loss of $4.

Open interest was off 4.5k contracts, showing a net combination of some short covering along with a bit of long liquidation from yesterday. Volume was much lower with 202k contracts trading.
Some bulls were disappointed that gold didn’t hold its overnight gains, given the uncertainty and turmoil surrounding the US-China trade dispute. However, other bulls were relieved that the yellow metal limited its damage to $1270 given that the dollar shot to an 11-month high at 95.30.

The bulls point to the still relatively and historically low NFLP which sets gold up to move higher. They feel gold’s downside has been overdone having fallen $95 from its 4/11 $1365 high (-6.96%), with a 14-day RSI approaching oversold (31.6). They expect gold to form base in the $1273 (double bottom, 12/25 and 12/26 lows) – $1275 area, and will look for a rapid bounce to $1290 – the 50% retracement of the move down from last Thursday’s $1309 high to today’s $1270 low.

While some bears took profits during Friday’s tumble or during today’s decline and are awaiting further strength to sell into, others are still looking for gold to decline further – with fuel from a firmer dollar providing the downside pressure. While the bears got their breach in the quadruple top in the DX between 95.14-95.17 earlier this morning, it failed to hold on the close. They will look for this level to be retested to knock gold below next support levels at $1271 (up trendline from 1/9/17 $1171 low), $1170 – today’s low, 1265 (12/22 low), $1261-63 (triple bottom – 12/19, 12/20, and 12/21 lows), and $1253 (double bottom – 12/15 ,12/18 lows).

All markets will continue to focus on geopolitical events, developments with the Trump Administration (especially on US-China trade), oil prices, and will turn to reports tomorrow on the BOJ’s Minutes of Policy Meeting, German PPI, US MBA Mortgage Applications, Current Account Balance, Existing Home Sales, Oil Inventories

Jim Pogoda, Trader, Gold Bullion International
JUN 19, 2018